Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the Quarterly Period Ended November 30, 2011
Or
o
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the Transition Period from _______ to_______
 
Commission File Number 0-22496
SCHNITZER STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
OREGON
 
93-0341923
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3200 NW Yeon Ave.
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 shares of Class A common stock, par value of $1.00 per share, and 2,866,295 shares of Class B common stock, par value of $1.00 per share, outstanding as of December 30, 2011 .

 
 
 
 
 


Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.
INDEX
 
 
PAGE
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

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
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
26,989

 
$
49,462

Accounts receivable, net of allowance for doubtful accounts of $6,048 and $6,148
209,475

 
229,975

Inventories, net
410,119

 
335,120

Deferred income taxes
10,942

 
11,784

Refundable income taxes
13,035

 
3,541

Prepaid expenses and other current assets
30,583

 
24,117

Total current assets
701,143

 
653,999

Property, plant and equipment, net of accumulated depreciation of $486,737 and $471,305
552,833

 
555,284

Investments in joint venture partnerships
17,665

 
17,208

Goodwill
622,382

 
627,805

Intangibles, net of accumulated amortization of $15,015 and $20,846
19,510

 
20,906

Other assets
14,768

 
14,967

Total assets
$
1,928,301

 
$
1,890,169

Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
14,665

 
$
643

Accounts payable
111,079

 
141,011

Accrued payroll and related liabilities
21,766

 
36,475

Environmental liabilities
2,971

 
2,983

Accrued income taxes
2,788

 
13,833

Other accrued liabilities
40,265

 
38,368

Total current liabilities
193,534

 
233,313

Deferred income taxes
84,845

 
85,378

Long-term debt, net of current maturities
480,943

 
403,287

Environmental liabilities, net of current portion
37,562

 
37,872

Other long-term liabilities
10,315

 
10,030

Total liabilities
807,199

 
769,880

Commitments and contingencies (Note 6)

 

Redeemable noncontrolling interest
18,936

 
19,053

Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
 
 
 
Preferred stock – 20,000 shares $1.00 par value authorized, none issued

 

Class A common stock – 75,000 shares $1.00 par value authorized, 24,395 and 24,241 shares issued and outstanding
24,395

 
24,241

Class B common stock – 25,000 shares $1.00 par value authorized, 2,866 and 3,060 shares issued and outstanding
2,866

 
3,060

Additional paid-in capital
3,769

 
762

Retained earnings
1,070,363

 
1,065,109

Accumulated other comprehensive income (loss)
(5,208
)
 
1,540

Total SSI shareholders’ equity
1,096,185

 
1,094,712

Noncontrolling interests
5,981

 
6,524

Total equity
1,102,166

 
1,101,236

Total liabilities and equity
$
1,928,301

 
$
1,890,169

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

3

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(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

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

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Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
Three Months Ended November 30,
 
2011
 
2010
Cash flows from operating activities:
 
 
 
Net income
$
7,745

 
$
18,917

Adjustments to reconcile net income to cash used in operating activities:
 
 
 
Depreciation and amortization
20,346

 
16,321

Deferred income taxes
906

 
2,464

Undistributed equity in earnings of joint ventures
(963
)
 
(962
)
Share-based compensation expense
4,613

 
3,568

Excess tax benefit from share-based payment arrangements
(413
)
 
383

Gain on disposal of assets
(116
)
 
(61
)
Environmental reserves charges (releases), net
(300
)
 
(200
)
Net gain on derivatives

 
(759
)
Unrealized foreign exchange loss, net
272

 

Changes in assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
8,278

 
(34,740
)
Inventories
(74,117
)
 
(6,456
)
Refundable income taxes
(5,292
)
 
53

Prepaid expenses and other current assets
(1,148
)
 
740

Intangibles and other long-term assets
(1,079
)
 
(556
)
Accounts payable
(19,193
)
 
(7,387
)
Accrued payroll and related liabilities
(14,745
)
 
(13,942
)
Other accrued liabilities
3,452

 
(1,291
)
Accrued income taxes
(14,834
)
 
5,173

Environmental liabilities
(12
)
 
(65
)
Other long-term liabilities
(81
)
 
3

Distributed equity in earnings of joint ventures
525

 
1,175

Net cash used in operating activities
(86,156
)
 
(17,622
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(25,551
)
 
(25,168
)
Acquisitions, net of cash acquired

 
(6,956
)
Joint venture receipts (payments), net
353

 
(619
)
Proceeds from sale of assets
251

 
251

Net cash used in investing activities
(24,947
)
 
(32,492
)
Cash flows from financing activities:
 
 
 
Proceeds from line of credit
173,000

 
147,500

Repayment of line of credit
(159,000
)
 
(147,500
)
Borrowings from long-term debt
294,212

 
168,000

Repayment of long-term debt
(214,396
)
 
(88,144
)
Repurchase of Class A common stock
(3,117
)
 

Taxes paid related to net share settlement of share-based payment arrangements
(840
)
 
(1,873
)
Excess tax benefit from share-based payment arrangements
413

 
(383
)
Stock options exercised

 
16

Contributions from redeemable noncontrolling interests
454

 

Distributions to noncontrolling interests
(1,477
)
 
(631
)
Dividends paid
(468
)
 
(466
)
Net cash provided by financing activities
88,781

 
76,519

Effect of exchange rate changes on cash
(151
)
 
288

Net increase (decrease) in cash and cash equivalents
(22,473
)
 
26,693

Cash and cash equivalents as of beginning of period
49,462

 
30,342

Cash and cash equivalents as of end of period
$
26,989

 
$
57,035

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

5

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 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 . The results for the three months ended November 30, 2011 and 2010 are not necessarily indicative of the results of operations for the entire year.
Cash and Cash Equivalents
Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date of 90 days or less. Included in accounts payable are book overdrafts of $33 million as of November 30, 2011 and $40 million as of August 31, 2011 .
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. The majority of cash and cash equivalents are maintained with two major financial institutions (Bank of America and Wells Fargo Bank, N.A.). Balances in these institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of November 30, 2011 . Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, letters of credit, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had $100 million and $90 million of open letters of credit relating to accounts receivable as of November 30, 2011 and August 31, 2011 , respectively.
Fair Value Measurements
Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the determination of the fair value of the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs that are significant to the determination of the fair value of the asset or liability.
When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. See Note 7 - Redeemable Noncontrolling Interest and Note 9 - Derivative Financial Instruments for further detail.
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 in the Unaudited Condensed Consolidated Statements of Income, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a hedge, and if designated as a hedge, the extent to which the hedge is effective. Amounts included in accumulated other comprehensive income (loss) 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

6

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


earnings. When available, quoted market prices or prices obtained through external sources are used to measure a contract’s fair value. The fair value of these instruments is a function of underlying forward commodity prices, related volatility, counterparty creditworthiness and duration of the contracts. 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 9 - Derivative Financial Instruments.
Derivative contracts for commodities used in normal business operations that are settled by physical delivery, among other criteria, are eligible for and may be designated as normal purchases and normal sales. Contracts that qualify as normal purchases or normal sales are not marked-to-market. The Company does not use derivative instruments for trading or speculative purposes.
Redeemable Noncontrolling Interest
The Company has issued 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. 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 redeemable noncontrolling interest is measured at fair value at each reporting period. Any adjustments to the carrying amount of the redeemable noncontrolling interest prior to exercise of the redemption option will be recorded to equity. Since redemption of the noncontrolling interest is outside of the Company’s control, these interests are presented on the Unaudited Condensed Consolidated Balance Sheets in the mezzanine section under the caption “Redeemable noncontrolling interest.” See Note 7 - Redeemable Noncontrolling Interest for further detail.

Note 2 - Recent Accounting Pronouncements
In May 2011, an accounting standard update was issued to clarify existing fair value measurement guidance and expand the disclosure requirements for fair value measurements estimated using unobservable inputs (Level 3 inputs). New disclosures are required to report quantitative information about the unobservable inputs used in the measurement of Level 3 valuations and to include the valuation process used to determine the fair value of the item and the sensitivity of the measurement to changes in unobservable inputs. This standard will be effective for the Company for the third quarter of fiscal year 2012. The standard is unlikely to impact the fair value measurement of any of the Company’s existing assets, liabilities, or equity valuations, but the additional disclosures will be required for the Company’s redeemable noncontrolling interest, which is measured using Level 3 inputs.
In June 2011, an accounting standard update was issued regarding the presentation of other comprehensive income in the financial statements. The standard eliminates the option of presenting other comprehensive income as part of the statement of changes in stockholders’ equity and instead requires the entity to present other comprehensive income as either a single statement of comprehensive income combined with net income or as two separate but consecutive statements. This amendment will be effective for the Company for fiscal year 2013 and interim periods therein. The Company currently reports other comprehensive income in the summary of changes in equity and comprehensive income and will be required to update the presentation of comprehensive income to be in compliance with the new standard.
In September 2011, an accounting standard update was issued that simplifies how an entity tests goodwill for impairment by allowing an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further testing is required. The revised standard includes examples of types of factors to consider in conducting the qualitative assessment. These include macro-economic conditions, such as a deterioration in the entity’s operating environment, entity-specific events, such as declining financial performance, and other events, such as an expectation that a reporting unit will be sold. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is likely to early adopt this standard for the goodwill impairment test to be performed in fiscal 2012. Upon adoption, this standard will impact how the Company assesses goodwill for impairment but will not change the measurement or recognition of a potential goodwill impairment charge.


7

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
Processed and unprocessed scrap metal
$
308,124

 
$
241,093

Semi-finished steel products (billets)
10,168

 
9,237

Finished goods
58,314

 
54,395

Supplies
33,513

 
30,395

Inventories, net
$
410,119

 
$
335,120


Note 4 - Business Combinations
During fiscal 2011 , the Company made 10 acquisitions accounted for as business combinations. The total purchase price of these acquisitions of $314 million , comprising $293 million in cash and $21 million in non-cash consideration ( $19 million in shares of a subsidiary and $2 million in contingent consideration), was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on their respective estimated fair values on the date of acquisition. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of $246 million for the year ended August 31, 2011 was recorded as goodwill.
The following unaudited 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):
 
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)
Excludes nonrecurring executive compensation paid to the management of acquired companies that will not be incurred in the future.
These pro forma results are not necessarily indicative of what actual 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 were as follows (in thousands):
 
Metals Recycling Business
 
Auto Parts Business
 
Total
Balance as of August 31, 2011
$
464,646

 
$
163,159

 
$
627,805

Purchase accounting adjustments
142

 

 
142

Foreign currency translation adjustment
(4,808
)
 
(757
)
 
(5,565
)
Balance as of November 30, 2011
$
459,980

 
$
162,402

 
$
622,382

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

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 were established.

8

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 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
Metals Recycling Business
$
25,655

 
$
(300
)
 
$
(22
)
 
$
25,333

 
$
2,417

 
$
22,916

Auto Parts Business
15,200

 

 

 
15,200

 
554

 
14,646

Total
$
40,855

 
$
(300
)
 
$
(22
)
 
$
40,533

 
$
2,971

 
$
37,562

Metals Recycling Business (“MRB”)
As of November 30, 2011 , MRB had environmental reserves of $25 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 natural resource damage assessment. The Company joined in that Phase I agreement and paid a portion of those costs. The Company did not participate in funding the second phase of the natural resource damage assessment.
The cost of the investigations and any remediation associated with the Site will not be reasonably estimable until completion of the data review and further investigations now being conducted by the LWG and the Trustees and the selection and approval of a remedy by the EPA. However, given the size of the Site and the nature of the conditions identified to date, the total cost of the investigations and remediation is likely to be substantial. In addition, because there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, it is not possible to estimate the costs which the Company might incur in connection with the Site, although such costs could be material to the Company’s financial position, results of operations, cash flows or liquidity. The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense and remediation in connection with the Site, although there is no assurance that those policies will cover all of the costs which the Company may incur. In fiscal 2006, the Company recorded a liability for its then estimated share of the costs of the investigation incurred by the LWG to date. As of 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 have been established in connection with these investigations because the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) has not yet been determined.
Other Metals Recycling Business Sites
As of November 30, 2011 , the Company had environmental reserves related to various MRB sites other than Portland Harbor of

9

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


$24 million . The reserves 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 , the Company had environmental reserves related to various APB sites of $15 million . The reserves 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 as of November 30, 2011 .
Other than the Portland Harbor Superfund site, which is discussed above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the Unaudited Condensed Consolidated Financial Statements of the Company as a whole. Historically, the amounts the Company has ultimately paid for such remediation activities have not been material in any given period.
 
Note 7 - Redeemable Noncontrolling Interest
In March 2011 , the Company, through a wholly-owned acquisition subsidiary, acquired substantially all of the metals recycling business assets of Amix Salvage & Sales Ltd. As part of the purchase consideration, the Company issued the seller common shares equal to 20% of the issued and outstanding capital stock of the Company’s acquisition subsidiary. Under the terms of an agreement related to the acquisition, the noncontrolling interest holder has the right to require the Company to purchase its 20% interest in the Company’s acquisition subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. The conditions for redemption of the noncontrolling interest had not been met as of November 30, 2011 .

As of November 30, 2011 , the fair value of the redeemable noncontrolling interest was $19 million . No material changes in fair value were recorded since the initial measurement of the noncontrolling interest. The Company estimates fair value using Level 3 inputs under the fair value hierarchy based on standard valuation techniques using a discounted cash flow analysis. The determination of fair value requires management to apply significant judgment in formulating estimates and assumptions. These estimates and assumptions primarily include forecasts of future cash flows based on management’s best estimate of future sales and operating costs; pricing expectations; capital expenditures; working capital requirements; discount rates; growth rates; tax rates; and general market conditions.


10

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


Note 8 - Changes in Equity and Comprehensive Income
The following is a summary of the changes in equity and comprehensive income (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

_____________________________
(1)
Net income attributable to noncontrolling interests at November 30, 2011 excludes a loss of $207 thousand allocable to the redeemable noncontrolling interest, which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets at November 30, 2011 . See Note 7 - Redeemable Noncontrolling Interest.
(2)
Foreign currency translation adjustments exclude $(886) thousand relating to redeemable noncontrolling interests for the three months ended November 30, 2011 , which is reported in the mezzanine section of the Unaudited Condensed Consolidated Balance Sheets at November 30, 2011 . See Note 7 - Redeemable Noncontrolling Interest.
 
Note 9 - Derivative Financial Instruments
Foreign Currency Exchange Rate Risk Management
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 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 1 fair value measurement under the fair value hierarchy. In the first quarter of fiscal 2012, the Company determined that the forecasted transaction was no longer probable and de-designated these contracts as hedges. These forward contracts were terminated in the first quarter of fiscal 2012. The nominal amount and fair value of these forward contracts, the amounts reclassified from accumulated other comprehensive income (loss) and the realized losses recorded in other income (expense), net during the period were not material to the Unaudited Condensed Consolidated Financial Statements.

Note 10 - Share-based Compensation
In the first quarter of fiscal 2012, the Compensation Committee granted 143,718 restricted stock units (RSU) to its key employees

11

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


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

Note 11 - Income Taxes
The effective tax rates for the Company’s continuing operations for the three months ended November 30, 2011 and 2010 were 31.5% and 32.7% , respectively.
A reconciliation of the difference between the federal statutory rate and the Company’s effective rate is as follows:
 
Three Months Ended November 30,
 
2011
 
2010
Federal statutory rate
35.0
 %
 
35.0
 %
State taxes, net of credits
1.3

 
1.0

Foreign income taxed at different rates
(1.6
)
 
(1.1
)
Section 199 deduction
(1.7
)
 
(1.4
)
Non-deductible officers’ compensation
0.7

 
0.3

Noncontrolling interests
(2.0
)
 
(1.4
)
Other
(0.2
)
 
0.3

Effective tax rate
31.5
 %
 
32.7
 %
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 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 12 - Net Income Per Share
The following table sets forth the information used to compute basic and diluted net income per share attributable to SSI for the three months ended November 30 (in thousands):
   
2011
 
2010
Income from continuing operations
$
7,745

 
$
18,894

Net income attributable to noncontrolling interests
(727
)
 
(1,123
)
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

Computation of shares:
 
 
 
Weighted average common shares outstanding, basic
27,451

 
27,563

Incremental common shares attributable to dilutive stock options, performance share awards, DSUs and RSUs
264

 
308

Weighted average common shares outstanding, diluted
27,715

 
27,871

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

Note 13 - Related Party Transactions
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $10 million for each of the three months ended November 30, 2011 and 2010 . Payments from these joint ventures were less than $1 million and $1 million for the three months ended November 30, 2011 and 2010 , respectively. The Company owed $3 million and $2 million to joint ventures as of November 30, 2011 and August 31, 2011 .
In November 2010, the Company and a joint venture partner entered into a series of agreements to facilitate the expansion of their

12

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 assets of Amix Salvage & Sales Ltd., 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 $3 million , primarily for barging services, under these agreements for the three months ended November 30, 2011 .
Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25% minority partner in a partnership in which the Company is the 75% partner and which operates four self-service stores in Northern California. Mr. Klauer’s 25% share of the profits of this partnership totaled $1 million for each of the three months ended November 30, 2011 and 2010 . The Company and a company owned by Mr. Klauer jointly own the real property at one of these stores, which is leased to the partnership. Mr. Klauer’s share of the annual rent paid by the partnership is less than $1 million . 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 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 Mr. Klauer’s company for this parcel was less than $1 million for each of the three months ended November 30, 2011 and 2010 . In addition, in July 2011 , the Company leased a parcel of land in San Jose from a company of which Mr. Klauer is the sole shareholder. The initial term of this lease expires on January 31, 2012 , and the Company has exercised its option to renew the lease for an additional six months. The rent paid to Mr. Klauer’s company for the three months ended November 30, 2011 was less than $1 million .
Certain members of the Schnitzer family own significant interests in, or are related to owners of, Schnitzer Investment Corp (“SIC”), which is engaged in the real estate business and was a subsidiary of the Company prior to 1989. SIC is considered a related party for financial reporting purposes. All transactions with the Schnitzer family (including Schnitzer family companies) require the approval of the Company’s Audit Committee, and the Company is in compliance with this policy. The Company and SIC are both potentially responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The Company and SIC have worked together in response to Portland Harbor matters, and the Company has paid all of the legal and consulting fees for the joint defense, in part due to its environmental indemnity obligation to SIC with respect to the Portland scrap metal operations property. As these costs have increased substantially in the last two years, the Company and SIC have agreed to an equitable cost sharing arrangement with respect to defense costs under which SIC will pay 50% of the legal and consulting costs, net of insurance recoveries. The amounts receivable from (payable to) SIC 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 under this agreement were less than $(1) million , compared to amounts receivable from SIC of less than $1 million as of August 31, 2011 .

Note 14 - Segment Information
The accounting standards for reporting information about operating segments define operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company is organized by line of business. While the Chief Executive Officer evaluates results in a number of different ways, the line of business management structure is the primary basis for which the allocation of resources and financial results are assessed. Under the aforementioned criteria, the Company operates in three operating and reporting segments: metal purchasing, processing, recycling and selling (MRB), used auto parts (APB) and mini-mill steel manufacturing (SMB). Additionally, the Company is a noncontrolling partner in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal.
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

13

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


ultimately sold to third parties.
The information provided below is obtained from internal information that is provided to the Company’s chief operating decision-maker for the purpose of corporate management. The Company uses operating income (loss) to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes, other income and expenses related to corporate activity or corporate expense for management and administrative services that benefit all three segments. Because of this unallocated expense, the operating income (loss) of each reporting segment does not reflect the operating income (loss) the reporting segment would have as a stand-alone business. All amounts presented exclude the results of operations of the Company’s discontinued full-service used auto parts operation.
The table below illustrates the Company’s operating results from continuing operations by reporting segment for the three months ended November 30 (in thousands):
 
2011
 
2010
Revenues:
 
 
 
Metals Recycling Business:
 
 
 
Revenues
$
728,438

 
$
591,708

Less: Intersegment revenues
(58,696
)
 
(31,709
)
MRB external customer revenues
669,742

 
559,999

Auto Parts Business:
 
 
 
Revenues
84,054

 
66,681

Less: Intersegment revenues
(21,522
)
 
(15,210
)
APB external customer revenues
62,532

 
51,471

Steel Manufacturing Business:
 
 
 
Revenues
79,902

 
63,634

Total revenues
$
812,176

 
$
675,104

The table below illustrates the reconciliation of the Company’s segment operating income (loss) to income from continuing operations before income taxes for the three months ended November 30 (in thousands):
 
2011
 
2010
Metals Recycling Business
$
13,099

 
$
25,533

Auto Parts Business
10,442

 
14,039

Steel Manufacturing Business
1,218

 
(2,035
)
Segment operating income
24,759

 
37,537

Corporate and eliminations
(9,789
)
 
(9,097
)
Operating income
14,970

 
28,440

Interest income
163

 
55

Interest expense
(3,271
)
 
(598
)
Other income (expense), net
(556
)
 
161

Income from continuing operations before income taxes
$
11,306

 
$
28,058


14

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


The following is a summary of the Company’s total assets by reporting segment (in thousands):
 
November 30, 2011
 
August 31, 2011
Metals Recycling Business (1)
$
1,645,870

 
$
1,668,778

Auto Parts Business
309,551

 
304,060

Steel Manufacturing Business
325,486

 
324,596

Total segment assets
2,280,907

 
2,297,434

Corporate and eliminations
(352,606
)
 
(407,265
)
Total assets
$
1,928,301

 
$
1,890,169

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


15

SCHNITZER STEEL INDUSTRIES, INC.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the three months ended November 30, 2011 and 2010 . The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2011 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. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; difficulties associated with acquisitions and integration of acquired businesses; the impact of goodwill impairment charges; the inability of customers to fulfill their contractual obligations; the impact of foreign currency fluctuations; potential limitations on our ability to access credit facilities; 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 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. Corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three reporting segments. As a result of this unallocated expense, the operating income (loss) of each reporting segment does not reflect the operating income (loss) the reporting segment would have as a stand-alone business. For further information regarding our reporting segments, see Note 14 - 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. Our deep water port facilities on both the East and West coasts of the U.S. (in Everett, Massachusetts; Oakland, California; Portland,

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SCHNITZER STEEL INDUSTRIES, INC.

Oregon; Tacoma, Washington; and Providence, Rhode Island) and access to public deep water port facilities (in Kapolei, Hawaii and Salinas, Puerto Rico) allow us to efficiently meet the global demand for ferrous scrap metal by shipping bulk cargoes to steel manufacturers located in Europe, Asia, Central America and Africa. Our exports of nonferrous processed scrap metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck and rail 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
In the first quarter of fiscal 2012 , we generated consolidated revenues of $812 million , an increase of 20% from the $675 million of revenues achieved in the first quarter of fiscal 2011 . The increase was primarily due to higher average net selling prices compared with the prior year quarter 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.
Our results in the first quarter of fiscal 2012 were adversely impacted by heightened global macroeconomic concerns, stemming primarily from an escalation in the European debt crisis which led to market volatility and resulted in a significant slowdown in customer buying patterns, followed by a rapid decline in selling prices, which impacted shipments and sales in the second half of the quarter. As selling prices declined, we adjusted our metal purchase prices downward. However, average inventory costs did not keep pace with the sharp drop in selling prices during the quarter. As cost of goods sold reflects the weighted average inventory costing method, this resulted in a compression of our operating margins.
In contrast with the current quarter, the prior year quarter reflected a less volatile market environment and was characterized by rising recycled metal prices. As net selling prices for our shipments increased faster than cost of goods sold determined using the weighted average inventory costing method, the prevalent market conditions in the first quarter of fiscal 2011 did not lead to a similar compression in operating margins as in the current quarter.
In addition, operating income in the current quarter was impacted by an increase in selling, general and administrative expenses of $11 million , or 25% , including operating expenses related to fiscal 2011 acquisitions of $5 million and costs associated with additional headcount from business growth. Diluted net income attributable to SSI was $0.25 per share in the first quarter of fiscal 2012, compared to $0.64 per share in the prior year comparable period.
The following items summarize our consolidated financial results for the first quarter of fiscal 2012 :
Revenues of $812 million , compared to $675 million in the first quarter of fiscal 2011 ;
Operating income of $15 million , compared to $28 million in the first quarter of fiscal 2011 ;
Net income attributable to SSI of $7 million , or $0.25 per share (diluted), compared to $18 million , or $0.64 per share (diluted), in the first quarter of fiscal 2011 ;
Net cash used in operating activities of $86 million , compared to $18 million in the first three months of fiscal 2011 ;
Cash and cash equivalents of $27 million as of November 30, 2011 , compared to $49 million as of August 31, 2011 ; and
Debt, net of cash, of $469 million as of November 30, 2011 , compared to $354 million as of August 31, 2011 (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 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 operating income of $13 million compared to $26 million for the first quarter of fiscal 2011 . Operating income during the quarter was negatively impacted by a compression in operating margins as a result of cost of goods sold, which reflects the weighted average inventory costing method, decreasing at a slower rate than net selling prices in a period of sharply declining recycled metal prices. In addition, operating income in the current quarter was impacted by an increase in selling, general and administrative expenses of $9 million , including operating expenses related to fiscal 2011 acquisitions of $4 million and costs associated with additional headcount from business growth.
Our APB segment generated revenues of $84 million , a $17 million increase from the first quarter of fiscal 2011 . The increase in 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 $10 million compared to $14 million for the first quarter of fiscal 2011 . Operating income in the first quarter of fiscal 2012 was negatively impacted by a compression in operating margins as a result of declining net selling prices that outpaced the decrease in car purchasing costs and the adverse effect of using the weighted average inventory costing method to determine cost of goods sold. In addition, operating income was

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SCHNITZER STEEL INDUSTRIES, INC.

impacted by an increase in selling, general and administrative expenses of $3 million primarily due to operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.
Our SMB segment generated revenues of $80 million , a $16 million increase from the first quarter of fiscal 2011 . 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 $1 million compared to an operating loss of $(2) million for the first quarter of fiscal 2011 .

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SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations
 
Three Months Ended November 30,
($ in thousands)
2011
 
2010
 
% Change
Revenues:
 
 
 
 
 
Metals Recycling Business
$
728,438

 
$
591,708

 
23
 %
Auto Parts Business
84,054

 
66,681

 
26
 %
Steel Manufacturing Business
79,902

 
63,634

 
26
 %
Intercompany revenue eliminations (1)
(80,218
)
 
(46,919
)
 
71
 %
Total revenues
812,176

 
675,104

 
20
 %
Cost of goods sold:
 
 
 
 
 
Metals Recycling Business
686,456

 
545,688

 
26
 %
Auto Parts Business
59,460

 
41,229

 
44
 %
Steel Manufacturing Business
77,005

 
64,218

 
20
 %
Intercompany cost of goods sold eliminations (1)
(80,706
)
 
(48,589
)
 
66
 %
Total cost of goods sold
742,215

 
602,546

 
23
 %
Selling, general and administrative (“SG&A”) expense:
 
 
 
 
 
Metals Recycling Business
30,165

 
21,648

 
39
 %
Auto Parts Business
14,152

 
11,413

 
24
 %
Steel Manufacturing Business
1,679

 
1,451

 
16
 %
Corporate (2)
10,296

 
10,563

 
(3
)%
Total SG&A expense
56,292

 
45,075

 
25
 %
Environmental reserves charges (releases), net:
 
 
 
 
 
Metals Recycling Business
(300
)
 
(200
)
 
50
 %
Total environmental reserves charges (releases), net
(300
)
 
(200
)
 
50
 %
Income from joint ventures:
 
 
 
 
 
Metals Recycling Business
(982
)
 
(961
)
 
2
 %
Change in intercompany profit elimination (3)
(19
)
 
204

 
NM

Total joint venture income
(1,001
)
 
(757
)
 
32
 %
Operating income (loss):
 
 
 
 
 
Metals Recycling Business
13,099

 
25,533

 
(49
)%
Auto Parts Business
10,442

 
14,039

 
(26
)%
Steel Manufacturing Business
1,218

 
(2,035
)
 
NM

Corporate expense
(10,296
)
 
(10,563
)
 
(3
)%
Change in intercompany profit elimination (4)
507

 
1,466

 
(65
)%
Total operating income
$
14,970

 
$
28,440

 
(47
)%
_____________________________
NM = Not Meaningful
(1)
MRB sells recycled ferrous metal to SMB at rates per ton that approximate West Coast export market prices. In addition, APB sells auto bodies to MRB. These intercompany revenues and cost of goods sold are eliminated in consolidation.
(2)
Corporate expense consists primarily of unallocated expenses for services that benefit all three reporting segments. As a consequence of this unallocated expense, the operating income of each segment does not reflect the operating income the segment would have as a stand-alone business.
(3)
The joint ventures sell recycled ferrous metal to MRB and then subsequently to SMB at rates per ton that approximate West Coast export market prices. Consequently, these intercompany revenues produce intercompany operating income (loss), which is not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.
(4)
Intercompany profits are not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.


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SCHNITZER STEEL INDUSTRIES, INC.

Revenues
Consolidated revenues increased $137 million to $812 million compared to the same period in the prior year. The increase in consolidated revenues was primarily due to higher average net selling prices as a result of higher commodity price levels. In addition, sales volumes increased for nonferrous materials mainly due 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 the prior year period due to a compression in operating margins in the first quarter of fiscal 2012 as a result of cost of goods sold, which reflects the weighted average inventory costing method, decreasing at a slower rate than metal purchase prices and net selling prices in a period 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 of $11 million in SG&A expenses over the same period in the prior year, including operating expenses related to fiscal 2011 acquisitions of $5 million and costs associated with additional headcount from business growth.
Interest Expense
Interest expense was $3 million and $1 million for the three months ended November 30, 2011 and 2010, respectively. The increase in interest expense was due to increased borrowings primarily related to our acquisitions in fiscal 2011 and higher average interest rates under our bank credit facilities.
Income Tax Expense
Our effective tax rate for the first quarter of fiscal 2012 was 31.5% , compared to 32.7% for the same period in the prior year. The effective tax rate is expected to be approximately 32.5% for the remainder of fiscal 2012 .

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SCHNITZER STEEL INDUSTRIES, INC.

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 14 - 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)
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.

Revenues
The increase in revenues was primarily attributable to higher average recycled metal sales prices in the commodity markets compared to the prior year quarter.
Ferrous revenues increased mainly 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 to a significant declining trend in ferrous net selling prices for shipments in the second half of the first quarter of fiscal 2012.
The increase in nonferrous revenues was driven by higher average nonferrous net selling prices and increased sales volumes. Average nonferrous net selling prices were 6% higher than in the prior year quarter despite a declining trend in nonferrous net selling prices during the first quarter of fiscal 2012. The 23% increase in nonferrous sales volumes reflected incremental volume from fiscal 2011 acquisitions, increased recovery of nonferrous materials processed through our enhanced shredding and sorting technologies and more nonferrous collection activity.



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

Auto Parts Business
 
Three Months Ended November 30,
($ in thousands)
2011
 
2010
 
% Change
Revenues
$
84,054

 
$
66,681

 
26
 %
Cost of goods sold
59,460

 
41,229

 
44
 %
Selling, general and administrative expense
14,152

 
11,413

 
24
 %
Segment operating income
$
10,442

 
$
14,039

 
(26
)%
Number of stores at period end
50

 
45

 
11
 %
Cars purchased (in thousands)
85

 
82

 
4
 %

Revenues
The increase in revenues included an $8 million increase in scrap vehicle revenue, a $5 million increase in core revenue and a $3 million increase in parts revenue. These increases were driven by higher commodity prices, increased car volumes from acquisitions and further enhancements of production operating efficiencies.
Segment Operating Income
Operating income in the first quarter of fiscal 2012 decreased compared to the prior year quarter as a result of a compression in operating margins due to selling prices declining at a faster rate than car purchasing costs and the adverse impact on cost of goods sold, which reflects the weighted average inventory costing method. In addition, operating income was impacted by an increase in SG&A expenses primarily due to operating expenses related to fiscal 2011 acquisitions and increases in advertising costs.
Steel Manufacturing Business
 
Three Months Ended November 30,
($ in thousands, except for price)
2011
 
2010
 
% Change
Revenues
$
79,902

 
$
63,634

 
26
%
Cost of goods sold
77,005

 
64,218

 
20
%
Selling, general and administrative expense
1,679

 
1,451

 
16
%
Segment operating income (loss)
$
1,218

 
$
(2,035
)
 
NM

Finished steel products average sales price ($/ton) (1)
$
722

 
$
634

 
14
%
Finished steel products sold (tons, in thousands)
107

 
98

 
9
%
Rolling mill utilization
60
%
 
48
%
 
 
_____________________________
NM = Not Meaningful
(1)
Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

Revenues
SMB revenues increased 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 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 increase in the volume of finished steel products sold due to improved, but still weak, demand for finished steel products in western North America.
Liquidity and Capital Resources

We rely on cash provided by operating activities as a primary source of liquidity, supplemented by current cash on hand and borrowings under our existing credit facilities.

Sources and Uses of Cash
We had cash balances of $27 million and $49 million as of November 30, 2011 and August 31, 2011 , respectively. Cash balances are intended to be used primarily for working capital and capital expenditures. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2011 , debt, net of cash, was $469 million compared to $354 million as of August 31, 2011 (refer to Non-GAAP Financial Measures below), an increase of $115 million primarily due to higher working capital requirements. Our cash balances as of November 30, 2011 and August 31, 2011 include $15 million and $11 million , respectively, which are indefinitely reinvested in Puerto Rico and Canada.
Operating Activities
Net cash used in operating activities in the first three months of fiscal 2012 was $86 million , compared to $18 million in the first three months of fiscal 2011 .

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

Cash used in operating activities for the first three months of fiscal 2011 included an increase in 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 was $25 million , compared to $32 million in the first three months of fiscal 2011 .

Cash used in investing activities in the first three months of fiscal 2012 included $26 million 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 was $89 million , compared to $77 million in the first three months of fiscal 2011 .

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

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 $650 million revolving credit facility, including $30 million in Canadian dollar availability, that matures in February 2016 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% and 2.75% , with the amount of the spread based on a pricing grid tied to our leverage ratio, or the base rate plus a spread of between 0% and 1% . In addition, annual commitment fees are payable on the unused portion of the credit facility at rates between 0.25% and 0.45% , which is based on a pricing grid tied to our leverage ratio. We had borrowings outstanding under the credit facility of $471 million as of November 30, 2011 and $393 million as of August 31, 2011 , 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% as of November 30, 2011 and 2.48% as of August 31, 2011 .

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

The two bank credit agreements contain various representations and warranties, events of default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio. As of November 30, 2011 , we were in compliance with all such covenants. We use these credit facilities to fund working capital requirements, acquisitions, capital expenditures and share repurchases.
 
In addition, as of November 30, 2011 and August 31, 2011 , we had $8 million of long-term tax-exempt bonds 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 $26 million for the first three months of fiscal 2012 , compared to $25 million for the same period in the prior year. During the first quarter of fiscal 2012 , we continued our investments in the replacement of existing equipment and infrastructure, investments in technology to improve the recovery and separation of nonferrous materials from the shredding process and investments to further improve efficiency and increase capacity, improve worker safety and enhance environmental systems.

Environmental Compliance
Our commitment to sustainable recycling and operating our business in an environmentally responsible manner requires us to continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our capital expenditures, we invested $5 million in capital expenditures for environmental projects during the first three months of fiscal 2012 .

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”). Because there has not been a determination of the total investigation costs, the remediation that will be required, the amount of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be allocated among the PRPs, it is not presently possible to estimate the costs which we are likely to incur in connection with the Site, although such costs could be significant and material to our future cash flows. Any material liabilities recorded in the future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. Significant cash outflows in the future related to the Site could reduce the amounts available for borrowing that could otherwise be used for investment in capital expenditures and acquisitions. The EPA has indicated that it expects to issue a record of decision sometime in 2013 that will discuss remedial alternatives for the Site. 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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Redeemable Noncontrolling Interest
In March 2011 , we issued common stock of one of our subsidiaries to a noncontrolling interest holder of that subsidiary that is redeemable both at the option of the holder and upon the occurrence of an event that is not solely within the Company’s control. Under the terms of an agreement related to the acquisition, the noncontrolling interest owner has the right to require the Company to purchase its 20% interest in the Company’s subsidiary for fair value. The noncontrolling interest becomes redeemable within 60 days after the later of (i) the third anniversary of the date of the acquisition and (ii) the date on which certain principals of the minority shareholder are no longer employed by the Company. The conditions for redemption of the noncontrolling interest had not been met as of November 30, 2011 . If the interest were to be redeemed, the Company would be required to purchase all of such interest at fair value on the date of redemption. As of November 30, 2011 , the fair value of the redeemable noncontrolling interest was $19 million . See Note 7 - Redeemable Noncontrolling Interest in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our acquisitions, capital expenditures, share repurchases, working capital and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities and access to the capital markets will provide adequate short-term and long-term liquidity needs for acquisitions, capital expenditures, working capital, 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
With the exception of operating leases and letters of credit, we are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations or cash flows. We enter into operating leases for both new equipment and property. There have been no material changes to any off-balance sheet arrangements as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended August 31, 2011 .
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 the exercise date and future fair value are not known and not solely within our control, no amount has been included in the contractual obligations table. See Note 7 - 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 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 .
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 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
Short-term borrowings
$
14,665

 
$
643

Long-term debt, net of current maturities
480,943

 
403,287

Total debt
495,608

 
403,930

Less: cash and cash equivalents
26,989

 
49,462

Total debt, net of cash
$
468,619

 
$
354,468

Net borrowings of debt
Net borrowings 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 for the period because it believes it is useful for investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings of debt (in thousands):
 
 
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

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 , a 10% decrease in the selling price per ton of finished steel products would have caused an NRV inventory write down of approximately $5 million at SMB. A 10% decrease in the selling price of inventory would not have had a material NRV impact on MRB or APB at November 30, 2011.
Interest Rate Risk
There have been no material changes to the 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 .
Credit Risk
As of November 30, 2011 and August 31, 2011 , 54% and 44% , respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance as of November 30, 2011 , 93% was less than 60 days past due, compared to 93% as of August 31, 2011 .
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 , 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 , which was filed with the Securities and Exchange Commission on October 20, 2011.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
2006 Restated Articles of Incorporation (as corrected December 2, 2011) of the Registrant.
 
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following financial information from Schnitzer Steel Industries, Inc.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income for the three months ended November 30, 2011 and 2010, (ii) Condensed Consolidated Balance Sheets as of November 30, 2011, and August 31, 2011, (iii) Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2011 and 2010, and (iv) the Notes to Condensed Consolidated Financial Statements. (1)
 
(1) In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by the specific reference in such filing.

29

Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
SCHNITZER STEEL INDUSTRIES, INC.
 
 
(Registrant)
 
 
 
 
Date:
January 9, 2012
By:
/s/ Tamara L. Lundgren
 
 
 
Tamara L. Lundgren
 
 
 
President and Chief Executive Officer
 
 
 
 
Date:
January 9, 2012
By:
/s/ Richard D. Peach
 
 
 
Richard D. Peach
 
 
 
Senior Vice President and Chief Financial Officer

30
Exhibit 3.1
2006 RESTATED ARTICLES OF INCORPORATION
OF
SCHNITZER STEEL INDUSTRIES, INC.
(as corrected as of December 2, 2011)
The following version of the 2006 Restated Articles of Incorporation of Schnitzer Steel Industries, Inc. has been prepared for filing with the Securities and Exchange Commission, and includes corrections reflected in Articles of Correction filed with the Oregon Secretary of State on December 2, 2011.
ARTICLE I
The name of the Corporation is Schnitzer Steel Industries, Inc.
ARTICLE II
A.    The Corporation is authorized to issue shares of three classes of stock: 25,000,000 shares of Class B Common Stock, $1.00 par value (“Class B Common Stock”), 75,000,000 shares of Class A Common Stock, $1.00 par value (“Class A Common Stock”), and 20,000,000 shares of Preferred Stock, $1.00 par value (“Preferred Stock”).
B.    The holders of shares of Class B Common Stock and Class A Common Stock shall have the following rights:
(1)     Voting .
(a)    The holders of shares of Class B Common Stock shall be entitled to ten votes per share and the holders of shares of Class A Common Stock shall be entitled to one vote per share on all matters requiring a vote of shareholders of the Corporation.
(b)    If the number of outstanding shares of Class B Common Stock is less than 20 percent of the sum of the number of outstanding shares of Class B Common Stock and Class A Common Stock, the holders of shares of Class B Common Stock and Class A Common Stock shall vote together as a class and be entitled to one vote per share on all matters submitted to the shareholders of the Corporation.
(c)    Neither the Class A Common Stock nor the Class B Common Stock shall be entitled to vote separately as a class on a merger of the Corporation.
(2)     Dividends and Distributions . The amount of any dividend or distribution of cash, stock of the Corporation (other than Class B Common Stock or Class A Common Stock) or of other property of the Corporation to be paid per share of Class B Common Stock shall equal the amount of such dividend or distribution to be paid per share of Class A Common Stock, and the amount of any such dividend or distribution to be paid per share of Class A Common Stock shall equal the amount of such dividend or distribution to be paid per share of Class B Common Stock.



The Corporation may not pay a dividend or make a distribution of Class B Common Stock, or any security exercisable for or convertible into Class B Common Stock (“Class B Common Stock Equivalents”), on or to shares of any class of the Corporation’s capital stock other than Class B Common Stock, and the Corporation may not pay a dividend or make a distribution of Class A Common Stock, or any security exercisable for or convertible into Class A Common Stock (“Class A Common Stock Equivalents”), on or to shares of any class of the Corporation’s capital stock other than Class A Common Stock. If the Corporation shall pay a dividend or make a distribution of Class A Common Stock or Class A Common Stock Equivalents, the Corporation shall simultaneously pay a dividend or make a distribution of Class B Common Stock or corresponding Class B Common Stock Equivalents, and the number of shares of Class B Common Stock issued or covered by Class B Common Stock Equivalents issued on each share of Class B Common Stock pursuant to such dividend or distribution shall equal the number of shares of Class A Common Stock issued or covered by Class A Common Stock Equivalents issued on each share of Class A Common Stock pursuant to such dividend or distribution. If the Corporation shall pay a dividend or make a distribution of Class B Common Stock or Class B Common Stock Equivalents, the Corporation shall simultaneously pay a dividend or make a distribution of Class A Common Stock or corresponding Class A Common Stock Equivalents, and the number of shares of Class A Common Stock issued or covered by Class A Common Stock Equivalents issued on each share of Class A Common Stock pursuant to the dividend or distribution shall equal the number of shares of Class B Common Stock issued or covered by Class B Common Stock Equivalents issued on each share of Class B Common Stock pursuant to the dividend or distribution. The limitations on the dividends and distributions set forth in this Section B(2) of Article II shall apply at any time during which shares of both Class B Common Stock and Class A Common Stock are outstanding. Notwithstanding anything in the foregoing to contrary, nothing in this Section 2 shall prohibit or render invalid that certain Rights Agreement, dated as of March 21, 2006, by and between the Corporation and Wells Fargo Bank, N.A. as the same may be amended, extended or renewed from time to time, or any similar shareholders rights plan.
(3)     Liquidation . On dissolution and liquidation of the Corporation, whether voluntary or involuntary, after paying or setting aside for the holders of all shares of Preferred Stock then outstanding the full preferential amounts to which they are entitled pursuant to any amendment to these Restated Articles of Incorporation authorizing the issuance of such Preferred Stock, the net assets of the Corporation remaining shall be divided among the holders of shares of Class B Common Stock and Class A Common Stock in such a manner that the amount of such net assets distributed per share of Class B Common Stock to the holders of shares of Class B Common Stock shall equal the amount of such assets distributed per share of Class A Common Stock to the holders of shares of Class A Common Stock.
(4)     Conversion . A holder of shares of Class B Common Stock shall have the right at any time to convert, at the option of and without cost to the shareholder, each share of Class B Common Stock into one share of Class A Common Stock. The holder shall exercise this right by the surrender of the certificate representing each share of Class B Common Stock to be converted to Class A Common Stock to the Corporation at its principal office or to such agent as the Board of Directors may designate. Written notice of the holder’s election to convert the shares and, if requested by the Corporation, an instrument of transfer satisfactory to the Corporation duly



executed by the holder or the holder’s duly authorized attorney shall accompany the surrendered certificate. As promptly as practicable after the holder’s surrender of the certificate for conversion as provided above, the Corporation shall deliver or cause to be delivered to the holder of shares represented by the surrendered certificate or certificates, a new certificate or certificates representing the number of shares of Class A Common Stock issuable upon such conversion issued in the name of the holder, or such other name or names as the holder may direct, and, if a surrendered certificate includes shares of Class B Common Stock not being converted, a certificate or certificates representing the number of shares of Class B Common Stock not being converted. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the certificate or certificates representing shares of Class B Common Stock unless the transfer books of the Corporation are closed on such date in which case such conversion shall be deemed to have been made immediately prior to the close of business on the first day thereafter on which the transfer books are open. At that time, all rights of such holder arising from ownership of the converted shares of Class B Common Stock shall cease, and the person or persons in whose name or names the certificate or certificates of Class A Common Stock are to be issued shall be treated for all purposes as having become the record holder or holders of such shares of Class A Common Stock.
The Corporation shall at all times reserve and keep available, solely for the purpose of issuance upon conversion of outstanding shares of Class B Common Stock such number of authorized but unissued shares of Class A Common Stock as will be sufficient to permit the conversion of all outstanding shares of Class B Common Stock.
If any share of Class A Common Stock requires registration with or approval of any governmental authority under any federal or state law before such share of Class A Common Stock may be issued upon conversion, the Corporation will endeavor to cause such share to be duly registered or approved, as the case may be. The Corporation will endeavor to list shares of Class A Common Stock required to be delivered upon conversion prior to such delivery upon any national securities exchange or national market system on which the outstanding shares of Class A Common Stock may be listed at the time of such delivery.
(5)     Restriction on Issuance of Class B Common Stock . The Corporation may not issue any shares of Class B Common Stock after the date of filing of these Restated Articles of Incorporation other than (i) in the form of a distribution or distributions pursuant to a stock dividend or division or split-up of the shares of Class B Common Stock and only then in respect of the issued shares of Class B Common Stock and (ii) pursuant to the terms of that certain Rights Agreement, dated as of March 21, 2006, by and between the Corporation and Wells Fargo Bank, N.A., as the same may be amended, extended or renewed from time to time, or any similar shareholders rights plan.
(6)     Restriction on Transfer of Class B Common Stock . No holder of Class B Common Stock may sell, assign, pledge, or in any manner transfer any shares of Class B Common Stock, or any right or interest in any shares of Class B Common Stock, whether voluntarily or by operation of law, or by gift, bequest or otherwise, except for a transfer to Manuel Schnitzer, Mildred Schnitzer, Gilbert Schnitzer, or Leonard Schnitzer, any spouse, descendant or spouse of a descendant



of any of them, any conservator or personal representative of the estate of any of the foregoing Schnitzer family members, any trust of which beneficiaries who are entitled to substantially all of the beneficial interest are Schnitzer family members described above or organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986, or any corporation which has no shareholders other than one or more of the foregoing Schnitzer family members. For purposes of determining descendants, an adopted child shall be treated as if he or she were a natural child. Any sale or transfer, or purported sale or transfer, of Class B Common Stock, or any right or interest in Class B Common Stock, to any person or entity other than those specified in this section shall be null and void. The certificates representing shares of Class B Common Stock shall bear the following legend:
“The shares represented by this certificate may not be sold, pledged or transferred in any other manner, including by gift, bequest or operation of law, to any person other than certain Schnitzer family members and related parties as specified in the 2006 Restated Articles of Incorporation of the Corporation.”
The provisions of this subsection (6) may not be amended, altered, changed or repealed in any respect, nor may any provision be adopted which is inconsistent with this subsection (6), unless the action is approved by the holders of a majority of the outstanding shares of Class B Common Stock and a majority of the outstanding shares of Class A Common Stock, each voting separately as a class.
C.    The Board of Directors is authorized, subject to limitations prescribed by the Oregon Business Corporation Act and by the provisions of this Article II, to provide for the issuance of shares of Preferred Stock in series, establish from time to time the number of shares to be included in each series, and determine the designations, relative rights, preferences and limitations of the shares of each series. The authority of the Board of Directors with respect to each series includes determination of the following:
(1)    The number of shares in and the distinguishing designation of that series;
(2)    Whether shares of that series shall have full, special, conditional, limited or no voting rights, except to the extent otherwise provided by the Oregon Business Corporation Act and Section B of this Article II;
(3)    Whether shares of that series shall be convertible and the terms and conditions of the conversion, including provision for adjustment of the conversion rate in circumstances determined by the Board of Directors;
(4)    Whether or not shares of that series shall be redeemable and the terms and conditions of redemption, including the date or dates upon or after which they shall be redeemable and the amount per share payable in case of redemption, which amount may vary under different conditions or at different redemption dates;
(5)    The dividend rate, if any, on shares of that series, the manner of calculating



any dividends and the preferences of any dividends;
(6)    The rights of shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation and the rights of priority of that series relative to the Class B Common Stock, the Class A Common Stock and any other series of Preferred Stock on the distribution of assets on dissolution; and
(7)    Any other relative rights, preferences and limitations of that series that are permitted by law to vary.
D.    The Board of Directors has created a series of Preferred Stock of the Corporation designated as “Series A Participating Preferred Stock”, par value $1.00 per share (the “Series A Preferred Stock”), with the number of shares constituting such series being 100,000 shares, and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof, being as follows:
(1)     Dividends and Distributions .
(A)    Subject to the prior and superior rights of the holders of any shares of any series of stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Class A Common Stock and Class B Common Stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July , and October in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, one thousand (1,000) times the aggregate per share amount of all cash dividends, and one thousand (1,000) times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend or distribution payable in shares of Class A Common Stock or Class B Common Stock or a subdivision of the outstanding shares of Class A Common Stock or Class B Common Stock (by reclassification or otherwise), declared on the Class A Common Stock or Class B Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. Dividends on the Series A Preferred Stock shall be paid out of funds legally available for such purpose. In the event the Company shall at any time after March 21, 2006 (the “Rights Declaration Date”), (i) declare any dividend on Class A Common Stock or Class B Common Stock payable in shares of Class A Common Stock or Class B Common Stock, (ii) subdivide the outstanding Class A Common Stock or Class B Common Stock, or (iii) combine the outstanding Class A Common Stock or Class B Common Stock into a smaller number of shares, then in each such case the amounts to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying each such amount by a fraction the numerator of which is the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Class A Common Stock and Class



B Common Stock that were outstanding immediately prior to such event.
(B)    The Company shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Class A Common Stock or Class B Common Stock (other than a dividend or distribution payable in shares of Class A Common Stock or Class B Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Class A Common Stock or Class B Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date; and provided further , that nothing contained in this paragraph (B) shall be construed so as to conflict with any provision relating to the declaration of dividends contained in the Certificate.
(C)    Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of dividend or distribution declared thereon, which record date shall be no more than 30 days before the date fixed for the payment thereof.
(2)     Voting Rights . The holders of shares of Series A Preferred Stock shall have the following voting rights:
(A)    Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Company. In the event the Company shall at any time following the Rights Declaration Date (i) declare any dividend on Class A Common Stock or Class B Common Stock payable in shares of Class A Common Stock or Class B Common Stock, (ii) subdivide the outstanding shares of Class A Common Stock or Class B Common Stock or (iii) combine the outstanding Class A Common Stock or Class B Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of votes entitled to be cast by the holders of shares of Class A Common Stock and Class B Common Stock outstanding immediately after such event and the



denominator of which is the number of votes entitled to be cast by the holders of shares of Class A Common Stock and Class B Common Stock that were outstanding immediately prior to such event.
(B)    Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Class A Common Stock and Class B Common Stock shall vote together as one class on all matters submitted to a vote of shareholders of the Company.
(C)    (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a “default period”) which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.
(ii)    During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this subsection (2)(C) or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders, provided that neither such voting right nor the right of the holders of any other series of Series A Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Series A Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Class A Common Stock and Class B Common Stock shall not affect the exercise by the holders of Series A Preferred Stock of such voting right. At any meeting at which the holders of Series A Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Series A Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Series A Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Series A Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Preferred Stock.
(iii)    Unless the holders of Series A Preferred Stock shall, during an



existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Series A Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Series A Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Series A Preferred Stock are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Series A Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or, in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Series A Preferred Stock outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the shareholders.
(iv)    In any default period, the holders of Class A Common Stock, Class B Common Stock and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Series A Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Series A Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this subsection (2)) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence.
(v)    Immediately upon the expiration of a default period, (x) the right of the holders of Series A Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Series A Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this subsection (2) (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors.
(D)    Except as set forth herein, holders of Series A Preferred Stock shall



have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Class A Common Stock and Class B Common Stock as set forth herein) for taking any corporate action.
(3)     Certain Restrictions .
(A)    Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section D(1) of this Article II are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Company shall not:
(i)     declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution, or winding up) to the Series A Preferred Stock;
(ii)    declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution, or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii)    redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution, or winding up) with the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or
(iv)     purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution, or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(B)    The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of Section D(3) of this Article II, purchase or otherwise acquire such shares at such time and in such manner.
(4)     Redemption . The Series A Preferred Stock shall not be redeemable.



(5)     Reacquired Shares . Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.
(6)     Liquidation, Dissolution, or Winding Up .
(A)    Upon any voluntary or involuntary liquidation, dissolution, or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution, or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1,000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Stock unless, prior thereto, the holders of shares of Class A Common Stock and Class B Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Class A Common Stock and Class B Common Stock) (such number in clause (ii) being the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Preferred Stock, Class A Common Stock and Class B Common Stock, respectively, holders of Series A Preferred Stock, holders of shares of Class A Common Stock and holders of shares of Class B Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to one with respect to such Preferred Stock, Class A Common Stock and Class B Common Stock, on a per share basis, respectively.
(B)    In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preference stock, if any, which rank on a parity with the Series A Preferred Stock, then all such available assets shall be distributed ratably to the holders of the Series A Preferred Stock and the holders of such parity stock in proportion to their respective liquidation preferences. In the event that, after payment in full of the Series A Liquidation Preference, there are not sufficient assets available to permit payment in full of the Common Adjustment, then any such remaining assets shall be distributed ratably to the holders of Class A Common Stock and Class B Common Stock.
(C)    In the event the Company shall at any time after the Rights Declaration Date, (i) declare any dividend on Class A Common Stock or Class B Common Stock payable in shares of Class A Common Stock or Class B Common Stock, (ii) subdivide the outstanding Class A Common Stock or Class B Common Stock, or (iii) combine the outstanding Class A Common Stock or Class B Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment



Number by a fraction, the numerator of which is the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Class A Common Stock and Class B Common Stock that were outstanding immediately prior to such event.
(7)     Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination, or other transaction in which the shares of Class A Common Stock or Class B Common Stock are exchanged for or changed into other stock or securities, cash, and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash, and/or any other property (payable in kind), as the case may be, into which or for which each share of Class A Common Stock and Class B Common Stock is changed or exchanged. In the event the Company shall at any time after the Rights Declaration Date: (i) declare or pay any dividend on Class A Common Stock or Class B Common Stock payable in shares of Class A Common Stock or Class B Common Stock, (ii) subdivide the outstanding shares of Class A Common Stock or Class B Common Stock, or (iii) combine the outstanding shares of Class A Common Stock or Class B Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately after such event, and the denominator of which is the number of shares of Class A Common Stock and Class B Common Stock that were outstanding immediately prior to such event.
(8)     Ranking . The Series A Preferred Stock shall rank junior to all other series of the Company’s Preferred Stock as to the payment of dividends and distribution of assets, unless the term of any such series shall provide otherwise.
(9)     Fractional Shares . The Company may issue fractions and certificates representing fractions of a share of Series A Preferred Stock in integral multiples of 1/1000th of a share of Series A Preferred Stock (or in lieu thereof, at the election of the Board of Directors of the Company at the time of the first issue of any shares of Series A Preferred Stock, and evidence such fractions by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all rights, privileges and preferences to which they would be entitled as beneficial owners of shares of Series A Preferred Stock in the event that fractional shares of Series A Preferred Stock are issued) which shall entitle the holders thereof, in the proportion which such fraction bears to a full share, to all the rights provided herein for holders of full shares of Series A Preferred Stock.
(10)     Amendment . At any time when any shares of Series A Preferred Stock are outstanding, the designation of terms of Series A Preferred Stock set forth in these Restated Articles of Incorporation shall not be amended in any manner that would materially alter or change the powers, preferences, or special rights of the Series A Preferred Stock so as to affect them adversely, without the affirmative vote of the holders of a majority or more of the outstanding shares of Series



A Preferred Stock, voting together as a single class.
ARTICLE III
Holders of Class B Common Stock, Class A Common Stock and Preferred Stock of the Corporation shall have no preemptive rights to purchase stock of the Corporation or securities convertible into or carrying a right to subscribe for or acquire stock of the Corporation.
ARTICLE IV
A.    No director of the Corporation may be removed without cause. No amendment of the bylaws of the Corporation shall have the effect of shortening the term of any incumbent director.
B.    Both the Board of Directors and the shareholders shall have the power to alter, amend or repeal the bylaws of the Corporation. Any repeal or change of the bylaws by the shareholders shall require the affirmative vote of not less than 80 percent of the votes entitled to be cast on the matter.
C.    The provisions set forth in this Article may not be amended, altered, changed or repealed in any respect, nor may any provision be adopted which is inconsistent with this Article unless such action is approved by the affirmative vote of not less than 80 percent of the votes entitled to be cast on the matter.
ARTICLE V
A.     Classified Board . The directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. One class will stand for election at each annual meeting of shareholders, with each class standing for election every third year. At the first annual meeting of shareholders following the filing of these Restated Articles of Incorporation, the term of office of the Class I directors shall expire and Class I directors shall be elected for a term ending at the third annual meeting succeeding such first annual meeting. At the second annual meeting of shareholders following the filing of these Restated Articles of Incorporation, the term of office of the Class II directors shall expire and Class II directors shall be elected for a term ending at the third annual meeting succeeding such second annual meeting. At the third annual meeting of shareholders following the filing of these Restated Articles of Incorporation, the term of office of the Class III directors shall expire and Class III directors shall be elected for a term ending at the third annual meeting succeeding such third annual meeting. At each succeeding annual meeting of shareholders, directors shall be elected for a term ending at the third annual meeting succeeding such annual meeting to succeed the directors of the class whose terms expire at such annual meeting. If the number of directors is increased or decreased, such change will be apportioned among the classes so that, after the change, the classes will remain as nearly equal in number as possible. The number of directors whose terms expire in any one year shall be less than one half of the total number of directors. The directors of the Corporation first elected to classes are eleven (11) in number and their names and classes are:

Name      Class



Robert S. Ball    III
John D. Carter    III
Jill Schnitzer Edelson    II
William A. Furman    I
Judith A. Johansen    II
William D. Larsson    I
Scott Lewis    I
Kenneth M. Novack    III
Mark L. Palmquist    II
Jean S. Reynolds    III
Ralph R. Shaw    II

If the number of directors is increased or decreased, such change will be apportioned among the classes so that, after the change, the classes will remain as nearly equal in number as possible. A decrease in the number of directors will not have the effect of shortening the term of any incumbent director. The number of directors whose terms expire in any one year shall be less than one half of the total number of directors. Except as set forth in Section B of this Article V with respect to vacancies and newly-created directorships, at each annual meeting, the shareholders will elect directors by a plurality of the votes cast by the shares entitled to vote in the election. The directors of the Corporation shall not be required to be elected by written ballots. Notwithstanding the foregoing provisions of this Article V, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal.
B.     Vacancies . Any vacancy occurring on the Board of Directors, including a vacancy resulting from an increase in the number of directors or the removal of any directors, may be filled only by the Board of Directors, by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors, or by a sole remaining director. The shareholders of the Corporation may not fill vacancies on the Board of Directors, including vacancies resulting from an increase in the number of directors or the removal of any directors. A director elected to fill a vacancy becomes a member of the same class as his predecessor and shall be elected for the unexpired term of his or her predecessor in office or, in the event of an increase in the number of directors, for a term of office continuing until the next election of directors of such class by the shareholders; provided, that the Board of Directors may designate the vacant directorship as a directorship of another class in order more nearly to achieve equality in the number of directors among the classes. A vacancy that will occur at a specific later date by reason of a resignation effective at such later date or otherwise may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs.
C.    The provisions set forth in this Article may not be amended, altered, changed or repealed in any respect, nor may any provision be adopted which is inconsistent with this Article, unless such action is approved by the affirmative vote of not less than 80 percent of the votes entitled to be cast on the matter.
ARTICLE VI
A.    Special meetings of the shareholders, for any purposes, unless otherwise prescribed



by statute, may be called by the Chairman of the Board, President, Secretary or the Board of Directors and shall be called by the Chairman of the Board, President, Secretary or the Board of Directors upon the written demand, describing the purposes for which the meeting is to be held, signed, dated and delivered to the Secretary in accordance with the bylaws of the Corporation, of the holders of not less than 25% of all the votes entitled to be cast on any issue proposed to be considered at the meeting or, if higher, the highest percentage permitted by Oregon law.
B.    The provisions set forth in this Article may not be amended, altered, changed or repealed in any respect, nor may any provision be adopted which is inconsistent with this Article, unless such action is approved by the affirmative vote of the holders of not less than 80 percent of the votes entitled to be cast on the matter.
ARTICLE VII
The Corporation shall indemnify to the fullest extent not prohibited by law any current or former director or officer of the Corporation who is made, or threatened to be made, a party to an action, suit or proceeding, whether civil, criminal, administrative, investigative or other (including an action, suit or proceeding by or in the right of the Corporation), by reason of the fact that such person is or was a director, officer, employee or agent of the Corporation or a fiduciary within the meaning of the Employee Retirement Income Security Act of 1974 with respect to any employee benefit plan of the Corporation, or serves or served at the request of the Corporation as a director, officer, employee or agent, or as a fiduciary of an employee benefit plan, of another corporation, partnership, joint venture, trust or other enterprise. The Corporation shall pay all expenses incurred by any such person in defending such a proceeding in advance of its final disposition at the written request of such person if the person furnishes the Corporation (a) a written statement of a good faith belief that he or she is entitled to indemnification and (b) a written undertaking to repay such advance if it is ultimately determined by a court that such person is not entitled to be indemnified. No amendment to these Restated Articles of Incorporation that limits the Corporation’s obligation to indemnify directors and officers of the Corporation shall have any effect on such obligation for any act or omission which occurs prior to the later of the effective date of the amendment or the date notice of the amendment is given to the officer or director. This Article shall not be deemed exclusive of any other provisions for indemnification or advancement of expenses of directors, officers, employees, agents and fiduciaries included in any statute, bylaw, agreement, general or specific action of the Board of Directors, vote of shareholders or other document or arrangement.
ARTICLE VIII
No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for conduct as a director; provided that this Article shall not eliminate the liability of a director for any act or omission for which such elimination of liability is not permitted under the Oregon Business Corporation Act. No amendment to the Oregon Business Corporation Act that further limits the acts or omissions for which elimination of liability is permitted shall affect the liability of a director for any act or omission which occurs prior to the effective date of the amendment.


Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Tamara L. Lundgren, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
January 9, 2012
 
/s/ Tamara L. Lundgren
Tamara L. Lundgren
President and Chief Executive Officer



Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Richard D. Peach, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Schnitzer Steel Industries, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
January 9, 2012
 
 
Richard D. Peach
Senior Vice President and Chief Financial Officer



Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Schnitzer Steel Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

January 9, 2012
 
/s/ Tamara L. Lundgren
Tamara L. Lundgren
President and Chief Executive Officer




Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Schnitzer Steel Industries, Inc. (the “Company”) on Form 10-Q for the quarter ended November 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
January 9, 2012
 
/s/ Richard D. Peach
Richard D. Peach
Senior Vice President and Chief Financial Officer