UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Quarterly Period Ended November 30, ~~2011~~2012



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

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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

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

(503) 224-9900

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Yes x No o

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



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

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

Yes o No x

The Registrant had ~~24,395,353~~25,681,272 shares of Class A common stock, par value of $1.00 per share, and ~~2,866,295~~719,823 shares of Class B common stock, par value of $1.00 per share, outstanding as of ~~December 30, 2011~~January 3, 2013.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

INDEX



	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012	3

Condensed Consolidated Statements of ~~Income~~Operations for the Three Months Ended November 30, ~~2011~~2012 and ~~2010~~2011	4

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended November 30, 2012 and 2011	45

Condensed Consolidated Statements of Cash Flows for the Three Months Ended November 30, ~~2011~~2012 and ~~2010~~2011	56

Notes to the Unaudited Condensed Consolidated Financial Statements	67

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1618

Item 3. Quantitative and Qualitative Disclosures About Market Risk	2730

Item 4. Controls and Procedures	2730

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	2831

Item 1A. Risk Factors	28

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds~~	2831

Item 6. Exhibits	2932

SIGNATURES	3033

Table of Contents

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)


	November 30, 2011			August 31, 2011		November 30, 2012			August 31, 2012
Assets
Current assets:
Cash and cash equivalents	$	26,989		$	49,462	$	24,404		$	89,863
Accounts receivable, net of allowance for doubtful accounts of $6,048 and $6,148	209,475			229,975
Accounts receivable, net of allowance for doubtful accounts of $1,038 and $4,459						152,860			137,313
Inventories, net	410,119			335,120		302,626			246,992
Deferred income taxes	10,942			11,784		5,458			6,362
Refundable income taxes	13,035			3,541		6,269			7,671
Prepaid expenses and other current assets	30,583			24,117		23,764			28,618
Total current assets	701,143			653,999		515,381			516,819
Property, plant and equipment, net of accumulated depreciation of $486,737 and $471,305	552,833			555,284
Property, plant and equipment, net of accumulated depreciation of $553,099 and $535,728						564,110			564,185
Investments in joint venture partnerships	17,665			17,208		16,339			17,126
Goodwill	622,382			627,805		634,451			635,491
Intangibles, net of accumulated amortization of $15,015 and $20,846	19,510			20,906
Intangibles, net of accumulated amortization of $20,262 and $19,023						14,544			15,778
Other assets	14,768			14,967		14,379			14,174
Total assets	$	1,928,301		$	1,890,169	$	1,759,204		$	1,763,573
Liabilities and Equity
Current liabilities:
Short-term borrowings	$	14,665		$	643	$	9,169		$	683
Accounts payable	111,079			141,011		97,331			115,007
Accrued payroll and related liabilities	21,766			36,475		19,741			22,130
Environmental liabilities	2,971			2,983		2,261			2,185
Accrued income taxes	2,788			13,833		47			38
Other accrued liabilities	40,265			38,368		37,911			38,799
Total current liabilities	193,534			233,313		166,460			178,842
Deferred income taxes	84,845			85,378		86,068			85,447
Long-term debt, net of current maturities	480,943			403,287		345,797			334,629
Environmental liabilities, net of current portion	37,562			37,872		44,939			44,874
Other long-term liabilities	10,315			10,030		11,585			11,837
Total liabilities	807,199			769,880		654,849			655,629
Commitments and contingencies (Note 6)
Redeemable noncontrolling interest	18,936			19,053		23,602			22,248
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock – 20,000 shares $1.00 par value authorized, none issued	—			—		—			—
Class A common stock – 75,000 shares $1.00 par value authorized, 24,395 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
Class A common stock – 75,000 shares $1.00 par value authorized, 25,684 and 25,219 shares issued and outstanding						25,684			25,219
Class B common stock – 25,000 shares $1.00 par value authorized, 720 and 1,113 shares issued and outstanding						720			1,113
Additional paid-in capital	3,769			762		3,171			816
Retained earnings	1,070,363			1,065,109		1,049,399			1,056,024
Accumulated other comprehensive income (loss)	(5,208		)	1,540
Accumulated other comprehensive loss						(3,629		)	(2,589		)
Total SSI shareholders’ equity	1,096,185			1,094,712		1,075,345			1,080,583
Noncontrolling interests	5,981			6,524		5,408			5,113
Total equity	1,102,166			1,101,236		1,080,753			1,085,696
Total liabilities and equity	$	1,928,301		$	1,890,169	$	1,759,204		$	1,763,573

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(Unaudited, in thousands, except per share amounts)

Three Months Ended November 30,
2011 2010
Revenues $ 812,176
$ 675,104
Operating expense:
Cost of goods sold 742,215
602,546
Selling, general and administrative 56,292
45,075
Environmental reserves charges (releases), net (300 ) (200 )
Income from joint ventures (1,001 ) (757 )
Operating income 14,970
28,440
Other income (expense):
Interest income 163
55
Interest expense (3,271 ) (598 )
Other income (expense), net (556 ) 161
Total other expense (3,664 ) (382 )
Income from continuing operations before income taxes 11,306
28,058
Income tax expense (3,561 ) (9,164 )
Income from continuing operations 7,745
18,894
Income from discontinued operations, net of tax —
23
Net income 7,745
18,917
Net income attributable to noncontrolling interests (727 ) (1,123 )
Net income attributable to SSI $ 7,018
$ 17,794
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 27,451
27,563
Diluted 27,715
27,871
Dividends declared per common share $ 0.017
$ 0.017



	Three Months Ended November 30,
	2012			2011
Revenues	$	592,820		$	812,176
Operating expense:
Cost of goods sold	541,884			742,215
Selling, general and administrative	47,995			55,992
Loss (income) from joint ventures	135			(1,001		)
Restructuring charges	1,593			—
Operating income	1,213			14,970
Interest expense	(2,017		)	(3,271		)
Other income (expense), net	321			(393		)
Income (loss) before income taxes	(483		)	11,306
Income tax expense	(960		)	(3,561		)
Net income (loss)	(1,443		)	7,745
Net income attributable to noncontrolling interests	(228		)	(727		)
Net income (loss) attributable to SSI	$	(1,671	)	$	7,018

Net income (loss) per share attributable to SSI - basic	$	(0.06	)	$	0.26
Net income (loss) per share attributable to SSI - diluted	$	(0.06	)	$	0.25
Weighted average number of common shares:
Basic	26,567			27,451
Diluted	26,567			27,715
Dividends declared per common share	$	0.188		$	0.017

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, in thousands)



	Three Months Ended November 30,
	2012			2011
Net income (loss)	$	(1,443	)	$	7,745
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments⁽¹⁾	(1,258		)	(6,438		)
Cash flow hedges, net⁽²⁾	17			—
Pension obligations, net⁽³⁾	375			67
Total other comprehensive loss, net of tax	(866		)	(6,371		)
Comprehensive income (loss)	(2,309		)	1,374
Less amounts attributable to noncontrolling interests:
Net income attributable to noncontrolling interests	(228		)	(727		)
Foreign currency translation adjustment attributable to redeemable noncontrolling interest	(174		)	(377		)
Total amounts attributable to noncontrolling interests	(402		)	(1,104		)
Comprehensive income (loss) attributable to SSI	$	(2,711	)	$	270

_____________________________


(1)	Net of tax benefit of $(91) and $(468) for each respective period.


(2)	Net of tax expense of $24 and $0 for each respective period.


(3)	Net of tax expense of $216 and $39 for each respective period.

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

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SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Months Ended November 30,						Three Months Ended November 30,
	2011			2010			2012			2011
Cash flows from operating activities:
Net income	$	7,745		$	18,917
Adjustments to reconcile net income to cash used in operating activities:
Net income (loss)							$	(1,443	)	$	7,745
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization	20,346			16,321			20,899			20,346
Deferred income taxes	906			2,464			2,261			906
Undistributed equity in earnings of joint ventures	(963		)	(962		)	(40		)	(963		)
Share-based compensation expense	4,613			3,568			4,210			4,613
Excess tax benefit from share-based payment arrangements	(413		)	383			—			(413		)
Gain on disposal of assets	(116		)	(61		)
Environmental reserves charges (releases), net	(300		)	(200		)
Net gain on derivatives	—			(759		)
(Gain) loss on disposal of assets							226			(116		)
Unrealized foreign exchange loss, net	272			—			46			272
Bad debt recoveries							(1,573		)	—
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	8,278			(34,740		)	(20,010		)	8,278
Inventories	(74,117		)	(6,456		)	(50,776		)	(74,117		)
Refundable income taxes	(5,292		)	53
Income taxes							903			(20,126		)
Prepaid expenses and other current assets	(1,148		)	740			1,173			(1,148		)
Intangibles and other long-term assets	(1,079		)	(556		)	298			(1,079		)
Accounts payable	(19,193		)	(7,387		)	(10,429		)	(19,193		)
Accrued payroll and related liabilities	(14,745		)	(13,942		)	(1,950		)	(14,745		)
Other accrued liabilities	3,452			(1,291		)	(3,687		)	3,452
Accrued income taxes	(14,834		)	5,173
Environmental liabilities	(12		)	(65		)	(74		)	(312		)
Other long-term liabilities	(81		)	3			(303		)	(81		)
Distributed equity in earnings of joint ventures	525			1,175			735			525
Net cash used in operating activities	(86,156		)	(17,622		)	(59,534		)	(86,156		)
Cash flows from investing activities:
Capital expenditures	(25,551		)	(25,168		)	(26,675		)	(25,551		)
Acquisitions, net of cash acquired	—			(6,956		)
Joint venture receipts (payments), net	353			(619		)
Joint venture receipts, net							222			353
Proceeds from sale of assets	251			251			532			251
Net cash used in investing activities	(24,947		)	(32,492		)	(25,921		)	(24,947		)
Cash flows from financing activities:
Proceeds from line of credit	173,000			147,500			135,500			173,000
Repayment of line of credit	(159,000		)	(147,500		)	(127,000		)	(159,000		)
Borrowings from long-term debt	294,212			168,000			72,742			294,212
Repayment of long-term debt	(214,396		)	(88,144		)	(61,449		)	(214,396		)
Repurchase of Class A common stock	(3,117		)	—			—			(3,117		)
Taxes paid related to net share settlement of share-based payment arrangements	(840		)	(1,873		)	(1,104		)	(840		)
Excess tax benefit from share-based payment arrangements	413			(383		)	—			413
Stock options exercised	—			16
Contributions from redeemable noncontrolling interests	454			—
Distributions to noncontrolling interests	(1,477		)	(631		)
Contributions from noncontrolling interest							1,970			454
Distributions to noncontrolling interest							(375		)	(1,477		)
Dividends paid	(468		)	(466		)	—			(468		)
Net cash provided by financing activities	88,781			76,519			20,284			88,781
Effect of exchange rate changes on cash	(151		)	288			(288		)	(151		)
Net increase (decrease) in cash and cash equivalents	(22,473		)	26,693
Net decrease in cash and cash equivalents							(65,459		)	(22,473		)
Cash and cash equivalents as of beginning of period	49,462			30,342			89,863			49,462
Cash and cash equivalents as of end of period	$	26,989		$	57,035		$	24,404		$	26,989

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair presentation have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012. The results for the three months ended November 30, ~~2011~~2012 and ~~2010~~2011 are not necessarily indicative of the results of operations for the entire year.

Accounting Changes

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

Cash and Cash Equivalents

Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checks in excess of funds on deposit of $3330 million as of November 30, ~~2011~~2012 and $4038 million as of August 31, ~~2011~~2012.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with two major financial institutions (Bank of America and Wells Fargo Bank, N.A.). Balances in these institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of November 30, ~~2011~~2012. 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~~54 million and $9037 million of open letters of credit relating to accounts receivable as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012, respectively.

Financial Instruments

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

Fair Value Measurements

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

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



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

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

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

When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. See Note 78 - Redeemable Noncontrolling Interest and Note 911 - Derivative Financial Instruments for further detail.

Derivatives

The Company records derivative instruments in other assets or other liabilities in the Unaudited Condensed Consolidated Balance Sheets at fair value and changes in the fair value are either recognized in accumulated other comprehensive income (loss) in the Unaudited Condensed Consolidated Balance Sheets or net income (loss) in the Unaudited Condensed Consolidated Statements of ~~Income,~~Operations, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a hedge, and if designated as a hedge, the extent to which the hedge is effective. Amounts included in accumulated other comprehensive income (loss) are reclassified to earnings in the period in which earnings are impacted by the hedged items or in the period that the hedged transaction is deemed no longer likely to occur. For cash flow hedges, a formal assessment is made, both at the hedge’s inception and on an ongoing basis, to determine whether the derivatives that are designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. To the extent the hedge is determined to be ineffective, the ineffective portion is immediately recognized in

~~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~~derivative instrument’s fair value. The fair value of these instruments is a function of underlying forward commodity prices, related volatility, counterparty creditworthiness and duration of the contracts. Cash flows from derivatives are recognized in the Unaudited Condensed Consolidated Statements of Cash Flows in a manner consistent with the underlying transactions. See Note 911 - 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.

Restructuring Charges

Restructuring charges consist of severance, contract termination and other exit costs. A liability for severance costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value, which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. A liability for other exit costs is measured at its fair value in the period in which the liability is incurred. See Note 7 - Restructuring Charges for further detail.

Redeemable Noncontrolling Interest

The Company has issued common stock of one of its subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within the Company’s control. Since redemption of the noncontrolling interest is outside of the Company’s control, this interest is presented on the Unaudited Condensed Consolidated Balance Sheets in the mezzanine section under the caption redeemable noncontrolling interest. If the interest were to be redeemed, the Company would be required to purchase all of such interest at fair value on the date of redemption. ~~As such, the~~The redeemable noncontrolling interest is ~~measured~~presented at the greater of its carrying amount (adjusted for the noncontrolling interest’s share of the allocation of income or loss of the subsidiary, dividends to and contributions from the noncontrolling interest) or its fair value atas of each ~~reporting period.~~measurement date. Any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in fair value prior to exercise of the redemption option will be recorded to equity. Since redemption of the noncontrolling interest is outside of the Company’s control, these interests are presented on the Unaudited Condensed Consolidated Balance Sheets in the mezzanine section under the caption “Redeemable noncontrolling interest.”retained earnings. See Note 78 - Redeemable Noncontrolling Interest for further detail.

Reclassifications

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



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

Note 2 - Recent Accounting Pronouncements

In ~~May~~December 2011, an accounting ~~standard~~standards update was issued ~~to clarify existing fair value measurement guidance~~increasing disclosures regarding offsetting assets and ~~expand~~liabilities. For financial instruments and derivative instruments, the standard requires 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~~gross amounts of recognized assets and liabilities, the amounts offset on the balance sheet, and the ~~sensitivity of~~amounts subject to the ~~measurement to changes in unobservable inputs. This standard will be effective for~~offsetting requirements but not offset on the ~~Company for the third quarter of fiscal year 2012.~~balance sheet. The standard is unlikely to impact the fair value measurement of any of the Company’s existing assets, liabilities, or equity valuations, but the additional disclosures will be required for the Company’s redeemable noncontrolling interest, which is measured using Level 3 inputs.

In June 2011, an accounting standard update was issued regarding the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but consecutive statements. This amendment will be effective for the Company for fiscal year ~~2013~~2014 and interim periods ~~therein. The Company currently reports other comprehensive income in the summary of changes in equity~~therein and ~~comprehensive income and will be required to update the presentation of comprehensive income~~is to be ~~in compliance with~~applied retrospectively. The adoption of this standard is not expected to have a significant impact on the ~~new standard.~~Company’s consolidated financial position, results of operations or cash flows.

In ~~September 2011,~~July 2012, an accounting ~~standard~~standards update was issued that simplifies how an entity tests ~~goodwill~~indefinite-lived intangible assets 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~~the indefinite-lived intangible asset is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard 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~~indefinite-lived intangible asset impairment tests performed for fiscal years beginning after ~~December~~September 15, ~~2011. Early adoption is permitted.~~2012. The Company ~~is likely~~intends to early adopt this standard for the ~~goodwill~~annual impairment test to be performed in the second quarter of fiscal ~~2012. Upon~~2013. The adoption of this standard ~~will~~is not expected to have a significant impact ~~how~~on the ~~Company assesses goodwill for impairment but will not change the measurement~~Company’s consolidated financial position, results of operations or ~~recognition of a potential goodwill impairment charge.~~cash flows.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

Note 3 - Inventories, net

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


	November 30, 2011		August 31, 2011		November 30, 2012		August 31, 2012
Processed and unprocessed scrap metal	$	308,124	$	241,093	$	209,067	$	152,930
Semi-finished steel products (billets)	10,168		9,237		4,950		7,328
Finished goods	58,314		54,395		51,797		49,988
Supplies	33,513		30,395		36,812		36,746
Inventories, net	$	410,119	$	335,120	$	302,626	$	246,992

Note 4 - Business Combinations

~~During fiscal~~ ~~2011~~,

In December 2012, the Company made the following acquisitions:

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

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

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

The aggregate consideration paid for ~~as business combinations. The total purchase price of~~ these acquisitions ofwas $~~314~~23 million~~, comprising~~ ~~$293 million~~ ~~in cash and~~ ~~$21 million~~ ~~in non-cash consideration ($19 million~~ ~~in shares~~. As of ~~a subsidiary and~~ ~~$2 million~~ ~~in contingent consideration), was allocated to tangible and identifiable intangible~~January 8, 2013, the initial accounting for determining the acquisition-date fair value for each major class of assets acquired, including goodwill, and liabilities assumed ~~based on their respective estimated fair values on the date of acquisition. The excess of~~was not yet complete. These acquisitions, individually or in the aggregate, ~~purchase price over~~are not material to the ~~fair value~~Company’s financial position or results of ~~the identifiable net assets acquired of~~ ~~$246 million~~ ~~for the year ended August 31, 2011 was recorded as goodwill.~~

~~The following unaudited~~operations, and thus pro forma ~~financial~~ information ~~represents the combined results of our operations for the three months ended November 30, 2010, as if all of the fiscal 2011 acquisitions had occurred as of September 1, 2009 (in thousands):~~is not presented.

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)~~ Table of Contents	~~Excludes nonrecurring executive compensation paid to the management of acquired companies that will not be incurred in the future.~~SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

These pro forma results are not necessarily indicative of what actual results would have been had these acquisitions occurred for the periods presented. In addition, the pro forma results are not intended to be a projection of future results and do not reflect any synergies that may be achieved from combining operations.

Note 5 - Goodwill

The gross changes in the carrying amount of goodwill by reporting segment for the three months ended November 30, ~~2011~~2012 were as follows (in thousands):


	Metals Recycling Business			Auto Parts Business			Total			Metals Recycling Business			Auto Parts Business			Total
Balance as of August 31, 2011	$	464,646		$	163,159		$	627,805
Balance as of August 31, 2012										$	471,954		$	163,537		$	635,491
Purchase accounting adjustments	142			—			142			(2		)	—			(2		)
Foreign currency translation adjustment	(4,808		)	(757		)	(5,565		)	(904		)	(134		)	(1,038		)
Balance as of November 30, 2011	$	459,980		$	162,402		$	622,382
Balance as of November 30, 2012										$	471,048		$	163,403		$	634,451

There were no accumulated goodwill impairment charges as of November 30, ~~2011.~~2012.

Note 6 - Commitments and Contingencies

The Company evaluates the adequacy of its environmental liabilities on a quarterly basis. Adjustments to the liabilities are made when additional information becomes available that affects the estimated costs to study or remediate any environmental issues or expenditures are made for which ~~reserves~~liabilities were established.

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

Changes in the Company’s environmental liabilities for the three months ended November 30, ~~2011~~2012 were as follows (in thousands):


	Balance as of August 31, 2011		Reserves Established (Released), Net			Payments			Balance as of November 30, 2011		Short-Term		Long-Term
Reporting Segment															Balance as of August 31, 2012		Liabilities Established (Released), Net		Payments and Other			Balance as of November 30, 2012		Short-Term		Long-Term
Metals Recycling Business	$	25,655	$	(300	)	$	(22	)	$	25,333	$	2,417	$	22,916	$	30,859	$	165	$	(124	)	$	30,900	$	1,707	$	29,193
Auto Parts Business	15,200		—			—			15,200		554		14,646		16,200		100		—			16,300		554		15,746
Total	$	40,855	$	(300	)	$	(22	)	$	40,533	$	2,971	$	37,562	$	47,059	$	265	$	(124	)	$	47,200	$	2,261	$	44,939

Metals Recycling Business (“MRB”)

As of November 30, ~~2011~~2012, MRB had environmental ~~reserves~~liabilities of $2531 million for the potential remediation of locations where it has conducted business and has environmental liabilities from historical or recent activities.

Portland Harbor

In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible 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 the natural resource damage assessment. The Company joined in that Phase I agreement and paid a portion of those costs. The Company did not participate in funding the second phase of the natural resource damage assessment.



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Because there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it is likely or reasonably possible that the Company ~~might~~may incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently not known or ~~liquidity.~~available are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and remedy costs among the PRPs. The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense and remediation in connection with the Site, although there is no assurance that those policies will cover all of the costs which the Company may incur. ~~In fiscal 2006, the~~The Company previously recorded a liability for its ~~then~~ estimated share of the costs of the investigation ~~incurred by the LWG to date. As~~ of~~November 30, 2011~~ ~~and~~ ~~August 31, 2011, the Company’s reserve for third party investigation costs of the Site was~~ $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~~liabilities have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) has not yet been determined.

Other ~~Metals Recycling Business~~MRB Sites

As of November 30, ~~2011~~2012, the Company had environmental ~~reserves~~liabilities related to various MRB sites other than Portland Harbor of

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

$2430 million. The ~~reserves~~liabilities relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff issues and were not individually material at any site. No material environmental compliance enforcement proceedings are currently pending related to these sites.

Auto Parts Business ~~(“APB”)~~

As of November 30, ~~2011~~2012, the Company had environmental ~~reserves~~liabilities related to various APB sites of $1516 million. The ~~reserves~~liabilities relate to the potential future remediation of soil contamination, groundwater contamination and storm water runoff issues and were not individually material at any site. No material environmental compliance enforcement proceedings are currently pending related to these sites.

Steel Manufacturing Business (“SMB”)

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

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

SMB had no environmental ~~reserves~~liabilities as of November 30, ~~2011~~2012.

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



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

the Unaudited Condensed Consolidated Financial Statements of the Company as a whole. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period.

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

Note 7 - Restructuring Charges

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

The Company expects that total pre-tax charges pursuant to these restructuring initiatives will be approximately $11 million. Of this amount, $7 million were incurred through the first quarter of fiscal 2013, with the balance expected to be incurred by the end of fiscal 2013. The Company expects that the vast majority of the restructuring charges will require cash payments.

The following illustrates the reconciliation of the restructuring liability by major type of costs for the three months ended November 30, 2012 (in thousands):



	Balance as of August 31, 2012		Charges		Payments and Other			Balance as of November 30, 2012		Total Charges to Date		Total Expected Charges
Severance costs	$	2,477	$	939	$	(2,548	)	$	868	$	3,680	$	4,000
Contract termination costs	414		5		(59		)	360		445		4,100
Other exit costs	64		649		(693		)	20		2,480		2,600
Total	$	2,955	$	1,593	$	(3,300	)	$	1,248	$	6,605	$	10,700

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



	As of November 30, 2012
		Current Period Charges		Total Charges to Date		Total Expected Charges
Metals Recycling Business		$	550	$	2,209	$	2,400
Auto Parts Business		187		420		600
Unallocated (Corporate)		856		3,976		7,700
Total		$	1,593	$	6,605	$	10,700

Note 78 - Redeemable Noncontrolling Interest

In March 2011, the Company, through a wholly-owned acquisition subsidiary, acquired substantially all of the metals recycling business assets of Amix Salvage & Sales Ltd. As part of the purchase consideration, the Company issued the seller common shares equal to 20% of the issued and outstanding capital stock of the Company’s acquisition subsidiary. Under the terms of an agreement related to the acquisition, the noncontrolling interest holder has the right to require the Company to purchase its ~~20%~~interest in the Company’s acquisition subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. ~~The conditions for redemption of the noncontrolling interest had not been met as~~As of November 30, ~~2011~~2012., the noncontrolling interest was 19% of the outstanding capital stock of the subsidiary and the conditions for redemption had not been met.

As of November 30, ~~2011~~2012, the ~~fair value of the redeemable~~ noncontrolling interest was presented at its adjusted carrying value of $1924 million~~. No material changes in~~, which approximates its fair ~~value were recorded since the initial measurement of the noncontrolling interest.~~value. The Company ~~estimates~~determines fair value using Level 3 inputs under the fair value hierarchy using an income approach based on ~~standard valuation techniques using~~ a discounted cash flow analysis. The determination of fair value requires management to apply significant judgment in formulating estimates and ~~assumptions. These estimates~~assumptions used in the discounted cash flow model, including primarily revenue growth



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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

Following is a reconciliation of the changes in the redeemable noncontrolling interest for the three months ended November 30, 2012 and 2011 (in thousands):



	2012			2011
Balances - September 1 (Beginning of period)	$	22,248		$	19,053
Net loss attributable to noncontrolling interest	(442		)	(207		)
Currency translation adjustment	(174		)	(377		)
Capital contributions from noncontrolling interest holder	1,970			467
Balances - November 30 (End of period)	$	23,602		$	18,936

Note 89 - Changes in Equity ~~and Comprehensive Income~~

The following is a summary of the changes in equity for the three months ended November 30, 2012and ~~comprehensive income~~2011 (in thousands):

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



	Fiscal 2013									Fiscal 2012
	SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balances - September 1 (Beginning of period)	$	1,080,583		$	5,113		$	1,085,696		$	1,094,712		$	6,524		$	1,101,236
Net income (loss)⁽¹⁾	(1,671		)	670			(1,001		)	7,018			934			7,952
Other comprehensive loss, net of tax⁽²⁾	(1,040		)	—			(1,040		)	(6,748		)	—			(6,748		)
Distributions to noncontrolling interests	—			(375		)	(375		)	—			(1,477		)	(1,477		)
Share repurchases	—			—			—			(3,117		)	—			(3,117		)
Restricted stock withheld for taxes	(1,104		)	—			(1,104		)	(840		)	—			(840		)
Share-based compensation	4,210			—			4,210			5,210			—			5,210
Excess tax (deficiency) benefit from stock options exercised and restricted stock units vested	(681		)	—			(681		)	413			—			413
Cash dividends ($0.188 and $0.017 per share)	(4,952		)	—			(4,952		)	(463		)	—			(463		)
Balances - November 30 (End of period)	$	1,075,345		$	5,408		$	1,080,753		$	1,096,185		$	5,981		$	1,102,166

_____________________________

(1)

Net income attributable to noncontrolling interests atfor the three months ended November 30, 2012 and 2011 excludes ~~a loss~~net losses of $~~207~~(442) thousand and $(207) thousand, respectively, allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance ~~Sheets at~~ ~~November 30, 2011~~.Sheets. See Note 78 - Redeemable Noncontrolling Interest.

(2)

~~Foreign currency translation adjustments exclude~~ ~~$(886) thousand~~ ~~relating to redeemable noncontrolling interests~~Other comprehensive loss, net of tax for the three months ended November 30, 2012 and 2011 excludes $(174) thousand and $(377) thousand, respectively, relating to foreign currency translation adjustments for the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance ~~Sheets at~~ ~~November 30, 2011~~.Sheets. See Note 78 - Redeemable Noncontrolling Interest.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

Note 10 - Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):



	November 30, 2012			August 31, 2012
Foreign currency translation adjustments	$	2,226		$	3,658
Pension obligations, net	(5,731		)	(6,106		)
Cash flow hedges, net	(124		)	(141		)
Total accumulated other comprehensive loss	$	(3,629	)	$	(2,589	)

Note 911 - Derivative Financial Instruments

Foreign Currency Exchange Rate Risk Management

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

The Company entered into forward contracts ~~during fiscal 2011~~ to mitigate exposure to exchange rate fluctuations on Euro-denominated fixed asset purchases, which were designated as qualifying cash flow hedges for accounting purposes. These foreign currency forward contracts are measured using forward exchange rates based on observable exchange rates quoted in an active market and are classified as a Level 12 fair value ~~measurement~~measurements under the fair value hierarchy. In the first quarter of fiscal 2012, the Company determined that ~~the~~certain forecasted ~~transaction was~~transactions were no longer probable, ~~and~~ de-designated these contracts as ~~hedges. These forward contracts were~~hedges and subsequently terminated in the ~~first quarter of fiscal 2012.~~contracts. 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 Unaudited Condensed Consolidated Financial ~~Statements.~~Statements for all periods presented.

Note 1012 - Share-based Compensation

In the first quarter of fiscal ~~2012,~~2013, as part of the annual awards under the Company’s Long-Term Incentive Plan, the Compensation Committee granted ~~143,718~~209,639 restricted stock units ~~(RSU)~~(“RSU”) to its key employees

~~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.~~2013. The ~~estimated~~ fair value of the RSUs granted is based on the market closing price of the underlying Class A common stock on the date of grant and totaled $6 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.

Note 1113 - Income Taxes

The effective tax ~~rates~~rate for the Company’s ~~continuing~~ operations for the three months ended November 30, ~~2011~~2012 and ~~2010~~2011 ~~were~~was ~~31.5%~~(198.8)% and ~~32.7%~~31.5%, respectively.

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


	Three Months Ended November 30,				Three Months Ended November 30,
	2011		2010		2012		2011
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of credits	1.3		1.0		7.1		1.3
Foreign income taxed at different rates	(1.6	)	(1.1	)	(1.0	)	(1.6	)
Section 199 deduction	(1.7	)	(1.4	)	4.6		(1.7	)
Non-deductible officers’ compensation	0.7		0.3		(1.1	)	0.7
Noncontrolling interests	(2.0	)	(1.4	)	48.5		(2.0	)
Research and development credits					21.7		—
Valuation allowance on deferred tax assets					(312.1	)	—
Other	(0.2	)	0.3		(1.5	)	(0.2	)
Effective tax rate	31.5	%	32.7	%	(198.8	)%	31.5	%



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

In the first quarter of fiscal 2013, the Company recorded an expense of $2 million to recognize a valuation allowance on deferred tax assets of a foreign subsidiary as a result of negative evidence, including recent losses at the subsidiary, outweighing the more subjective positive evidence, thus indicating that it is more likely than not that the associated tax benefit will not be realized in the future.

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

Note 1214 - Net Income (Loss) Per Share

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


	2011			2010			Three Months Ended November 30,
Income from continuing operations	$	7,745		$	18,894
							2012			2011
Net income (loss)							$	(1,443	)	$	7,745
Net income attributable to noncontrolling interests	(727		)	(1,123		)	(228		)	(727		)
Income from continuing operations attributable to SSI	7,018			17,771
Income from discontinued operations, net of tax	—			23
Net income attributable to SSI	$	7,018		$	17,794
Net income (loss) attributable to SSI							(1,671		)	7,018
Computation of shares:
Weighted average common shares outstanding, basic	27,451			27,563			26,567			27,451
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs	264			308			—			264
Weighted average common shares outstanding, diluted	27,715			27,871			26,567			27,715

Common stock equivalent shares of ~~351,074~~864,874 and ~~50,599~~351,074 were considered antidilutive and were excluded from the calculation of diluted net income (loss) per share for the three months ended November 30, ~~2011~~2012 and ~~2010~~2011., respectively.

Note 1315 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $6 million and $10 million for ~~each of~~ the three months ended November 30, ~~2011~~2012 and ~~2010~~2011. Payments from these joint ventures were less than $1 million ~~and~~ ~~$1 million~~for the three months ended November 30, ~~2011~~2012 and ~~2010~~2011~~, respectively.~~. The Company owed $3 million and $2 million to joint ventures as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012.

~~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 million~~ ~~in equity to the joint venture.~~

In connection with the acquisition of the metals recycling business assets of Amix Salvage & Sales Ltd., in March 2011, the Company entered into a series of agreements to obtain barging and other services and lease property with entities owned by the minority shareholder of the Company’s subsidiary that operates its MRB facilities in Vancouver, British Columbia and Alberta, Canada. The Company paid less than $1 million and $3 million, primarily for barging services, under these agreements for the three months ended November 30, 2012 and 2011, respectively. Amounts payable to entities affiliated with this minority shareholder were less than $1 million as of November 30, 2012 and August 31, 2012.

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

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



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

Certain members of the Schnitzer family own significant interests in, or are related to owners of, MMGL Corp (“MMGL”, formerly known as Schnitzer Investment ~~Corp (“SIC”~~Corp.), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. ~~SIC~~MMGL is considered a related party for financial reporting purposes. ~~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.~~ The Company and ~~SIC~~MMGL are both potentially responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The Company and ~~SIC~~MMGL have worked together in response to Portland Harbor matters, and the Company has paid all of the legal and consulting fees for the joint defense, in part due to its environmental indemnity obligation to ~~SIC~~MMGL with respect to the Portland scrap metal operations property. As these costs have increased substantially in the last two years, the Company and ~~SIC~~MMGL have agreed to an equitable cost sharing arrangement with respect to defense costs under which ~~SIC~~MMGL will pay 50% of the legal and consulting costs, net of insurance recoveries. The amounts receivable from (payable to) ~~SIC~~MMGL vary from period to period because of the timing of incurring legal and consulting fees, payments for cost reimbursements and insurance recoveries. ~~As of~~ ~~November 30, 2011, amounts payable to SIC~~Amounts receivable from MMGL under this agreement were ~~less than~~ ~~$(1) million, compared to amounts receivable from SIC of~~ less than $1 million as of November 30, 2012 and August 31, ~~2011~~2012.

Note 1416 - Segment Information

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

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

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

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

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

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



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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


							Three Months Ended November 30,
	2011			2010			2012			2011
Revenues:
Metals Recycling Business:
Revenues	$	728,438		$	591,708		$	494,461		$	728,438
Less: Intersegment revenues	(58,696		)	(31,709		)	(47,255		)	(58,696		)
MRB external customer revenues	669,742			559,999			447,206			669,742
Auto Parts Business:
Revenues	84,054			66,681			69,555			84,054
Less: Intersegment revenues	(21,522		)	(15,210		)	(15,970		)	(21,522		)
APB external customer revenues	62,532			51,471			53,585			62,532
Steel Manufacturing Business:
Revenues	79,902			63,634			92,029			79,902
Total revenues	$	812,176		$	675,104		$	592,820		$	812,176

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

~~SCHNITZER STEEL INDUSTRIES, INC.~~

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



	Three Months Ended November 30,
	2012			2011
Metals Recycling Business	$	5,654		$	13,099
Auto Parts Business	6,364			10,442
Steel Manufacturing Business	3,404			1,218
Segment operating income	15,422			24,759
Restructuring charges	(1,593		)	—
Corporate and eliminations	(12,616		)	(9,789		)
Operating income	1,213			14,970
Interest expense	(2,017		)	(3,271		)
Other income (expense), net	321			(393		)
Income (loss) before income taxes	$	(483	)	$	11,306

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


	November 30, 2011			August 31, 2011			November 30, 2012			August 31, 2012
Metals Recycling Business⁽¹⁾	$	1,645,870		$	1,668,778		$	1,680,808		$	1,696,296
Auto Parts Business	309,551			304,060			337,734			329,327
Steel Manufacturing Business	325,486			324,596			325,741			322,398
Total segment assets	2,280,907			2,297,434			2,344,283			2,348,021
Corporate and eliminations	(352,606		)	(407,265		)	(585,079		)	(584,448		)
Total assets	$	1,928,301		$	1,890,169		$	1,759,204		$	1,763,573

_____________________________


(1)	MRB total assets include $1816 million and $17 million as of November 30, ~~2011~~2012 and August 31, ~~2011,~~2012, respectively, for investments in joint venture partnerships.

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section includes a discussion of our operations for the three months ended November 30, ~~2011~~2012 and ~~2010~~2011. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012 and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

Forward-Looking Statements

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

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

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

We may make other forward-looking statements from time to time, including in press releases and public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in Item 1A. Risk Factors of Part I in our Annual Report on Form 10-K for the year ended August 31, ~~2011.~~2012. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site; the impact of general economic conditions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; difficulties associated with acquisitions and integration of acquired businesses; the impact of goodwill impairment charges; the realization of expected cost reductions related to restructuring initiatives; the inability of customers to fulfill their contractual obligations; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; the impact of the consolidation in the steel industry; the impact of imports of foreign steel into the U.S.; inability to realize expected benefits from investments in technology; freight rates and availability of transportation; product liability claims; costs associated with compliance with environmental regulations; the adverse impact of climate change; inability to obtain or renew business licenses and permits; compliance with greenhouse gas emission regulations; reliance on employees subject to collective bargaining agreements; and the impact of the underfunded status of multiemployer plans in which we participate.

General

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

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



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see Note 1416 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

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

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Oregon; and Tacoma, ~~Washington; and Providence, Rhode Island)~~Washington) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for ferrous ~~scrap~~recycled metal by shipping bulk cargoes to steel manufacturers located in Europe, Asia, Central America and Africa. Our exports of nonferrous processed ~~scrap~~recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck and rail in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities and to meet regional domestic demand. ~~In particular, our processing facilities in the Southeastern U.S. also provide efficient access to the automobile and steel manufacturing industries in that region.~~

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

~~In the~~ ~~first~~ ~~quarter of fiscal~~ ~~2012, we~~We generated consolidated revenues of $~~812~~593 million~~, an increase of~~ ~~20%~~ ~~from the~~ ~~$675 million~~ ~~of revenues achieved~~ in the first quarter of fiscal ~~2011~~2013~~. The increase~~, a decrease of 27% from the $812 million of revenues in the first quarter of fiscal 2012. This decrease was primarily due to ~~higher~~lower ferrous and nonferrous sales volumes and average net selling prices ~~compared with~~as a result of weak economic conditions that negatively impacted global demand for recycled metal. In addition, the ~~prior year quarter~~sluggish U.S. economic growth and ~~incremental revenues from fiscal 2011 acquisitions. Our operating income for~~ the ~~quarter decreased by~~ ~~$13 million, or~~ ~~(47)%, to~~ ~~$15 million~~ ~~when compared with our prior year quarter.~~lower price environment adversely impacted the supply of scrap metal.

~~Our~~

The weak global economic conditions and the slowdown of economic activity adversely impacted our results in the first quarter of fiscal ~~2012 were adversely impacted by heightened global macroeconomic concerns, stemming primarily from an escalation~~2013, leading to operating income of $1 million, which included restructuring charges of $2 million, compared to operating income of $15 million 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 reflected a less volatile market environment and was characterized by rising~~quarter. Selling prices for ferrous recycled metal ~~prices. As net selling prices for our shipments increased faster than cost~~experienced a sharp decline in the first half 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~~2013. In these weak market conditions, purchase costs for recycled metal decreased at a ~~similar~~slower pace than average net selling prices for shipments resulting in a compression inof operating margins ascompared to the prior year period. This compression was further compounded at MRB by the adverse impact of average inventory costing on costs of goods sold caused by the sharp decline in ferrous recycled metal prices during the ~~current~~ quarter.

In addition, operating ~~income~~results at MRB and APB were negatively impacted by the reduction in volumes due to the ~~current quarter~~constrained supply of raw materials, including end-of-life vehicles, primarily related to the continued weak domestic economic conditions. This was ~~impacted~~partially offset by an increase in ~~selling,~~operating income at SMB primarily as a result of higher finished steel volumes compared to the first quarter of fiscal 2012. Selling, general and administrative (“SG&A”) expenses ofdecreased by $118 million, or ~~25%~~14%, ~~including operating expenses related~~compared 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~~primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012 and reduced incentive compensation expense due to lower financial performance.~~$0.64~~ ~~per share in the prior year comparable period.~~

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

Revenues of $~~812~~593 million, compared to $~~675~~812 million in the first quarter of fiscal ~~2011~~2012;

Operating income of $151 million, compared to operating income of $2815 million in the first quarter of fiscal ~~2011~~2012;

Net ~~income~~loss attributable to SSI of $2 million, or $(0.06) per diluted share, compared to net income of $7 million, or $0.25 per diluted share, ~~(diluted), compared to~~ ~~$18 million, or~~ ~~$0.64~~ ~~per share (diluted),~~ in the first quarter of fiscal ~~2011~~2012;

Net cash used in operating activities of $~~86 million, compared to~~ ~~$18~~60 million in the first three months of fiscal ~~2011~~;

~~Cash and cash equivalents of~~ ~~$27 million~~ ~~as of~~ ~~November 30, 2011~~2013, compared to $4986 million asin the first quarter of ~~August 31, 2011; and~~fiscal 2012;

Debt, net of cash, of $~~469~~331 million as of November 30, ~~2011~~2012, compared to $~~354~~245 million as of August 31, ~~2011~~2012 (see the reconciliation of Debt, net of cash in Non-GAAP Financial Measures at the end of this Item 2).

~~Our MRB segment generated revenues of~~ ~~$728 million, a~~ ~~$137 million~~ ~~increase from~~The following items highlight the ~~first~~ ~~quarter of fiscal~~ ~~2011. The increase in revenues was driven by a~~ ~~$97 million, or~~ ~~20%, increase in ferrous revenues and a~~ ~~$34 million, or~~ ~~31%, increase in nonferrous revenues. These increases were primarily due to higher average net selling prices and higher nonferrous sales volumes. MRB had~~financial results for our operating ~~income of~~ ~~$13 million~~ ~~compared to~~ ~~$26 million~~segments for the first quarter of fiscal ~~2011~~2013. 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,:

MRB revenues and 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~~ $4494 million and ~~costs associated with additional headcount from business growth.~~

~~Our APB segment generated revenues of~~ $846 million, arespectively, compared to $17728 million ~~increase from~~and $13 million in the first quarter of fiscal ~~2011~~2012~~. The increase in~~, respectively;

APB revenues ~~was driven by an~~ ~~$8 million~~ ~~increase in scrap vehicle revenue, a~~ ~~$5 million~~ ~~increase in core revenue~~ and a ~~$3 million~~ ~~increase in parts revenue primarily due to higher commodity prices, increased car volumes from acquisitions and further enhancements of production operating efficiencies. APB had~~ ~~first~~ ~~quarter~~ operating income of $1070 million and $6 million, respectively, compared to $1484 million ~~for~~and $10 million in the first quarter of fiscal ~~2011~~2012. 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, respectively; and ~~the adverse effect of using the weighted average inventory costing method to determine cost of goods sold. In addition,~~

SMB revenues and operating income ~~was~~

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~~impacted by an increase in selling, general~~$92 million and ~~administrative expenses of~~ $3 million ~~primarily due~~, respectively, compared to ~~operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.~~

~~Our SMB segment generated revenues of~~ $80 million~~, a~~ and $161 million ~~increase from~~in the first quarter of fiscal ~~2011~~2012. The increase in revenues was primarily due to increases in average sales prices and finished steel sales volumes due to improved, but still weak, demand for finished steel products in western North America. SMB had operating income of , respectively.~~$1 million~~ ~~compared to an operating loss of~~ ~~$(2) million~~ ~~for the~~ ~~first~~ ~~quarter of fiscal~~ ~~2011~~.

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Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations


	Three Months Ended November 30,								Three Months Ended November 30,
($ in thousands)	2011			2010			% Change		2012			2011			% Change
Revenues:
Metals Recycling Business	$	728,438		$	591,708		23	%	$	494,461		$	728,438		(32	)%
Auto Parts Business	84,054			66,681			26	%	69,555			84,054			(17	)%
Steel Manufacturing Business	79,902			63,634			26	%	92,029			79,902			15	%
Intercompany revenue eliminations⁽¹⁾	(80,218		)	(46,919		)	71	%	(63,225		)	(80,218		)	(21	)%
Total revenues	812,176			675,104			20	%	592,820			812,176			(27	)%
Cost of goods sold:
Metals Recycling Business	686,456			545,688			26	%	466,587			686,456			(32	)%
Auto Parts Business	59,460			41,229			44	%	50,044			59,460			(16	)%
Steel Manufacturing Business	77,005			64,218			20	%	86,944			77,005			13	%
Intercompany cost of goods sold eliminations⁽¹⁾	(80,706		)	(48,589		)	66	%	(61,691		)	(80,706		)	(24	)%
Total cost of goods sold	742,215			602,546			23	%	541,884			742,215			(27	)%
Selling, general and administrative (“SG&A”) expense:
Selling, general and administrative expense:
Metals Recycling Business	30,165			21,648			39	%	22,173			29,865			(26	)%
Auto Parts Business	14,152			11,413			24	%	13,147			14,152			(7	)%
Steel Manufacturing Business	1,679			1,451			16	%	1,681			1,679			—	%
Corporate⁽²⁾	10,296			10,563			(3	)%	10,994			10,296			7	%
Total SG&A expense	56,292			45,075			25	%	47,995			55,992			(14	)%
Environmental reserves charges (releases), net:
Metals Recycling Business	(300		)	(200		)	50	%
Total environmental reserves charges (releases), net	(300		)	(200		)	50	%
Income from joint ventures:
Loss (income) from joint ventures:
Metals Recycling Business	(982		)	(961		)	2	%	47			(982		)	NM
Change in intercompany profit elimination⁽³⁾	(19		)	204			NM		88			(19		)	NM
Total joint venture income	(1,001		)	(757		)	32	%
Operating income (loss):
Total joint venture loss (income)									135			(1,001		)	NM
Operating income:
Metals Recycling Business	13,099			25,533			(49	)%	5,654			13,099			(57	)%
Auto Parts Business	10,442			14,039			(26	)%	6,364			10,442			(39	)%
Steel Manufacturing Business	1,218			(2,035		)	NM		3,404			1,218			179	%
Corporate expense	(10,296		)	(10,563		)	(3	)%
Change in intercompany profit elimination⁽⁴⁾	507			1,466			(65	)%
Segment operating income									15,422			24,759			(38	)%
Restructuring charges⁽⁴⁾									(1,593		)	—			NM
Corporate expense⁽²⁾									(11,144		)	(10,296		)	8	%
Change in intercompany profit elimination⁽⁵⁾									(1,472		)	507			NM
Total operating income	$	14,970		$	28,440		(47	)%	$	1,213		$	14,970		(92	)%

_____________________________

NM = Not Meaningful


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


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

(3)

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


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


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

1920

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Revenues

Consolidated revenues ~~increased~~in the first quarter of fiscal 2013 were $~~137~~593 million to, a decrease of ~~$812 million~~27% compared to the same period in the prior year. ~~The increase in consolidated revenues~~This decrease was primarily due to ~~higher~~lower ferrous and nonferrous sales volumes and lower average net selling prices due to softer global demand for recycled metal resulting from a continued slowdown in global economic growth. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal compared to the prior year and contributed to the lower sales volumes.

Operating Income

Consolidated operating income in the first three months of fiscal 2013 was $1 million, compared to operating income of $15 million in the prior year period. In the first quarter of fiscal 2013, selling prices for ferrous recycled metal experienced a sharp decline. As a result of the weak market conditions, purchase costs for recycled metal decreased at a slower pace than average net selling prices for shipments resulting in a compression of operating margins compared to the prior year period. This compression was further compounded at MRB by the adverse impact of average inventory costing on costs of goods sold caused by the sharp decline in recycled recycled metal prices during the quarter. In addition, operating results at MRB and APB were negatively impacted by the reduction in volumes due to the constrained supply of raw materials, including end-of-life vehicles, primarily related to the continued weak domestic economic conditions. This was partially offset by an increase in operating income at SMB primarily as a result of higher ~~commodity price levels. In addition, sales~~finished steel volumes ~~increased for nonferrous materials mainly due~~compared to fiscal 2011 acquisitions and increased recovery through enhanced processing technologies and for APB primarily as a result of 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~~ While the prior year period ~~due to~~also experienced a ~~compression~~decline in selling prices for recycled metals, operating ~~margins~~results for MRB and APB in the first quarter of fiscal 2012 benefited from higher sales volumes and average net selling prices resulting in less margin compression.

Included in operating results for the first quarter of fiscal 2013 was a reduction in SG&A expenses of $8 million, or 14%. The decrease was primarily as a result of the restructuring initiatives and other operating efficiencies initiated in fiscal 2012 and reduced incentive compensation expense due to lower financial performance.

Consolidated operating income in the first quarter of fiscal 2013 included restructuring charges of $2 million consisting of severance, contract termination and other exit costs. These charges related to the restructuring initiatives announced in the fourth quarter of fiscal 2012 designed to extract greater synergies from the significant acquisitions and technology investments made in recent years, achieve further integration between MRB and APB, realign our organization to support future growth and decrease operating expenses by streamlining functions and reducing organizational layers. These initiatives are expected to lower annual operating costs by $25 million, comprising approximately $18 million of selling, general and administrative expense and $7 million of cost of goods sold, ~~which reflects~~and be substantially complete by the ~~weighted average inventory costing method, decreasing at a slower rate than metal purchase prices and net selling prices in a period~~end of sharply declining recycled metal prices. 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 offiscal 2013. Total pre-tax charges pursuant to these restructuring initiatives are expected to amount to $11 million ~~in SG&A expenses over~~, of which $7 million have been recognized to date with the ~~same period~~balance expected to be incurred by the end of fiscal 2013. We expect that the vast majority of the restructuring charges will require us to make cash payments.

Following is a summary of the restructuring charges incurred in the ~~prior year, including~~first quarter of fiscal 2013 by major type of cost and the total charges expected to be incurred pursuant to these restructuring initiatives (in thousands):



	MRB		APB		Corporate		Total charges in the Period		Total Expected Charges
Severance costs	$	521	$	111	$	307	$	939	$	4,000
Contract termination costs	5		—		—		5		4,100
Other exit costs	24		76		549		649		2,600
Total	$	550	$	187	$	856	$	1,593	$	10,700

We do not include restructuring charges in the measurement of the performance of our operating ~~expenses related to fiscal 2011 acquisitions of~~ ~~$5 million~~ ~~and costs associated with additional headcount from business growth.~~segments.

Interest Expense

Interest expense was $32 million and $13 million for the three months ended November 30, ~~2011~~2012 and ~~2010,~~2011, respectively. The ~~increase~~decrease in interest expense was primarily due to ~~increased~~decreased average borrowings ~~primarily related to our acquisitions in fiscal 2011 and higher average interest rates~~ under our bank credit ~~facilities.~~facilities compared to the prior year period.

Income Tax Expense

Our effective tax rate for the first quarter of fiscal ~~2012~~2013 was an expense of ~~31.5%~~198.8%, compared to ~~32.7%~~31.5% for the same period in the prior year. The effective tax rate in the first quarter of fiscal 2013 was impacted by the near break-even pre-tax results and the recognition of a valuation allowance on deferred tax assets of $2 million. The valuation allowance was recorded on deferred tax assets of a foreign subsidiary as a result of negative evidence, including recent losses at the subsidiary, outweighing the more



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subjective positive evidence, thus indicating that it is more likely than not that the associated tax benefit will not be realized in the future. We will continue to regularly assess the realizability of deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets, which would impact our income tax expense in the period we determine that these factors have changed.

The effective tax rate for fiscal 2013is expected to be approximately ~~32.5%~~36%, subject to financial performance for the remainder of ~~fiscal~~ ~~2012~~.the year.

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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 1416 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Metals Recycling Business



	Three Months Ended November 30,
($ in thousands, except for prices)	2012		2011			% Change
Ferrous revenues	$	370,476	$	578,024		(36	)%
Nonferrous revenues	116,601		142,290			(18	)%
Other	7,384		8,124			(9	)%
Total segment revenues	494,461		728,438			(32	)%
Cost of goods sold	466,587		686,456			(32	)%
Selling, general and administrative expense	22,173		29,865			(26	)%
Loss (income) from joint ventures	47		(982		)	NM
Segment operating income	$	5,654	$	13,099		(57	)%
Average ferrous recycled metal sales prices ($/LT):⁽¹⁾
Domestic	$	354	$	420		(16	)%
Foreign	$	360	$	436		(17	)%
Average	$	358	$	432		(17	)%
Ferrous sales volume (LT, in thousands):
Domestic	279		319			(13	)%
Foreign	675		913			(26	)%
Total ferrous sales volume (LT, in thousands)	954		1,232			(23	)%
Average nonferrous sales price ($/pound)⁽¹⁾	$	0.95	$	1.00		(5	)%
Nonferrous sales volumes (pounds, in thousands)	118,931		137,243			(13	)%
Outbound freight included in cost of goods sold	$	32,322	$	50,086		(35	)%

Three Months Ended November 30,
($ in thousands, except for prices) 2011 2010 % Change
Ferrous revenues $ 578,024
$ 480,868
20 %
Nonferrous revenues 142,290
108,273
31 %
Other 8,124
2,567
216 %
Total segment revenues 728,438
591,708
23 %
Cost of goods sold 686,456
545,688
26 %
Selling, general and administrative expense 30,165
21,648
39 %
Environmental reserves charges (releases), net (300 ) (200 ) 50 %
Income from joint ventures (982 ) (961 ) 2 %
Segment operating income $ 13,099
$ 25,533
(49 )%
Average ferrous recycled metal sales prices ($/LT):⁽¹⁾

Steel Manufacturing Business $ 429
$ 350
23 %
Other domestic $ 413
$ 315
31 %
Foreign $ 436
$ 359
21 %
Average $ 432
$ 353
22 %
Ferrous sales volume (LT, in thousands):
Steel Manufacturing Business 135
91
48 %
Other domestic 184
161
14 %
Total domestic 319
252
27 %
Foreign 913
979
(7 )%
Total ferrous sales volume (LT, in thousands) 1,232
1,231
— %
Average nonferrous sales price ($/pound)⁽¹⁾
$ 1.00
$ 0.94
6 %
Nonferrous sales volumes (pounds, in thousands) 137,243
111,495
23 %
Outbound freight included in cost of goods sold $ 50,086
$ 50,797
(1 )%

_____________________________

LT = Long Ton, which is 2,240 pounds


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

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

Revenues

The ~~increase~~decrease in ferrous revenues was ~~primarily attributable~~due to ~~higher~~the combination of lower sales volumes and lower average net selling prices. Softer global demand for recycled metal ~~sales prices~~resulting from a continued slowdown in ~~the commodity markets~~global economic growth compared to the prior year ~~quarter.~~quarter contributed to these declines. In addition, the sluggish U.S. economic growth and the lower price environment adversely impacted the supply of scrap metal compared to the prior year and contributed to the lower sales volumes.

~~Ferrous~~The decrease in nonferrous revenues ~~increased mainly~~was driven primarily by the combination of lower sales volumes and lower average net selling prices as a result of ~~higher average ferrous net selling prices. While average selling prices in~~ the ~~current year quarter were~~ ~~22%~~ ~~higher than in the prior year quarter, a period of~~ weak ~~demand led~~market conditions. Nonferrous volumes decreased compared 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~~2012 despite the ~~prior year quarter despite a declining trend in nonferrous net selling prices during the first quarter~~impact of ~~fiscal 2012. The~~ ~~23%~~ ~~increase in nonferrous sales volumes reflected incremental volume from fiscal 2011 acquisitions, increased~~improved recovery of nonferrous materials processed through our enhanced ~~shredding and sorting technologies and more nonferrous collection activity.~~processing technologies.

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Segment Operating Income

Operating income for the first quarter of fiscal 2013 decreased by $7 million, or 57%, to $6 million compared to the prior year period. The first half of the first quarter of fiscal 2013 included a decline in selling prices for ferrous recycled metal which led to



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an adverse effect of average inventory costing on cost of goods sold. In addition, operating results in the first quarter of fiscal 2013 were negatively impacted by the reduction in volumes as a result of the constrained supply of raw materials primarily related to the continued weak domestic economic conditions. The combination of these factors led to a compression in operating margins ~~were compressed~~in the first quarter of fiscal 2013. While the prior year period also experienced declining selling prices for recycled metals, MRB’s operating results in the first quarter of fiscal 2012 benefited from higher sales volumes and higher average net selling prices resulting in less margin compression.

Included in operating income was an $8 million reduction in SG&A expenses for the first quarter of fiscal 2013 primarily as a result of ~~a significant slowdown~~the restructuring initiatives and other operating efficiencies initiated 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,fiscal 2012 and reduced incentive compensation expense due to decrease at a slower rate than net selling 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 lower financial performance.~~$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,						Three Months Ended November 30,
($ in thousands)	2011		2010		% Change		2012		2011		% Change
Revenues	$	84,054	$	66,681	26	%	$	69,555	$	84,054	(17	)%
Cost of goods sold	59,460		41,229		44	%	50,044		59,460		(16	)%
Selling, general and administrative expense	14,152		11,413		24	%	13,147		14,152		(7	)%
Segment operating income	$	10,442	$	14,039	(26	)%	$	6,364	$	10,442	(39	)%
Number of stores at period end	50		45		11	%	51		50		2	%
Cars purchased (in thousands)	85		82		4	%	79		85		(7	)%

Revenues

The ~~increase~~decrease in revenues ~~included an~~in the ~~$8 million~~first ~~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~~quarter of fiscal 2013 was primarily due to lower commodity prices ~~increased~~and decreased car volumes, ~~from acquisitions~~both of which adversely impacted ferrous and ~~further enhancements of production operating efficiencies.~~nonferrous sales compared to the prior year period.

Segment Operating Income

Operating income for the first quarter of fiscal 2013 decreased by 39% compared to the prior year period primarily due to the compression in operating margins caused by the adverse impact of lower car volumes on costs of goods sold and by car purchase costs decreasing at a slower rate than ferrous selling prices.

Operating income in the first quarter of fiscal ~~2012 decreased compared to the prior year quarter~~2013 reflected lower SG&A expenses of $1 million primarily as a result of ~~a compression in operating margins due to selling prices declining at a faster rate than car purchasing costs~~the benefits arising from restructuring initiatives and the adverse impact on cost of goods sold, which reflects the weighted average inventory costing method. In addition, operating income was impacted by an increase in SG&A expenses primarily due to operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.other operational efficiencies.

Steel Manufacturing Business


	Three Months Ended November 30,								Three Months Ended November 30,
($ in thousands, except for price)	2011			2010			% Change		2012			2011			% Change
Revenues	$	79,902		$	63,634		26	%	$	92,029		$	79,902		15	%
Cost of goods sold	77,005			64,218			20	%	86,944			77,005			13	%
Selling, general and administrative expense	1,679			1,451			16	%
Segment operating income (loss)	$	1,218		$	(2,035	)	NM
Selling, general and administrative									1,681			1,679			—	%
Segment operating income									$	3,404		$	1,218		179	%
Finished steel products average sales price ($/ton)⁽¹⁾	$	722		$	634		14	%	$	680		$	722		(6	)%
Finished steel products sold (tons, in thousands)	107			98			9	%	130			107			21	%
Rolling mill utilization	60		%	48		%			70		%	60		%

_____________________________

~~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 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 compared to the prior year quarter, reflecting our ability to pass through higher purchase prices for scrap and

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~~other raw materials to end customers. Additionally, there was a~~ ~~9 thousand~~ ~~ton increase in finished steel products sold compared to the same period in the prior year as a result of slightly improved, although still weak, demand for our products in our West Coast markets.~~

~~Segment Operating Income (Loss)~~

~~The increase in operating income~~revenues was primarily due to ~~the increase in the average selling prices for finished steel products which outpaced the increase in scrap and other raw material purchase costs, as well as the~~an increase in the volume of finished steel products sold ~~due to~~in the first quarter of fiscal 2013 as a result of slightly improved ~~but still weak,~~ demand in our West Coast markets. The impact on revenue from improved volumes was partially offset by lower average selling prices for our finished steel products as a result of the declining trend in ~~western North America.~~global steel prices.



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Segment Operating Income

The increase in operating income for the first quarter of fiscal 2013 compared to the prior year period was primarily due to the positive impact of higher production volumes on cost of goods sold. In addition, operating results benefited from raw material costs decreasing at a faster rate than the average sales price for our finished steel products and a more favorable product mix.

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 $2724 million and $4990 million as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, acquisitions, dividends and ~~capital expenditures.~~share repurchases. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, ~~2011~~2012, debt, net of cash, was $~~469~~331 million compared to $~~354~~245 million as of August 31, ~~2011~~2012 (refer to Non-GAAP Financial Measures below), an increase of $~~115~~86 million primarily ~~due to higher~~as a result of the increase in our working ~~capital requirements.~~capital. Our cash balances as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012 include $155 million and $1113 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.

Operating Activities

Net cash used in operating activities in the first three months of fiscal ~~2012~~2013 was $8660 million, compared to $1886 million in the first three months of fiscal ~~2011~~2012.

Cash used in operating activities in the first three months of fiscal ~~2012~~2013 included a $51 million increase in inventory due to higher volumes on hand, a $20 million increase in accounts receivable due to the timing of collections and a $10 million decrease in accounts payable due to the timing of payments.

Cash used in operating activities in the first three months of fiscal 2012 included an increase in inventory of ~~$74~~$74 million due to higher volumes on hand and a decrease of ~~$19~~$19 million in accounts payable due to the timing of payments. Sources of cash ~~include~~included a decrease of $8$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 accounts receivable of~~ ~~$35 million~~ ~~due to timing of collections, a~~ ~~$14 million~~ ~~decrease in accrued payroll and related liabilities due to the payment of fiscal 2010 incentive compensation awards in the first quarter of fiscal 2011, a~~ ~~$7 million~~ ~~decrease in accounts payable due to timing of payments and a~~ ~~$6 million~~ ~~increase in inventories due to higher purchase costs and higher volumes of material on hand at period end.~~

Investing Activities

Net cash used in investing activities in the first three months of fiscal ~~2012~~2013 was $2526 million, compared to $3225 million in the first three months of fiscal ~~2011~~2012.

Cash used in investing activities in the first three months of fiscal 2013 and 2012 included $2627 million and $26 million, respectively, in capital expenditures to upgrade our equipment and infrastructure.

~~Cash used in investing activities in the first~~ ~~three~~ ~~months of fiscal~~ ~~2011~~ ~~included~~ ~~$25 million~~ ~~in capital expenditures to upgrade our equipment and infrastructure and~~ ~~$7 million~~ ~~paid for acquisitions completed in the first quarter of fiscal 2011 as well as amounts that were accrued for prior acquisitions.~~

Financing Activities

Net cash provided by financing activities in the first three months of fiscal ~~2012~~2013 was $8920 million, compared to $7789 million in the first three months of fiscal ~~2011~~2012.

Cash provided by financing activities in the first three months of fiscal 2013 included $20 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) mainly used to support higher working capital requirements.

Cash provided by financing activities in the first three months of fiscal 2012 included $94 million in net borrowings of debt (refer to Non-GAAP Financial Measures below) principally used to support higher working capital requirements and $3$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~~ ~~$80 million~~ ~~in net borrowings of debt (refer~~

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~~to Non-GAAP Financial Measures below) principally used to support higher working capital requirements.~~

Credit Facilities

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



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We had borrowings outstanding under the credit facility of $~~471~~337 million as of November 30, ~~2011~~2012 and $~~393~~325 million as of August 31, ~~2011~~2012~~, an increase of~~ ~~$78 million~~ ~~primarily due to increased working capital requirements.~~. The weighted average interest rate on amounts outstanding under this facility was ~~2.57%~~1.80% as of November 30, ~~2011~~2012 and ~~2.48%~~2.06% as of August 31, ~~2011~~2012.

We also have an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. ~~The credit line~~that expires on March 1, ~~2012; however, we believe we will be able to renew the facility on terms substantially similar to the existing facility.~~2013. Interest rates are set by the bank at the time of borrowing. We had borrowings outstanding of $149 million ~~of borrowings outstanding~~ under this facility as of November 30, ~~2011~~2012 and no borrowings outstanding as of August 31, ~~2011~~2012.

The two bank credit agreements contain various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of November 30, ~~2011~~2012, we were in compliance with ~~all such~~these covenants. We use these credit facilities to fund working capital requirements, acquisitions, capital expenditures, dividends and share repurchases.

In addition, as of November 30, ~~2011~~2012 and August 31, ~~2011~~2012, we had $8 million of long-term tax-exempt bonds outstanding that mature in January 2021.

~~Acquisitions~~

~~During the~~ ~~first~~ ~~quarter of~~ ~~fiscal 2011, we completed two acquisitions with an aggregate purchase price of $6 million. There were no acquisitions in the~~ ~~first~~ ~~quarter of~~ ~~fiscal 2012~~.

Capital Expenditures

Capital expenditures totaled $2627 million for the first three months of fiscal ~~2012~~2013, compared to $2526 million for the same period in the prior year. During the first quarter of fiscal ~~2012~~2013, we continued our investments in the ~~replacement~~construction of ~~existing~~a new shredder, advanced processing equipment and related infrastructure in Surrey, British Columbia, which is expected to begin operations in fiscal 2013. In addition, we made further investments in technology to improve the recovery and separation of nonferrous materials from the shredding process and investments in infrastructure to ~~further~~ improve efficiency, ~~and~~ increase capacity, improve worker safety, ~~and~~ enhance environmental ~~systems.~~systems and replace equipment. We expect our investments in capital expenditures to be up to $90 million in fiscal 2013.

Dividends

On November 12, 2012, our Board of Directors declared a dividend for the first quarter of fiscal 2013 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share.

Acquisitions

We continue to expand our presence in the regions in which we operate and in new locations through the acquisition of businesses. In December 2012, we completed the acquisition of four used auto parts facilities in Richmond and Surrey, British Columbia, near our MRB operations in Surrey, British Columbia; two used auto parts facilities located in Kansas and Missouri; and two used auto parts facilities located in Massachusetts near our MRB operations. The acquired facilities will operate under APB’s Pick-N-Pull brand. The aggregate consideration paid for these acquisitions was $23 million. See Note 4 - Business Combinations in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Environmental Compliance

Our commitment to sustainable recycling and to operating our business in an environmentally responsible manner requires us to continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures, we invested $52 million in capital expenditures for environmental projects during the first three months of fiscal ~~2012~~2013., and plan to invest up to $12 million for such projects in fiscal 2013.

We have been identified by the United States Environmental Protection Agency (“EPA”) as one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (“the Site”). A group of PRPs is conducting an investigation and study to identify and characterize the contamination at the Site and develop alternative approaches to remediation of the contamination. On March 30, 2012 the group submitted to the EPA a draft feasibility study (“draft FS”) based on approximately ten years of work and $100 million in costs classified as investigation-related. The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately $170 million to $250 million (net present value) for the least costly alternative to approximately $1.08 billion to $1.76 billion (net present value) for the most costly and estimates a range of two to 28 years to implement the remedial work, depending on the selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries or select remedies. The draft FS is being reviewed, and may be subject to revisions prior to its approval, by the EPA. A final decision on the nature and extent of the required remediation will occur only after the EPA has prepared a proposed plan for public review and issued a record of decision (“ROD”). Currently available information indicates that the EPA does not expect to issue its final ROD selecting a remedy for the Site until at least 2014. Because there has not been a determination of the total ~~investigation costs,~~cost of



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the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, we believe it is not ~~presently~~reasonably possible to estimate the amount or range of costs which we are likely or reasonably possible to incur in connection with the Site, although such costs could be ~~significant and~~ material to our financial position, results of operations, future cash ~~flows.~~flows and liquidity. Any material liabilities recorded in the future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. Significant cash outflows in the future related to the Site could reduce the amounts available for borrowing that could otherwise be used for investment in capital expenditures, acquisitions, dividends and ~~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.~~share repurchases. See Note 6 - Commitments and Contingencies in the Notes to the 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~~our control. Under the terms of an agreement related to the acquisition, the noncontrolling interest ~~owner~~holder has the right to require ~~the Company~~us to purchase its ~~20%~~interest in ~~the Company’s~~our subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. The conditions for redemption of the noncontrolling interest had not been met as of November 30, ~~2011~~2012. If the interest were to be redeemed, ~~the Company~~we would be required to purchase all of such interest at fair value on the date of redemption. As of November 30, ~~2011~~2012, the fair value of the redeemable noncontrolling interest was $1924 million. See Note 78 - 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 short-term and long-term liquidity needs for acquisitions, capital expenditures, working capital, dividends, share repurchases, joint ventures, ~~share repurchases,~~ debt service requirements and environmental obligations. However, in the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate steps to obtain sufficient additional funds. There can be no assurance that any such supplemental funding, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

Off-Balance Sheet Arrangements

None.

Contractual Obligations

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~~were no material changes related to ~~any off-balance sheet arrangements as discussed in “Management’s Discussion~~contractual obligations and ~~Analysis of Financial Condition and Results of Operations”~~commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, ~~2011~~2012.

~~Contractual Obligations~~

~~As of~~ ~~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, 2011~~ ~~are presented in the table below:~~

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.

Our redeemable noncontrolling interest is a potential future ~~obligation; however, as~~obligation for which 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.~~control. See Note 78 - Redeemable Noncontrolling Interest in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. At November 30, ~~2011~~2012, we had $18 million outstanding under these arrangements.

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Critical Accounting Policies and Estimates

We reaffirm our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012, with the following changes:

Goodwill

We evaluate goodwill for impairment annually during the second fiscal quarter and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment (referred to as



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a ‘component’). The Company has determined that its reporting units for which goodwill has been allocated are equivalent to the Company’s operating segments, as all of the components of each segment have similar economic characteristics.

When testing goodwill for impairment, we first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative impairment test. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. In the first step of the quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.

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

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

In the third quarter of fiscal 2012, we identified the combination of the then recent but significant decline of the Company’s market capitalization below the carrying value of its net assets, the persistent uncertainty around global macroeconomic conditions and the impact on our fiscal 2012 operating results of current challenging market conditions in our industry as a triggering event requiring an interim impairment test of goodwill. For the APB reporting unit, the calculated fair value using the income approach substantially exceeded its carrying value. For the MRB reporting unit with goodwill of $465 million as of May 31, 2012, the calculated fair value exceeded the carrying value by approximately 11%. The projections used in the income approach for MRB took into consideration the current weak market conditions, including the challenging macroeconomic indicators in the markets in which we operate and those where our customers are based, and the cyclical nature of our industry. The projections assumed a gradual recovery of operating margins over a multi-year period, eventually returning to levels of profitability in the range of average historical levels. The market-based WACC used in the income approach for MRB was 11.7%. The terminal year growth rate used in the discounted cash flow model was 2%. Assuming all other components of the fair value estimate were held constant, an increase in the WACC in excess of 1% could result in a failure of the Step 1 impairment test for the MRB reporting unit.

We also use a market approach based on earnings multiple data and our Company’s market capitalization to corroborate our reporting units’ valuations. We reconcile the Company’s market capitalization to the aggregated estimated fair value of our reporting units, including consideration of a control premium representing the estimated amount an investor would pay to obtain a controlling interest. The implied control premium resulting from the difference between our market capitalization (based on the average trading price of the Company’s Class A common stock for the two-week period ending May 31, 2012) and the higher aggregated estimated fair value of our reporting units was above the historical range of premiums observed in normal market conditions on transactions within the steel making and scrap processing industries and in other comparable sectors. We believe the implied control premium reflected the recent impact on our stock price of current depressed market conditions in our industry, weak macroeconomic indicators and the cyclical nature of our business.

We did not identify triggering events during either the fourth quarter of fiscal 2012 or first quarter of fiscal 2013 requiring an interim impairment test of goodwill.

As a result of the inherent uncertainty associated with forming these estimates, actual results could differ from those estimates. Future events and changing market conditions may impact our assumptions as to future revenue growth rates, pace and extent of operating margins’ recovery, market-based WACC and other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions used in testing our reporting units’ goodwill for impairment are reasonable, it is reasonably possible that market and economic conditions deteriorate further, including additional declines in or a lack of long-term recovery of market conditions from current levels, a lack of recovery in our share price from current levels, or an increase in the market-based WACC, among other factors, which could significantly impact our impairment analysis and increase the likelihood of future goodwill impairment charges that, if incurred, could be material to our results of operations and financial position.



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Redeemable Noncontrolling Interest

We have issued common stock of one of our subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within our control. Since redemption of the noncontrolling interest is outside of our control, this interest is presented on the Consolidated Balance Sheets in the mezzanine section under the caption “Redeemable noncontrolling interest.” If the interest were to be redeemed, we would be required to purchase all of such interest at fair value on the date of redemption. The redeemable noncontrolling interest is presented at the greater of its carrying amount (adjusted for the noncontrolling interest’s share of the allocation of income or loss of the subsidiary, dividends to and contributions from the noncontrolling interest) or its fair value as of each measurement date. Any adjustments to the carrying amount of the redeemable noncontrolling interest for changes in fair value prior to exercise of the redemption option are recorded to retained earnings.

As of November 30, 2012, the noncontrolling interest was presented at its adjusted carrying value of $24 million, which approximates its fair value. We estimate fair value using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis. The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions used in the discounted cash flow model, including primarily revenue growth rates driven by future commodity prices and volume expectations, operating margins, capital expenditures, working capital requirements, terminal growth rates and an appropriate discount rate. The subsidiary is presently undertaking significant investments to install a large-scale shredder and related processing and sorting equipment and increase shipping capabilities. As a result, projections of future cash flows assume volumes to grow above historical levels once construction activity is complete and the new equipment is put in service. The present value of future cash flows are determined using a market-based weighted average cost of capital of 12.8%, including a subject-company risk premium. The terminal year growth rate used in the discounted cash flow model is 2%. A 1% increase (decrease) in the discount rate would decrease (increase) the estimated fair value of the redeemable noncontrolling interest by approximately 7%. We also used a market approach based on earnings multiple data to corroborate the fair value estimate of the noncontrolling interest determined using the discounted cash flow model. As a result of the inherent uncertainty associated with forming these estimates, including changes in general market conditions, actual results could differ from those estimates which may result in a material change in the fair value of the redeemable noncontrolling interest.

Recently Issued Accounting Standards

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

Non-GAAP Financial Measures

Debt, net of cash

Debt, net of cash is the difference between (i) the sum of long-term debt and short-term debt (i.e., total debt) and (ii) cash and cash equivalents. Management believes that debt, net of cash is a useful measure for investors because, as cash and cash equivalents can be used, among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.

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


	November 30, 2011		August 31, 2011		November 30, 2012		August 31, 2012
Short-term borrowings	$	14,665	$	643	$	9,169	$	683
Long-term debt, net of current maturities	480,943		403,287		345,797		334,629
Total debt	495,608		403,930		354,966		335,312
Less: cash and cash equivalents	26,989		49,462		24,404		89,863
Total debt, net of cash	$	468,619	$	354,468	$	330,562	$	245,449

Net borrowings (repayments) of debt

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



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



	Three Months Ended November 30,
	2012			2011
Borrowings from long-term debt	$	72,742		$	294,212
Proceeds from line of credit	135,500			173,000
Repayment of long-term debt	(61,449		)	(214,396		)
Repayment of line of credit	(127,000		)	(159,000		)
Net borrowings of debt	$	19,793		$	93,816

Adjusted net loss and adjusted diluted loss per share

Management presents adjusted net loss attributable to SSI and adjusted diluted loss per share attributable to SSI because it believes these measures provide a meaningful presentation of the Company’s results from its core business operations excluding adjustments for restructuring charges that are not related to the Company’s ongoing core business operations and improves the period-to-period comparability of the Company’s results from its core business operations.

The following is a reconciliation of adjusted net loss attributable to SSI and adjusted diluted loss per share attributable to SSI for the three months ended November 30, 2012 (in thousands, except per share data):

Three Months Ended November 30,
2011 2010
Borrowings from long-term debt $ 294,212
$ 168,000
Proceeds from line of credit 173,000
147,500
Repayment of long-term debt (214,396 ) (88,144 )
Repayment of line of credit (159,000 ) (147,500 )
Net borrowings of debt $ 93,816
$ 79,856



	November 30, 2012
Net loss attributable to SSI:
As reported	$	(1,671	)
Restructuring charges, net of tax	1,055
Adjusted	$	(616	)

Diluted loss per share attributable to SSI:
As reported	$	(0.06	)
Restructuring charges, net of tax, per share	0.04
Adjusted	$	(0.02	)

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

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products, ferrous and nonferrous metals, including scrap metal, autobodies and other commodities. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling prices by adjusting purchase prices on a timely basis. We actively manage our exposure to commodity price risk and monitor the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices at November 30, ~~2011~~2012, a 10% decrease in the selling price per ton of finished steel products would not have caused an NRV inventory write down at any of ~~approximately~~our operating segments as of ~~$5 million~~ ~~at SMB. A 10% decrease in the selling price of inventory would not have had a material NRV impact on MRB or APB at~~ November 30, ~~2011.~~2012.

Interest Rate Risk

There have been no material changes to the Company’s disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, ~~2011~~2012.

Credit Risk

As of November 30, ~~2011~~2012 and August 31, ~~2011~~2012, ~~54%~~37% and ~~44%~~28%, respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance as of November 30, ~~2011~~2012, ~~93%~~91% was less than 60 days past due, compared to ~~93%~~89% as of August 31, ~~2011~~2012.


ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of November 30, ~~2011~~2012, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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

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PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

See Note 6 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.


ITEM 1A.	RISK FACTORS

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



~~ITEM 2.~~ Table of Contents	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~SCHNITZER STEEL INDUSTRIES, INC.

~~Issuer Purchases of Equity Securities~~

~~Pursuant to a share repurchase program as amended in 2001 and 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 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 require us to acquire any specific number of shares, and we may suspend, extend or terminate the program at any time without prior notice and the program may be executed through open-market purchases, privately negotiated transactions or utilizing Rule 10(b)5-1 programs. We evaluate long- and short-range forecasts as well as anticipated sources and uses of cash before determining the course of action that would best enhance shareholder value.

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ITEM 6.	EXHIBITS



Exhibit Number	Exhibit Description
~~3.1~~*10.1	~~2006 Restated Articles~~Form of ~~Incorporation (as corrected December 2, 2011)~~Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted in fiscal 2013.

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

*10.3	Amendment No. 1 to Employment Agreement by and between the Registrant and John D. Carter dated November 6, 2012.

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

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

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

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

101	The following financial information from Schnitzer Steel Industries, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 30, ~~2011,~~2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of ~~Income~~Operations for the three months ended November 30, ~~2011~~2012 and ~~2010,~~2011, (ii) Condensed Consolidated Balance Sheets as of November 30, ~~2011,~~2012, and August 31, ~~2011,~~2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended November 30, 2012 and 2011; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended November 30, ~~2011~~2012 and ~~2010,~~2011; and ~~(iv)~~(v) the Notes to Condensed Consolidated Financial Statements. ⁽¹⁾

*Management contract or compensatory plan or arrangement.

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

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SIGNATURES

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



		SCHNITZER STEEL INDUSTRIES, INC.
		(Registrant)

Date:	January ~~9, 2012~~8, 2013	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			President and Chief Executive Officer

Date:	January ~~9, 2012~~8, 2013	By:	/s/ Richard D. Peach
			Richard D. Peach
			Senior Vice President and Chief Financial Officer

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	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



	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



	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



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