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EX-21.1 - SUBSIDIARIES OF REGISTRANT - SCHNITZER STEEL INDUSTRIES INCschnex211_8312014.htm
EX-31.2 - CERTIFICATIONOF CHIEF FINANCIAL OFFICER - SCHNITZER STEEL INDUSTRIES INCschn-ex312_8312014.htm
EX-24.1 - POWERS OF ATTORNEY - SCHNITZER STEEL INDUSTRIES INCschnex241_8312014.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SCHNITZER STEEL INDUSTRIES INCschn-ex311_8312014.htm
EX-32.1 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - SCHNITZER STEEL INDUSTRIES INCschn-ex322_8312014.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - SCHNITZER STEEL INDUSTRIES INCschn-ex321_8312014.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2014
or
[    ] 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 of Incorporation)
 
(I.R.S. Employer Identification No.)

299 SW Clay St., Suite 350
Portland, OR
 
97201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (503) 224-9900
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $1.00 par value
 
The NASDAQ Global Select Market
(Title of Each Class)
 
(Name of each Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ x ]    No [    ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [    ]    No [ x ]
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 [    ]
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 [    ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ]
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 [    ]
Non-Accelerated Filer [    ]
 
Smaller Reporting company [    ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [    ]    No [ x ]
The aggregate market value of the registrant’s outstanding common stock held by non-affiliates on February 28, 2014 was $647,393,005.
The registrant had 26,394,164 shares of Class A common stock, par value of $1.00 per share, and 305,900 shares of Class B common stock, par value of $1.00 per share, outstanding as of October 23, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for the January 2015 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.




SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
 
 
 
 
PAGE
 
 
 
 
 
 
Item 1
 
Item 1A
 
Item 1B
 
Item 2
 
Item 3
 
Item 4
 
 
 
 
 
 
 
Item 5
 
Item 6
 
Item 7
 
Item 7A
 
Item 8
 
Item 9
 
Item 9A
 
Item 9B
 
 
 
 
 
 
 
Item 10
 
Item 11
 
Item 12
 
Item 13
 
Item 14
 
 
 
 
 
 
 
Item 15
 
 
 




FORWARD-LOOKING STATEMENTS
Statements and information included in this Annual Report on Form 10-K 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 Annual Report on Form 10-K include statements regarding our expectations, intentions, beliefs and strategies regarding the future, which may include statements regarding trends, cyclicality and changes in the markets we sell into; strategic direction; changes to manufacturing and production processes; the cost of and the status of any agreements or actions related to our compliance with environmental and other laws; expected tax rates, deductions and credits; the realization of deferred tax assets; planned capital expenditures; liquidity positions; ability to generate cash from continuing operations; the potential impact of adopting new accounting pronouncements; expected results, including pricing, sales volumes and profitability; obligations under our retirement plans; benefits, savings or additional costs from business realignment, cost containment and productivity improvement programs; and the adequacy of accruals.
When used in this report, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “could,” “opinions,” “forecasts,” “future,” “forward,” “potential,” “probable,” and similar expressions are intended to identify forward-looking statements.
We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases and public conference calls. All forward-looking statements we make are based on information available to us at the time the statements are made, and we assume no obligation to update any forward-looking statements, except as may be required by law. Our business is subject to the effects of changes in domestic and global economic conditions and a number of other risks and uncertainties that could cause actual results to differ materially from those included in, or implied by, such forward-looking statements. Some of these risks and uncertainties are discussed in Item 1A. Risk Factors of Part I of this Form 10-K. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund site; the impact of general economic conditions; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; difficulties associated with acquisitions and integration of acquired businesses; the impact of goodwill impairment charges; the impact of long-lived asset impairment charges; the realization of expected cost reductions related to restructuring initiatives; the benefit of cost containment and productivity improvement programs and initiatives; the inability of customers to fulfill their contractual obligations; the impact of foreign currency fluctuations; potential limitations on our ability to access capital resources and existing credit facilities; restrictions on our business and financial covenants under our bank credit agreement; the impact of the consolidation in the steel industry; the impact of imports of foreign steel into the U.S.; inability to realize expected benefits from investments in technology; freight rates and availability of transportation; impact of equipment upgrades and failures on production; product liability claims; the impact of impairment of our deferred tax assets; the impact of a cybersecurity incident; 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.


1 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


PART I
 
ITEM 1. BUSINESS
General
Founded in 1906, Schnitzer Steel Industries, Inc., an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous scrap metal, a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products. The foundation of our business is a commitment to sustainability – recycling metal to generate additional value while achieving profitable growth. In recent years, the worldwide demand for scrap metal has been driven by growing demand for new steel products, electric arc furnace (“EAF”) steel mill technology which relies on scrap metal as its primary feedstock and, to a certain extent, the use by blast furnaces of scrap metal, which reduces energy costs and use of virgin materials. The emerging markets, the primary end markets for our recycled scrap metal, currently generate insufficient levels of scrap metal to feed their steel production. This results in a need to source recycled scrap metal from developed economies, including the United States and Canada, which, together with domestic requirements, creates ongoing demand for our products.
Through our North American Metals Recycling Business, we collect and recycle autobodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap from bridges, buildings and other structures. With 55 operating facilities located in 14 States, Puerto Rico and Western Canada, we are well-positioned to efficiently collect scrap metal throughout North America and export products to customers around the world from our seven deep water ports. In fiscal 2014, we sold our products to customers located in 21 countries including the United States and Canada. Our Metals Recycling Business benefits from synergies with our Auto Parts Business in several geographic regions. Our Auto Parts Business, which has 62 retail locations, buys end-of-life vehicles, sells parts to retail and wholesale customers, and sells ferrous and nonferrous metal to metals recyclers, including our Metals Recycling Business where geographically feasible. In addition, our Steel Manufacturing Business produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using nearly 100% recycled metal sourced from our Metals Recycling Business.
In fiscal 2014, our Metals Recycling Business processed or brokered 4.1 million tons of ferrous scrap metal and 555 million pounds of nonferrous scrap metal. Our Metals Recycling Business’ revenues by major scrap product were 75% ferrous and 24% nonferrous, and 75% of our external revenues were generated from export sales.
In fiscal 2014, we initiated and implemented restructuring and productivity initiatives incremental to those completed in fiscal 2013 designed to further reduce our annual operating expenses by $40 million, achieving $29 million of benefit in fiscal 2014 results with the full annual benefit expected to be achieved in fiscal 2015. The benefits associated with these initiatives are occurring primarily in our Metals Recycling Business as a result of a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs and other productivity improvements. These initiatives are anticipated to be completed by the end of fiscal 2015. We incurred restructuring charges and other exit-related costs of $6 million in connection with these initiatives in fiscal 2014. We plan to initiate and implement additional productivity initiatives in our Auto Parts Business in fiscal 2015 to improve profitability through a combination of revenue drivers and cost reduction initiatives. Our targeted annual improvement is approximately $7 million, with approximately 50% of that amount expected to benefit the second half of fiscal 2015 and the full annual run rate achieved in fiscal 2016.
We report the operations of these three businesses in three reporting segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”). See Note 21 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for a discussion of the primary activities of each reporting segment, total assets by reporting segment, operating results from continuing operations, revenues from external customers and concentration of sales to foreign countries.
Metals Recycling Business
Business
MRB buys, collects, processes, recycles, sells and brokers ferrous scrap metal (containing iron) to foreign and domestic steel producers, including SMB, and nonferrous scrap metal (not containing iron) to both foreign and domestic markets. MRB processes mixed and large pieces of scrap metal into smaller pieces by crushing, sorting, shearing, shredding, and torching, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. The manufacturing process includes physical separation of materials through automated and manual processes into ferrous and nonferrous and various sub-classifications, each of which has a value and metal content of importance to different customers for their end product.
To prepare scrap metal, we crush, sort and bale the material by product grade for easier handling and sale. One of the most efficient ways to process and sort recycled scrap metal is through the use of shredding systems. MRB has eight port locations equipped with large scale shredders, seven of which are deep water ports with export capabilities. In fiscal 2013, we completed the construction of a new shredder, advanced processing equipment, and related infrastructure for our dock facility in Surrey, British Columbia,

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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


which was acquired in fiscal 2011. This state-of-the-art facility began shredding operations in the third quarter of fiscal 2013. Our largest port facilities in Everett, Massachusetts; Portland, Oregon; Oakland, California; and Tacoma, Washington each operate a mega-shredder with 7,000 to 9,000 horsepower. Our facilities in Johnston, Rhode Island; Surrey, British Columbia; Salinas, Puerto Rico; Kapolei, Hawaii; and Concord, New Hampshire operate shredders with 1,500 to 6,000 horsepower. Our shredders are designed to provide a denser product and, in conjunction with advanced separation equipment, a more refined form of ferrous scrap metal which can be more efficiently used by steel mills. The shredding process reduces autobodies, home appliances and other scrap metal into fist-size pieces of shredded recycled scrap metal. The shredded material is then carried by conveyor under magnetized drums that attract the ferrous scrap metal and separate it from the nonferrous scrap metal and other residue found in the shredded material, resulting in a consistent and high-quality shredded ferrous product. The nonferrous scrap metal and residue then pass through a series of additional mechanical sorting systems designed to separate the nonferrous metal from the residue. The remaining nonferrous metal is then hand-sorted and graded before being sold. MRB continues to invest in nonferrous metal extraction and separation technologies in order to maximize the recoverability of valuable nonferrous metal. MRB also purchases nonferrous metal directly from industrial vendors and other suppliers and prepares this metal for shipment to customers.
Products
MRB sells both ferrous and nonferrous scrap metal. Ferrous scrap metal is a key feedstock used in the production of finished steel products and is primarily categorized into heavy melting steel (“HMS”), plate and structural (“bonus”) and shredded scrap (“shred”), although there are various grades of each category depending on metal content and the size and consistency of individual pieces. These attributes affect the product’s relative value. Our nonferrous products include aluminum, copper, stainless steel, nickel, brass, titanium, lead, high temperature alloys and joint products such as zorba (primarily mixed nonferrous material) and zurik (predominantly stainless steel).
Customers
MRB sells its products globally to steel mills, foundries and smelters, and supplies the ferrous scrap metal required by SMB.
Presented below are MRB revenues by continent and, separately, from sales to SMB, for the last three fiscal years ended August 31 (dollars in thousands):
 
2014
 
% of
Revenue
 
2013
 
% of
Revenue
 
2012
 
% of
Revenue
Asia
$
1,049,531

 
55
 %
 
$
1,161,086

 
57
 %
 
$
1,598,889

 
58
 %
North America
672,831

 
35
 %
 
609,684

 
30
 %
 
728,338

 
26
 %
Europe(1)
285,540

 
15
 %
 
381,867

 
19
 %
 
480,723

 
17
 %
Africa
76,122

 
4
 %
 
53,841

 
3
 %
 
130,469

 
5
 %
South America
18,911

 
1
 %
 
4,006

 
 %
 
10,288

 
1
 %
Sales to SMB
(188,103
)
 
(10
)%
 
(178,341
)
 
(9
)%
 
(183,906
)
 
(7
)%
Total (net of intercompany)
$
1,914,832

 
100
 %
 
$
2,032,143

 
100
 %
 
$
2,764,801

 
100
 %
 ____________________________
(1)
Includes sales to customers in Turkey.
In fiscal 2014, the five countries from which MRB derived its largest revenues from external customers were the United States, China, South Korea, Turkey and Malaysia, which collectively accounted for 79% of total MRB external revenue. In fiscal 2013 and 2012, the five countries from which MRB derived its largest revenues from external customers accounted for 84% and 81%, respectively, of total MRB external revenue.
MRB’s five largest external ferrous scrap metal customers accounted for 35% of external recycled ferrous metal revenues in fiscal 2014, compared to 41% and 38% in fiscal 2013 and 2012, respectively. Customer purchase volumes of ferrous scrap metal vary from year to year due to the level of demand, availability of supply, economic growth, infrastructure spending, relative currency values, availability of credit and other factors. Ferrous metal sales are primarily denominated in U.S. dollars, and nearly all of the large shipments of ferrous scrap metal to foreign customers are supported by letters of credit.
MRB had no external customers that accounted for 10% or more of consolidated revenues in fiscal 2014, 2013 and 2012.

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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


The table below sets forth, on a revenue and volume basis, the amount of recycled ferrous scrap metal sold by MRB to foreign and domestic customers, including sales to SMB, during the last three fiscal years ended August 31:
 
2014
 
2013
 
2012
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
Foreign
$
1,088,546

 
2,799

 
$
1,255,636

 
3,167

 
$
1,799,991

 
3,928

Domestic
492,499

 
1,323

 
421,399

 
1,142

 
497,589

 
1,187

Total
$
1,581,045

 
4,122

 
$
1,677,035

 
4,309

 
$
2,297,580

 
5,115

 _____________________________
(1)
Revenues stated in thousands of dollars.
(2)
Volume stated in thousands of long tons (one long ton = 2,240 pounds).
MRB sells processed nonferrous scrap metal to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. MRB continues to invest in advanced separation technologies in order to extract higher nonferrous yields from the shredding process and to enhance the separation of nonferrous metals in order to increase the intrinsic value of the individual metals.
The table below sets forth, on a revenue and volume basis, the amount of recycled nonferrous scrap metal sold by MRB to foreign and domestic customers during the last three fiscal years ended August 31:
 
2014
 
2013
 
2012
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
Foreign
$
342,040

 
395,853

 
$
345,973

 
369,869

 
$
420,378

 
451,163

Domestic
152,705

 
158,955

 
155,682

 
150,573

 
194,089

 
177,489

Total
$
494,745

 
554,808

 
$
501,655

 
520,442

 
$
614,467

 
628,652

 ____________________________
(1)
Revenues stated in thousands of dollars.
(2)
Volume stated in thousands of pounds.
Pricing
Domestic and foreign prices for ferrous scrap metal are generally based on prevailing market rates, which differ by region and are subject to market cycles that are influenced by worldwide demand from steel and other metal producers and by the availability of materials that can be processed into saleable scrap metal, among other factors. Ferrous scrap metal export sales contracts generally provide for shipment within 30 to 60 days after the price is agreed to which, in most cases, includes freight. Nonferrous scrap metal sales contracts generally provide for shipment within 30 days after the price is agreed to, which also typically includes freight.
MRB responds to changes in selling prices by seeking to adjust scrap metal purchase prices at its recycling facilities in order to manage the impact on its operating income. The spread between selling prices and the cost of purchased material is subject to a number of factors, including differences in the market conditions between the domestic regions where raw scrap metal is acquired and the areas in the world where the processed materials are sold, market volatility from the time the selling price is agreed to with the customer until the time the raw material is purchased, and changes in the estimated costs of transportation to the buyer’s facility. We believe MRB generally benefits from sustained periods of rising recycled scrap metal selling prices, which allow it to better maintain or expand both operating income and unprocessed scrap metal flow into its facilities, and suffers when recycled scrap metal selling prices decline, which tends to compress its operating margins.
Markets
Worldwide demand for finished steel products, driven primarily by infrastructure spending and industrialization, drives demand for raw materials, in particular recycled ferrous metal, which is one of the primary feedstocks used in EAFs to manufacture steel. Demand for finished steel has been more pronounced in Asia and the Mediterranean region, which currently do not possess a sufficient supply of raw materials to meet production needs. As a result of this demand, MRB’s ferrous exports have made up 68%, 73% and 77% of its total ferrous sales volume in fiscal 2014, 2013 and 2012, respectively. Over the last three years, the rate of growth for global steel production slowed as a result of decelerating global economic growth, continuing geopolitical unrest, the European sovereign debt crisis, industry production cuts and a weakening price environment for finished steel. The softening market conditions reflected these macroeconomic trends which are typical of the long-term cyclicality in our industry. We believe future demand for recycled metals will be driven by factors including global infrastructure spending, fixed asset investment,

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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


consumer spending, availability of credit, government stimulus programs and environmental policy promoting the use of recycled metals.
Nonferrous exports made up 71%, 71% and 72% of MRB’s total nonferrous sales volumes in fiscal 2014, 2013 and 2012, respectively. China and the U.S. have been the largest sales destinations in the nonferrous markets, unlike the ferrous market which is highly diversified with no single country dominating sales from year to year.
Distribution
MRB delivers recycled ferrous and nonferrous scrap metal to foreign customers by ship and to domestic customers by barge, rail and over-the-road transportation networks. Cost efficiencies are achieved by operating deep water terminal facilities at Everett, Massachusetts; Portland, Oregon; Oakland, California; Tacoma, Washington; and Providence, Rhode Island, all of which are owned, except for the Providence, Rhode Island facility, which is operated under a long-term lease. We also have access to deep water terminal facilities at Kapolei, Hawaii and Salinas, Puerto Rico through public docks, and have water access for transportation purposes at our facility in Surrey, British Columbia. Our seven deep water terminals enable us to load ferrous material in large vessels capable of holding up to 50,000 tons for trans-oceanic shipments. Additionally, because we own most of the terminal facilities at which MRB operates, MRB is not normally subject to the same berthing delays often experienced by users of unaffiliated terminals. We believe that MRB’s loading costs are lower than at terminal facilities operated by third parties. From time to time, MRB may enter into contracts of affreightment, which guarantee the availability of ocean going vessels, in order to manage the risks associated with ship availability and freight costs.
Our nonferrous products are shipped in containers which hold 20 to 30 tons from container ports and rail ramps located in close proximity to our recycling facilities. Containerized shipments are exported by marine vessels to customers globally and domestic shipments are typically shipped by rail or by truck.
Sources of Unprocessed Metal
The most common forms of purchased raw metal are obsolete machinery and equipment, such as automobiles, railroad cars, railroad tracks, home appliances and other consumer goods, waste metal from manufacturing operations and demolition metal from buildings and other obsolete structures. Raw metal is acquired from a diverse base of suppliers that unload at MRB’s facilities, from drop boxes at suppliers’ industrial sites and through negotiated purchases from other large suppliers, including railroads, industrial manufacturers, automobile salvage facilities, metal dealers, various government entities and individuals. The majority of MRB’s scrap metal collection and processing facilities receive raw metal via major railroad routes, waterways or highways. Metals recycling facilities situated near unprocessed metal sellers and major transportation routes have the competitive advantage of reduced freight costs because of the significant cost of freight relative to the cost of metal. The locations of MRB’s West Coast facilities allow it to competitively purchase raw metal from the Northern California region, northward to Western Canada and Alaska, and to the east, including Idaho, Montana, Utah, Colorado and Nevada. The locations of the East Coast facilities provide access to sources of unprocessed metal in New York, Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, Vermont, Eastern Canada and, from time to time, the Midwest. In the Southeastern U.S., approximately half of MRB’s ferrous and nonferrous unprocessed metal volume is purchased from industrial companies, including auto manufacturers, with the remaining volume being purchased from smaller dealers and individuals. These industrial companies provide MRB with metals that are by-products of their manufacturing processes. The supply of scrap metal from these sources can fluctuate with the level of economic activity in the U.S. and can be sensitive to variability in scrap metal prices, particularly in the short-term.
Backlog
As of September 30, 2014, MRB had a backlog of orders to sell $91 million of export ferrous metal compared to $104 million in the prior year as a result of a decrease in selling prices compared to the prior year and timing of sales. Additionally, as of September 30, 2014, MRB had a backlog of orders to sell $44 million of export nonferrous metal compared to $38 million in the prior year primarily due to timing of sales.
Competition
MRB competes in the U.S. and in Western Canada for the purchase of scrap metal with large, well-financed recyclers of scrap metal, steel mills that own scrap yards and, increasingly in recent years, with smaller metal facilities and dealers. In general, the competitive factors impacting the purchase of scrap metal are the price offered by the purchaser and the proximity of the purchaser to the scrap metal source. MRB also competes with brokers that buy scrap metal on behalf of domestic and foreign steel mills. No single scrap metals recycler has a dominant market share in the markets in which we do business.
In fiscal 2012, 2013 and continuing in fiscal 2014, an environment of lower economic growth rates and lower prices constrained scrap generation in the U.S. which, coupled with incremental investments in equipment by competitors that increased scrap recycling capacity in certain regional markets, led to increasing market pressure on supply flows and margin compression. During

5 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


fiscal 2014, a number of smaller competitors consolidated or exited the scrap market due to the protracted cyclical downturn while larger, well-capitalized competitors continued to operate.
MRB competes globally for the sale of processed recycled metal to finished steel and other metal product producers. The predominant competitive factors that impact recycled metal sales are price (including shipping cost), reliability of service, product quality, the relative value of the U.S. dollar and the availability and price of scrap metal and scrap metal substitutes. In the summer of 2014, the increased production and availability of iron ore, a raw material used in steel-making in blast furnaces which compete with EAF steel-making production that uses primarily ferrous scrap, led to a declining price trend for this raw material. This among other reasons may be a contributing factor to weaker demand for ferrous scrap in our export markets. While the availability of iron ore may continue to expand in the near-term, we believe worldwide long-term demand for ferrous scrap will continue to increase as a result of the significant steel-making production efficiencies and environmental benefits compared to the use of iron ore.
We believe MRB’s ability to process substantial volumes of scrap metal products, state-of-the-art equipment, number of locations, access to a variety of different modes of transportation, geographic dispersion and cross-divisional synergies provide its business with the ability to compete in varying market conditions.
Auto Parts Business
Business and Products
APB procures used and salvaged vehicles and sells serviceable used auto parts from these vehicles through its 62 self-service auto parts stores located across the U.S. and Western Canada. The remaining portions of these vehicles, consisting primarily of autobodies and major parts containing ferrous and nonferrous materials such as engines, transmissions, alternators and catalytic converters, are sold to metals recyclers, including MRB where geographically feasible. In fiscal 2014, APB continued to expand its network of locations by acquiring one store and opening one greenfield store location.
Customers
Self-service stores generally serve customers who are looking to obtain serviceable used auto parts at a competitive price. These customers remove the used auto parts from vehicles in inventory without the assistance of store employees. In addition, APB sells ferrous and nonferrous material obtained from end-of-life vehicles to a variety of wholesale buyers, including MRB and third party recycling yards throughout the U.S. and Western Canada.
We believe that APB has a competitive advantage due to its various information technology systems, which are used to centrally manage and operate the geographically diverse network of stores; its consistent approach to offering customers a large selection of vehicles from which to obtain parts; and its efficient processing of autobodies. No single external customer accounted for 10% or more of consolidated revenues in fiscal 2014, 2013 and 2012.
APB is dedicated to supplying low-cost used auto parts to its customers. In general, we believe that the sale prices of auto parts at APB’s self-service stores are significantly lower than those offered at full-service auto dismantlers, retail car parts stores and car dealerships. Each self-service store offers an extensive selection of vehicles (including domestic and foreign cars, vans and light trucks) from which consumers can remove parts. APB regularly rotates its vehicle inventory to provide its customers greater access to a continually changing parts inventory.
The table below sets forth APB revenues from domestic and foreign customers, and, separately, from sales to MRB, for the last three fiscal years ended August 31 (in thousands):
 
2014
 
2013
 
2012
Domestic
$
319,306

 
$
305,035

 
$
295,618

Foreign
8,263

 
8,271

 
21,266

Sales to MRB
(87,458
)
 
(75,992
)
 
(73,974
)
Total (net of intercompany)
$
240,111

 
$
237,314

 
$
242,910

Distribution
APB sells used auto parts from each of its self-service retail stores. Upon arriving at a self-service store, a customer pays an admission charge and signs a liability waiver before entering the car lot. When a customer finds a desired part on a vehicle, the customer removes it and pays a listed price for the part.
The wholesale component of APB’s business consists of sales of ferrous and nonferrous materials obtained from end-of-life vehicles. Catalytic converters are removed from the vehicle prior to it being placed in the retail customer area. Once the vehicle is removed from the retail customer area, remaining parts with significant ferrous and nonferrous content, including engines,

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transmissions and alternators, are removed from the vehicle and items not sold to MRB are consolidated at central facilities in California, Oregon,Texas and Massachusetts in the United States and Calgary in Canada. From our facilities, these parts are sold to a variety of wholesale buyers through a competitive bidding process. Due to the larger quantities generated by this consolidation process, APB is able to obtain higher prices by focusing on larger wholesale customers that purchase in volume. The remaining autobody is crushed and sold as ferrous metal in the wholesale market. The autobodies are sold on a price-per-ton basis, which is subject to fluctuations in the recycled ferrous metal markets. APB generated revenues of $87 million, $76 million and $74 million during fiscal 2014, 2013 and 2012, respectively, from sales to MRB, making MRB the single largest customer of APB.
Marketing
APB has customized marketing initiatives that are unique to its self-service brand. The marketing plan focuses on strategies to maximize the acquisition of end-of-life vehicles and attracting auto parts customers into the stores. The marketing plan targets the regional customer base surrounding the stores and incorporates various strategies, including the use of radio and television advertising to promote vehicle purchasing, regularly scheduled in-store promotions and other forms of product marketing. Each store has a customized marketing calendar designed for its market and the community it serves.
APB typically seeks to locate its facilities with convenient road access and in major population centers. By operating at locations that are convenient and visible to the target customer, the stores seek to become the customer’s first stop when acquiring used auto parts.
Sources of Vehicles
APB obtains vehicles from five primary sources: private parties, tow companies, charities, auto auctions and municipal contracts. APB has a program to purchase vehicles from private parties called “Cash for Junk Cars,” which is advertised in local markets. Private parties call a toll-free number and receive a quote for their vehicle. The private party can either deliver the vehicle to one of APB’s retail locations or arrange for the vehicle to be picked up. APB also employs car buyers who travel to vendors and bid on vehicles.
Competition
The auto parts industry is characterized by diverse and fragmented competition and comprises a large number of aftermarket and used auto parts suppliers of all sizes. These companies range from large, multi-national corporations which serve both original equipment manufacturers and the aftermarket on a worldwide basis to small, local entities which supply only a few parts for a particular car model. After a sustained period of strong demand for recycled metals, some smaller suppliers entered the market and some existing suppliers expanded their presence. This, combined with the constrained availability of end-of-life vehicles resulting from lower economic growth rates, led to a more competitive pricing environment beginning in fiscal 2012 and continuing throughout fiscal 2014.
APB competes for the purchase of vehicles with other auto dismantlers, used car dealers, auto auctions and metal recyclers. In general, the main competitive factors impacting the purchase of vehicles are the price offered by the purchaser and the proximity of the purchaser to the source of the vehicle.
APB competes for the sale of used auto parts with other self-service and full-service auto dismantlers, as well as larger well-financed retail auto parts businesses. For wholesale sales of ferrous and nonferrous materials obtained from end-of-life vehicles, APB competes globally with other metal recyclers. The main competitive factors impacting the sale of APB’s products are price, availability of product, quality and convenience of the retail stores to customers.
Steel Manufacturing Business
Business
SMB operates a steel mini-mill in McMinnville, Oregon that produces a wide range of finished steel products using recycled metal and other raw materials. MRB is the sole supplier for SMB’s scrap metal requirements, which SMB purchases at rates that approximate export market prices for shipments from the West Coast of the U.S.
Manufacturing
SMB’s melt shop includes an EAF, a ladle refining furnace with enhanced steel chemistry refining capabilities, and a five-strand continuous billet caster, permitting the mill to produce special alloy grades of steel not currently produced by other mills on the U.S. West Coast. The melt shop produced 580 thousand, 546 thousand and 464 thousand tons of steel in the form of billets during fiscal 2014, 2013 and 2012, respectively. SMB continues to reinvest in its melt shop to improve efficiencies in the melting process.
SMB also operates two computerized rolling mills that allow for synchronized operations of the rolling mills and related equipment. Billets produced in SMB’s melt shop are reheated in two natural gas-fueled furnaces and are then hot-rolled through one of the two rolling mills to produce finished products. SMB has completed a number of improvement projects to both mills designed to

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increase both their operating efficiency and the types of products that can be competitively produced. SMB continues to monitor the market for new products and, through discussions with customers, identify additional opportunities to expand its product lines and sales. SMB’s effective annual finished goods production capacity is approximately 800 thousand tons under current conditions.
Products
SMB produces semi-finished goods (billets) and finished goods, consisting of rebar, coiled rebar, wire rod, merchant bar and other specialty products. Semi-finished goods are predominantly used for SMB’s finished products, but also have been produced for sale to other steel mills. Rebar is produced in either straight length steel bars or coils and used to increase the tensile strength of poured concrete. Coiled rebar is preferred by some manufacturers because it reduces the waste generated by cutting individual lengths to meet customer specifications and, therefore, improves yield. Wire rod is steel rod, delivered in coiled form, used by manufacturers to produce a variety of products such as chain link fencing, nails, wire and stucco netting. Merchant bar consists of round, flat, angle and square steel bars used by manufacturers to produce a wide variety of products, including gratings, steel floor and roof joists, safety walkways, ornamental furniture, stair railings and farm equipment. SMB is also certified to produce high-quality rebar to support nuclear power plant construction and has a license to produce certain patented high-strength specialty steels.
The table below sets forth, on a revenue and volume basis, the sales of finished steel products during the last three fiscal years ended August 31:
 
2014
 
2013
 
2012
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
 
Revenues(1)
 
Volume(2)
Finished steel products
$
377,678

 
533,147

 
$
346,982

 
487,542

 
$
332,719

 
447,254

_____________________________
(1)
Revenues stated in thousands of dollars.
(2)
Volume stated in short tons (one short ton = 2,000 pounds).
Customers
SMB’s customers are principally steel service centers, construction industry subcontractors, steel fabricators, wire drawers and major farm and wood products suppliers. During fiscal 2014, SMB sold its finished steel products to customers located in the Western U.S., Canada and Hawaii. Customers in California accounted for 43% of SMB’s revenues in fiscal 2014. SMB’s ten largest customers accounted for 40%, 43% and 43% of its revenues during fiscal 2014, 2013 and 2012, respectively. No SMB customer accounted for 10% or more of consolidated revenues in fiscal 2014, 2013 and 2012.
The table below sets forth SMB revenues from domestic and foreign customers for the last three fiscal years ended August 31 (in thousands):
 
2014
 
2013
 
2012
Domestic
$
354,420

 
$
304,598

 
$
290,710

Foreign(1)
34,220

 
47,856

 
42,517

Total
$
388,640

 
$
352,454

 
$
333,227

____________________________
(1)
Consists entirely of sales to Canada.
Distribution
SMB sells directly from its mini-mill in McMinnville, Oregon and its owned distribution center in El Monte, California (Los Angeles area). Products are shipped from the mini-mill to the distribution center, primarily by rail. The distribution center facilitates sales by maintaining an inventory of products close to major customers for just-in-time delivery. SMB communicates regularly with major customers to determine their anticipated needs and plans its rolling mill production schedule, accordingly. Shipments to customers are made by common carrier, primarily truck or rail.
Supply of Scrap Metal
We believe SMB operates the only mini-mill in the Western U.S. that obtains its scrap metal requirements from an affiliated metal recycler. MRB provides a mix of recycled metal grades to SMB, which allows SMB to achieve optimum efficiency in its melting operations.

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Energy Supply
SMB needs a significant amount of electricity to run its operations, primarily its EAF. SMB purchases electricity under a long-term contract with McMinnville Water & Light (“MW+L”), which in turn relies on the Bonneville Power Administration (“BPA”). We entered into our current contract with MW+L in October 2011 that will expire in September 2028.
SMB also needs a significant amount of natural gas to run its reheat furnaces, which are used to reheat billets prior to running them through the rolling mills. SMB meets this demand through a natural gas agreement with a utility provider that obligates SMB at each month-end to purchase a volume of gas based on its projected needs for the immediately subsequent month on a take-or-pay basis priced using published natural gas indices.
Energy costs represented 5% of SMB’s cost of goods sold in fiscal 2014, 2013 and 2012.
Backlog
SMB generally ships products within days after the receipt of a purchase order. As of September 30, 2014 and 2013, SMB had a backlog of orders of $25 million and $27 million, respectively.
Competition
SMB’s primary domestic competitors for the sale of finished steel products include Nucor Corporation’s manufacturing facilities in Arizona, Utah and Washington; Gerdau Long Steel North America’s facility in California; and Commercial Metals Company’s manufacturing facility in Arizona. In addition to domestic competition, SMB competes with foreign steel producers, principally located in Asia, Canada, Mexico and Central and South America, primarily in shorter length rebar and certain wire rod grades. The principal competitive factors in SMB’s market are price, product availability, quality and service.
For more than a decade, the U.S. government has imposed anti-dumping and countervailing duties against wire rod and rebar products from a number of foreign countries. These duties remain in effect today and are periodically reassessed. In addition, every five years the U.S. government conducts sunset reviews to determine whether revocation of the orders would likely lead to resumption of dumping and subsidization and negatively impact the U.S. domestic industry. Affirmative decisions would allow the orders to continue for an additional five years. In fiscal 2014, both the International Trade Commission and the U.S. Department of Commerce made affirmative preliminary determinations with regard to a new anti-dumping and countervailing duty case involving wire rod from China. On September 9, 2014, the U.S. Department of Commerce made a final affirmative anti-dumping determination with respect to rebar from Mexico and an affirmative countervailing duty determination against rebar from certain producers in Turkey, but made a negative anti-dumping determination regarding rebar from Turkey. On October 14, 2014, the International Trade Commission made final affirmative injury determinations in the Mexican and Turkish rebar investigation. As a consequence, the U.S. government will impose duties on future imports of these products which, particularly in the case of Mexico due to high anti-dumping duties, is expected to generally lead to a reduction in the volume of imports.
Strategic Focus
Use of our Seven Deep Water Ports to Access Global Demand
Our seven deep water terminal facilities enable us to bulk load large vessels capable of trans-oceanic shipments, thereby allowing us to efficiently ship product globally to wherever demand is highest. We achieve cost efficiencies because we own the majority of these terminal facilities, which reduces the likelihood of berthing delays often experienced by users of unaffiliated terminals, and because we are able to ship bulk cargoes of up to 50,000 tons, which generally have lower freight costs on a per-ton basis than containerized shipments that hold 20 to 30 tons.
Acquisitions
In fiscal 2014, we continued to focus on growth primarily through acquisition and greenfield development of used auto parts businesses consistent with our strategy of creating synergies within geographic regions where MRB already operates and building on our existing presence in major metropolitan areas. With our history of generating positive cash flows from operations and available borrowing capacity, we believe we are in a position to continue to complete acquisitions when consistent with our long-term strategic plans.
During fiscal 2014, we made the following acquisition:
In November 2013, we acquired all of the equity interests of Pick A Part, Inc., a used auto parts business with one store in the Olympia metropolitan area in Washington, which expanded APB’s presence in the Pacific Northwest and is near MRB’s operations in Tacoma, Washington.

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During fiscal 2013, we made the following acquisitions:
In December 2012, we acquired substantially all of the assets of Ralph’s Auto Supply (B.C.) Ltd., a used auto parts business with four stores in Richmond and Surrey, British Columbia, which expanded APB’s presence in Western Canada and is near MRB’s operations in Surrey, British Columbia.
In December 2012, we acquired substantially all of the assets of U-Pick-It, Inc., a used auto parts business with two stores in the Kansas City metropolitan area in Missouri and Kansas, which expanded APB’s presence in the Midwestern U.S.
In December 2012, we acquired all of the equity interests of Freetown Self Serve Used Auto Parts, LLC, Freetown Transfer Facility, LLC, Millis Used Auto Parts, Inc. and Millis Industries, Inc., which together operated a used auto parts and scrap metal recycling business with two stores in Massachusetts. This acquisition established a new APB presence in the Northeastern U.S. and expanded the nearby MRB operations.
In June 2013, we acquired substantially all of the assets of Bill’s Auto Parts, Inc. and Perkins Horseshoe Works, Inc., which operated a used auto parts business with one store in Rhode Island. This acquisition expanded APB’s presence in the Northeastern U.S. and is near MRB’s operations.
During fiscal 2012, we made the following acquisition:
In June 2012, we acquired substantially all of the assets of Rocky Mountain Salvage, Ltd., a metals recycler in Hinton, Alberta, which expanded MRB’s presence in Western Canada.
Continuous Improvement Benefits from Technology, Growth Investments and Operational Efficiencies
We aim to be an efficient and competitive producer of both recycled metal and finished steel products in order to maximize the operating income for both operations. To meet this objective, we have historically focused on, and will continue to emphasize, continuous improvement programs which seek to maximize production from shredders using technology to improve ferrous and nonferrous scrap metal recovery processes and productivity in our steel manufacturing operations and ongoing performance initiatives throughout our operations that focus on enhancing returns from growth investments. The objective of these programs is to identify areas in existing processes that could be made more efficient or where current performance could be improved and to recommend and implement solutions that could increase revenues or reduce costs by increasing output, recovery and productivity.
In fiscal 2013, we implemented certain restructuring initiatives announced in the fourth quarter of fiscal 2012 designed to extract greater synergies from acquisitions and technology investments made in recent years, achieve further integration between our Metals Recycling Business and Auto Parts Business, realign our organization to support future growth and decrease operating expenses by streamlining functions and reducing organizational layers. These initiatives targeted a reduction in annual pre-tax operating costs of $25 million and were completed by the end of fiscal 2013.
In fiscal 2014, we initiated and implemented restructuring and productivity initiatives incremental to those completed in fiscal 2013 designed to further reduce our annual operating expenses by $40 million, achieving approximately $29 million of benefit in fiscal 2014 results with the full annual benefits expected to be achieved in fiscal 2015. The benefits associated with these initiatives are occurring primarily in our Metals Recycling Business as a result of a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs and other productivity improvements.
During fiscal 2014, 2013 and 2012, we spent $39 million, $90 million and $79 million, respectively, on capital improvements. These capital expenditures primarily reflect our significant investments in modern equipment to improve the efficiency and capabilities of our businesses and to further maximize our economies of scale. Our capital expenditures in fiscal 2014 included costs to upgrade our equipment and infrastructure. We currently plan to invest approximately $40 million in capital expenditures on similar upgrades in fiscal 2015, exclusive of any capital expenditures for growth projects.
Environmental Matters
Impact of Legislation and Regulation
Compliance with environmental laws and regulations is a significant factor in our operations. Our businesses are subject to extensive local, state and federal environmental protection, health, safety and transportation laws and regulations relating to, among others:
The U.S. Environmental Protection Agency (“EPA”);
Remediation under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”);
The discharge of materials and emissions into the air;

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The prevention and remediation of soil and groundwater contamination;
The management and treatment of wastewater and storm water;
Global climate change;
The treatment, handling and/or disposal of solid waste and hazardous waste; and
The protection of our employees’ health and safety.
These environmental laws regulate, among other things, the release and discharge of hazardous materials into the air, water and ground; exposure to hazardous materials; and the identification, storage, treatment, handling and disposal of hazardous materials. Environmental legislation and regulations have changed rapidly in recent years, and it is likely that we will be subject to even more stringent environmental standards in the future.
Concern over climate change, including the impact of global warming, has led to significant U.S. and international regulatory and legislative initiatives to limit greenhouse gas (“GHG”) emissions. In 2007, the U.S. Supreme Court ruled that the EPA was authorized to regulate carbon dioxide under the U.S. Clean Air Act. As a consequence, the EPA initiated a series of regulatory efforts aimed at addressing greenhouse gases as pollutants, including finding that GHG emissions endanger public health, implementing mandatory GHG emission reporting requirements, setting carbon emission standards for light-duty vehicles and taking other steps to address GHG emissions. Legislation has also been proposed in the U.S. Congress to address GHG emissions and global climate change, including “cap and trade” programs, and some form of federal climate change legislation or additional federal regulation is possible. In addition, we are required to annually report GHG emissions from our steel mill to the State of Oregon Department of Environmental Quality and the EPA. A number of other states, including states in which we have operations and facilities, have considered, are considering or have already enacted legislation to develop information or address climate change and GHG emissions, as well.
Although our objective is to maintain compliance with applicable environmental regulations, we have, in the past, been found not to be in compliance with certain environmental laws and regulations and have incurred liabilities, expenditures, fines and penalties associated with such violations. In December 2000, we were notified by the EPA that we are one of the potentially responsible parties that owns or operates, or formerly owned or operated, sites which are part of or adjacent to the Portland Harbor Superfund site (see discussion in Risk Factors in Part I, Item 1A and Note 11 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report). In fiscal 2014, capital expenditures related to ongoing environmental compliance were $8 million, and we expect to spend up to $12 million on capital expenditures for ongoing environmental compliance in fiscal 2015.
Indirect Consequences of Future Legislation and Regulation
Increased regulation regarding climate change and GHG emissions could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with regulations concerning climate change and GHG emissions. The potential costs of allowances, offsets or credits that may be part of “cap and trade” programs or similar future regulatory measures are still uncertain. Any adopted future climate change and GHG regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products.
GHG legislation and regulation is also expected to have an effect on the price of electricity, especially when generated using carbon-based fuels. Since the electricity supply for SMB includes a significant element of hydro-generated production, SMB’s energy costs are less likely to be impacted than those of competitors using electricity generated by carbon-based fuels. In addition, demand for scrap metal may increase as a result of mills with blast furnaces seeking to maximize the scrap metal component of raw material infeed, as melting scrap metal involves less energy than is required for melting iron ore.
Since the use of recycled iron and steel instead of iron ore to make new steel results in savings in the consumption of energy, virgin materials and water and reduces mining wastes, we believe our recycled metal products position us to be more competitive in the future for business from companies wishing to reduce their carbon footprint and impact on the environment. In addition, our EAF generates fewer GHG emissions than traditional blast furnaces.
Physical Impacts of Climate Change on Our Costs and Operations
There has been public discussion that climate change may be associated with rising sea levels as well as extreme weather conditions such as more intense hurricanes, thunderstorms, tornadoes and snow or ice storms. Extreme weather conditions may increase our costs or cause damage to our facilities, and any damage resulting from extreme weather may not be fully insured. As many of our recycling facilities are located near deep water ports, significantly rising sea levels may disrupt our ability to receive scrap metal, process the scrap metal through our mega-shredders and ship product to our customers. Periods of extended adverse weather

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conditions may inhibit the supply of scrap metal to MRB and SMB and end-of-life vehicles to APB which could cause us to fail to meet our sales commitments. In addition, sustained periods of increased temperature levels in the summer in areas where our APB operations are located could result in less customer traffic, thus resulting in reduced admissions and parts sales.
Employees
As of September 30, 2014, we had 3,371 full-time employees, consisting of 1,581 employees at MRB, 1,189 employees at APB, 437 employees at SMB and 164 corporate administrative employees. Of these employees, 740 were covered by collective bargaining agreements. The SMB contract with the United Steelworkers of America, which covers 314 of these employees, was renewed and ratified in June 2012 and will expire on March 31, 2016. We believe that in general our labor relations are good.
Available Information
Our internet address is www.schnitzersteel.com. The content of our website is not incorporated by reference into this Annual Report on Form 10-K. We make available on our website, free of charge, under the caption “Investors – SEC Filings” our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after electronically filing with or furnishing such materials to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934.
From time to time, we may use our website as a channel of distribution of material Company information. Financial and other material information regarding our Company is routinely posted on and accessible at http://www.schnitzersteel.com/investors.aspx. In addition, you may automatically receive e-mail alerts and other information about our Company by enrolling your e-mail address by visiting the “E-mail Alerts” section at http://www.schnitzersteel.com/investors.aspx.
ITEM 1A. RISK FACTORS
Described below are risks, which are categorized as “Risk Factors Relating to Our Business,” “Risk Factors Relating to the Regulatory Environment” and “Risk Factors Relating to Our Employees,” that could have a material adverse effect on our results of operations, financial condition and cash flows or could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Annual Report. See “Forward-Looking Statements” that precedes Part I of this report. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may in the future have a material adverse effect on our results of operations, financial condition and cash flows.
Risk Factors Relating to Our Business
Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity
In December 2000, we were notified by the EPA under CERCLA that we are one of the potentially responsible parties (“PRP”) that owns or operates 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. A group of PRPs referred to as the “Lower Willamette Group” (“LWG”) is conducting a remedial investigation and feasibility study (“RI/FS”) to identify and characterize the contamination at the Site and develop alternative approaches to remediation of the contamination. On March 30, 2012, the LWG submitted to the EPA and made available on its website a draft feasibility study (“draft FS”) for the Site based on approximately ten years of work and $100 million in costs classified by the LWG as investigation related. The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately $170 million to $250 million (net present value) for the least costly alternative to approximately $1.08 billion to $1.76 billion (net present value) for the most costly and estimates a range of two to 28 years to implement the remedial work, depending on the selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries or select remedies. The draft FS is being revised by the EPA and the revisions may be significant and could materially impact the scope or cost of remediation. While the draft FS is an important step in the EPA’s development of a proposed plan for addressing the Site, a final decision on the nature and extent of the required remediation will occur only after the EPA has prepared a proposed plan for public review and issued a record of decision (“ROD”). Currently available information indicates that the EPA does not expect to issue its final ROD selecting a remedy for the Site until at least 2017 or commence remediation activities until 2024. Responsibility for implementing and funding the EPA’s selected remedy will be determined in a separate allocation process, which is currently underway. Separately, the natural resource damages trustees for the Site are conducting a process to determine the amount of natural resource damages at the Site and identify the persons potentially liable for such damages. Given the size of the Site, the costs to date of the RI/FS and the nature of the conditions identified to date, the total cost of the investigations, remediation and natural resource damages claims are likely to be substantial. 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, we believe it is not possible to reasonably estimate the amount or range of costs which we are likely or reasonably possible to incur in connection with the Site, although such costs could be material to our

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financial position, results of operations, cash flows and liquidity. Significant cash outflows in the future related to the Site could reduce the amount of our borrowing capacity that could otherwise be used for investment in capital expenditures, acquisitions, dividends and share repurchases. Any material liabilities incurred in the future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. See “Contingencies – Environmental” in Note 11 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
We operate in industries that are cyclical and sensitive to general economic conditions, which could have a material adverse effect on our operating results and financial condition
Demand for most of our products is cyclical in nature and sensitive to general economic conditions. The timing and magnitude of the cycles in the industries in which our products are used including global steel manufacturing and residential construction in the U.S. are difficult to predict. The cyclical nature of our operations tends to reflect and be amplified by changes in economic conditions, both domestically and internationally, supply/demand imbalances and foreign currency exchange fluctuations. Economic downturns or a prolonged period of slow growth in the U.S. and foreign markets or any of the industries in which we operate could have a material adverse effect on our results of operations, financial condition and cash flows. While we believe that drivers such as infrastructure growth in developing economies and demand for environmentally sustainable raw materials will continue to drive long-term global demand for recycled metal, we are unable to predict the duration of the current uncertain economic conditions that are contributing to a softer demand environment for our products and constrained supply of raw materials.
Changes in the availability or price of raw materials and end-of-life vehicles could reduce our sales
Our businesses require certain materials that are sourced from third party suppliers. Although our cross-divisional synergies allow us to be our own source for some raw materials, particularly with respect to scrap metal for SMB, we rely on other suppliers for most of our raw material needs. Industry supply conditions generally involve risks, including the possibility of shortages of raw materials, increases in raw material costs and reduced control over delivery schedules. We procure our scrap inventory from numerous sources. These suppliers generally are not bound by long-term contracts and have no obligation to sell scrap metal to us. In periods of declining scrap metal prices, suppliers may elect to hold scrap metal to wait for higher prices or intentionally slow their metal collection activities. If a substantial number of suppliers ceases selling scrap metal to us, we will be unable to recycle metal at desired levels, and our results of operations and financial condition could be materially adversely affected. A slowdown of industrial production in the U.S. may also reduce the supply of industrial grades of metal to the metals recycling industry, resulting in less recyclable metal available to process and market. Increased competition for domestic scrap metal, including as a result of investments by competitors that expand the scrap recycling capacity in the U.S. and Canada, may also reduce the supply of scrap metal available to us. Failure to obtain a steady supply of scrap material could both adversely impact our ability to meet sales commitments and reduce our operating margins. Failure to obtain an adequate supply of end-of-life vehicles could adversely impact our ability to attract customers and charge admission fees and reduce our parts sales. Failure to obtain raw materials, such as alloys used in the steel-making process, could adversely impact our ability to make steel to the specifications of our customers.
Significant decreases in scrap metal prices may adversely impact our operating results
The timing and magnitude of the cycles in the industries in which we operate are difficult to predict and are influenced by different economic conditions in the domestic market, where we typically acquire our raw materials, and foreign markets, where we typically sell the majority of our products. Purchase prices for autobodies and scrap metal and selling prices for recycled scrap metal are volatile and beyond our control. While we attempt to respond to changing recycled scrap metal selling prices through adjustments to our metal purchase prices, our ability to do so is limited by competitive and other market factors. As a result, we may not be able to reduce our metal purchase prices to offset a sharp reduction in recycled scrap metal sales prices, which may adversely impact our operating income and cash flows. In addition, a rapid decrease in selling prices may compress our operating margins due to the impact of average inventory cost, which causes cost of goods sold recognized in the Consolidated Statements of Operations to decrease at a slower rate than metal purchase prices and net selling prices. Lower export demand for recycled scrap metal relative to demand in the domestic market may also compress operating margins due to higher purchase prices resulting from stronger domestic competition for supply without commensurately higher export selling prices.
Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences
We have completed a number of acquisitions in recent years and expect to continue making acquisitions of complementary businesses to enable us to enhance our customer base and grow our revenues. Execution of our acquisition strategy involves a number of risks, including:
Difficulty integrating the acquired businesses’ personnel and operations;
Potential loss of key employees or customers of the acquired business;
Difficulties in realizing anticipated cost savings, efficiencies and synergies;
Unexpected costs;

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Inaccurate assessment of or undisclosed liabilities;
Inability to maintain uniform standards, controls and procedures; and
Difficulty managing the growth of a larger company.
If we do not successfully execute our acquisition strategy and the acquired businesses do not perform as projected, our financial condition and results of operations could be materially adversely affected.
Goodwill impairment charges may adversely affect our operating results
Goodwill represents the excess purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We have a substantial amount of goodwill on our balance sheet generated in connection with our acquisitions and business growth strategy. We test the goodwill balances allocated to our reporting units for impairment on an annual basis and if events occur or circumstances change that indicate that the fair value of one or more of our reporting units may be below its carrying amount. A decline in the quoted market price of our stock could denote a triggering event indicating that goodwill may be impaired. When testing goodwill for impairment, we determine fair value using an income approach based on the present value of expected future cash flows utilizing a market-based weighted average cost of capital (“WACC”). Given that market prices of our reporting units are not readily available, we make various estimates and assumptions in determining the fair value of the reporting units, including estimating revenue growth rates, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount rate, benefits associated with a taxable transaction and synergistic benefits available to market participants. We corroborate the reporting units’ valuation using a market approach based on earnings multiple data and a reconciliation between our market capitalization and our estimate of the aggregate fair value of the reporting units, including consideration of a control premium. Fair value determinations require considerable judgment and are sensitive to inherent uncertainties and changes in the estimates and assumptions described above.
In the fourth quarter of fiscal 2013, we identified a triggering event requiring an interim impairment test of goodwill allocated to our reporting units. As a result of the test, we recorded a goodwill impairment charge of $321 million at the MRB reporting unit leaving a goodwill balance of $327 million as of August 31, 2013. In the first quarter of fiscal 2014, we changed our goodwill impairment testing date from February 28 to July 1 of each year. We performed our fiscal 2014 annual goodwill impairment test as of July 1, 2014 and identified no impairment of the reporting units' goodwill balances. Additional declines or a lack of recovery of market conditions in the metals recycling industry from current levels, a trend of weaker than anticipated financial performance, including the pace and extent of operating margin and volume recovery, a lack of recovery in our share price from current levels for a sustained period of time, or an increase in the market-based WACC, among other factors, could significantly impact our impairment analysis and may result in further goodwill impairment charges that, if incurred, could have a material adverse effect on our financial condition and results of operations. See Critical Accounting Policies and Estimates in Part II, Item 7 of this report.
Impairment of long-lived assets may adversely affect our operating results
Long-lived assets are subject to an impairment assessment when certain triggering events or circumstances indicate that their carrying value may be impaired. If the carrying value exceeds our estimate of future undiscounted cash flows of the operations related to the asset, an impairment is recorded for the difference between the carrying amount and the fair value of the asset. The results of these tests for potential impairment may be adversely affected by unfavorable market conditions, the Company’s financial performance trends, or an increase in interest rates, among other factors. If as a result of the impairment test we determine that the fair value of any of our long-lived assets is less than its carrying amount, we may incur an impairment charge that could have a material adverse effect on our financial condition and results of operations.
Our restructuring and other productivity improvement initiatives may not achieve the expected benefits or cost reductions
We have been implementing various restructuring and productivity improvement initiatives designed to extract greater synergies from our acquisitions and technology investments, achieve further synergies between our Metals Recycling Business and Auto Parts Business, realign our organization to support future growth, decrease operating expenses by streamlining functions and reducing organizational layers and improve our productivity. Our ability to achieve the anticipated cost savings and other benefits from these initiatives within the expected time frame is subject to many estimates and assumptions. These estimates and assumptions are subject to significant economic, competitive and other uncertainties, some of which are beyond our control. We have incurred significant restructuring charges and other exit-related costs in fiscal 2013 and 2014 as a result of these activities and expect to incur limited restructuring and exit-related costs associated with these initiatives until fiscal 2017, with expected charges in fiscal 2016 and 2017 representing accretion on contract termination liabilities. Failure to achieve the expected cost reductions and benefits related to these restructuring initiatives could have a material adverse effect on our business and results of operations.
Uncertain economic conditions may cause customers to be unable to fulfill their contractual obligations
We enter into export ferrous sales contracts preceded by negotiations that include fixing price, quantity, shipping terms and other contractual terms. Upon finalization of these terms and satisfactory completion of other contractual contingencies, the customer typically opens a letter of credit to satisfy its obligation under the contract prior to our shipment of the cargo. Although not

14 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


considered normal course of business, during uncertain economic conditions, we are at risk on consummating the transaction until the customer successfully opens the letter of credit. Customers may not be able to fulfill their contractual obligations or open letters of credit in times of illiquid market conditions. As of August 31, 2014 and 2013, 39% and 49%, respectively, of our trade accounts receivable balance were covered by letters of credit.
Increases in the value of the U.S. dollar relative to other currencies may reduce the demand for our products
A significant portion of MRB’s revenues is generated from sales to foreign customers, which are denominated in U.S. dollars, including customers located in Asia, Africa and Europe. A strengthening U.S. dollar would make our products more expensive for non-U.S. customers, which could negatively impact export sales. A strengthening U.S. dollar would also make imported metal products less expensive, resulting in an increase in imports of steel products into the U.S. As a result, our finished steel products, which are made in the U.S., may become more expensive for our U.S. customers relative to imported steel products.
We are exposed to translation and transaction risks associated with fluctuations in foreign currency exchange rates. Hedging instruments may not be effective in mitigating such risks and may expose us to losses or limit our potential gains
Our operations in Canada expose us to translation and transaction risks associated with fluctuations in foreign currency exchange rates as compared to the U.S. dollar, our reporting currency. As a result, we are subject to foreign currency exchange risks due to exchange rate movements in connection with the translation of the operating costs and the assets and liabilities of our foreign operations into our functional currency for inclusion in our Consolidated Financial Statements.
We are also exposed to foreign currency exchange transaction risk. As part of our risk management program, we use financial instruments, including foreign currency exchange forward contracts. While intended to reduce the effects of fluctuations in foreign currency exchange rates, these instruments may not be effective in reducing all risks related to such fluctuations and may limit our potential gains or expose us to losses. Although we do not enter into these instruments for trading purposes or speculation, and our management believes all such instruments are entered into as hedges of underlying physical transactions, these instruments are dependent on timely performance by our counterparties. Should our counterparties to such instruments or the sponsors of the exchanges through which these transactions are offered fail to honor their obligations due to financial distress or otherwise, we would be exposed to potential losses or the inability to recover anticipated gains from the transactions covered by these instruments.
Potential limitations on our ability to access capital resources may restrict our ability to operate or execute our growth strategy
Our operations are capital intensive. Our business also requires substantial expenditures for routine maintenance. While we expect that our cash requirements, including the funding of capital expenditures, debt service, dividends, share repurchases and any contingencies, will be financed by internally generated funds or from borrowings under our unsecured committed bank credit facility, there can be no assurance that this will be the case. Additional acquisitions could require financing from external sources.
Although we believe we have adequate access to contractually committed borrowings, we could be adversely affected if our banks were unable to honor their contractual commitments or ceased lending. Failure to access our credit facilities could restrict our ability to fund operations, make capital expenditures or execute acquisitions.
The agreement governing our bank credit facility imposes certain restrictions on our business and contains financial covenants
Our unsecured committed bank credit agreement contains certain restrictions on our business, including our ability to create liens, raise additional capital, enter into transactions with affiliates, acquire and dispose of businesses, guarantee debt, and consolidate or merge. These restrictions may affect our ability to operate our business or execute our growth strategy and may limit our ability to take advantage of potential business opportunities as they arise. Our bank credit agreement also requires that we maintain certain financial and other covenants, including a minimum fixed charge coverage ratio and a maximum leverage ratio. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our failure to comply with any of these restrictions or financial covenants could result in an event of default under the bank credit agreement, and permit our lenders to cease lending to us and declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. This could require us to refinance our bank credit agreement, which we may not be able to do at terms acceptable to us, or at all.
Consolidation in the steel industry may reduce demand for our products
There has been a significant amount of consolidation in the steel industry in recent years that has included steel mills acquiring steel fabricators to ensure demand for their products. If any of SMB’s significant remaining customers were to be acquired by competing steel mills, this could reduce the demand for our products and force us to lower our prices, reducing our revenues, or to reduce production, which could increase our unit costs and have a material adverse effect on our financial condition and results of operations.

15 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Increases in imports of foreign steel into the U.S. may reduce domestic demand for our products
Economic expansion in China and other foreign countries has affected the availability, and increased the price volatility, of recycled metal and steel products. Expansions and contractions in these economies can significantly affect the price of commodities used and sold by our business, as well as the price of finished steel products. Additionally, in a number of foreign countries, such as China, steel producers are generally government-owned and may therefore make production decisions based on political or other factors that do not reflect market conditions. Disruptions in foreign markets from excess steel production may encourage importers to target the U.S. with excess capacity at aggressive prices, and existing trade laws and regulations may be inadequate to prevent unfair trade practices, which could have a material adverse effect on our financial condition and results of operations. Although trade regulations restrict or impose duties on the importation of certain products, if foreign steel production significantly exceeds consumption in those countries, imports of steel products into the U.S. could increase, resulting in lower volumes and selling prices for SMB’s steel products.
Failure to realize expected benefits from investments in processing and manufacturing technology may impact our operating results and cash flows
We make significant investments in processing and manufacturing technology improvements aimed at increasing the efficiency and capabilities of our businesses and to maximize our economies of scale. Failure to realize the anticipated benefits and generate adequate returns on such capital improvement projects may have a material adverse effect on our results of operations and cash flows.
Reliance on third party shipping companies may restrict our ability to ship our products
MRB and SMB generally rely on third parties to handle and transport raw materials to their production facilities and products to customers. Despite our practice of utilizing a diversified group of suppliers of transportation, due to factors beyond our control, including changes in fuel prices, political events, governmental regulation of transportation, changes in market rates, carrier availability and disruptions in transportation infrastructure, third party shipping companies may be forced to increase their charges for transportation services or otherwise reduce the availability of their vehicles or ships, and thus we may not be able to transport our products in a timely and cost-effective manner, which could have a material adverse effect on our financial condition and results of operations and may harm our reputation.
Equipment upgrades and equipment failures may lead to production curtailments or shutdowns
Our recycling and manufacturing processes depend on critical pieces of equipment, including shredders, nonferrous sorting technology, furnaces and rolling mills, which may be out of service occasionally for scheduled upgrades or maintenance or as a result of unanticipated failures. Our facilities are subject to equipment failures and the risk of catastrophic loss due to unanticipated events such as fires, accidents or violent weather conditions. We have insurance to cover certain of the risks associated with equipment damage and resulting business interruption, but there are certain events that would not be covered by insurance and there can be no assurance that insurance will continue to be available on acceptable terms. Interruptions in our processing and production capabilities could have a material adverse effect on our financial condition, results of operations and cash flows.
Product liability claims may adversely impact our operating results
We could inadvertently acquire radioactive scrap metal that could potentially end up in mixed scrap metal shipped to consumers worldwide. Although we have invested in radiation detection equipment in the majority of our locations, including the facilities from which we ship directly to customers, failure to detect radioactive scrap metal remains a possibility. Even though we maintain insurance to address the risk of this failure in detection, there can be no assurance that the insurance coverage would be adequate or will continue to be available on acceptable terms. In addition, if we fail to meet contractual requirements for a product, we may be subject to product warranty costs and claims. These costs and claims could both have a material adverse effect on our financial condition and results of operations and harm our reputation.
Climate change may adversely impact our facilities and our ongoing operations
The potential physical impacts of climate change on our operations are highly uncertain and depend upon the unique geographic and environmental factors present, for example rising sea levels at our deep water port facilities, changing storm patterns and intensities, and changing temperature levels. As many of our recycling facilities are located near deep water ports, rising sea levels may disrupt our ability to receive scrap metal, process the scrap metal through our mega-shredders and ship products to our customers. Periods of extended adverse weather conditions may inhibit the supply of scrap metal to MRB and SMB and end-of-life vehicles to APB, which could have an adverse effect on our sales or cause us to fail to meet our sales commitments. In addition, sustained periods of increased temperature levels in the summer in areas where our APB operations are located could result in reduced customer traffic, thus resulting in lower admissions and parts sales.

16 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Our deferred tax assets may become impaired in the future
The assessment of recoverability of our deferred tax assets is based on an evaluation of existing positive and negative evidence as to whether it is more likely than not that they will be realized. If negative evidence outweighs positive evidence, a valuation allowance is required. Impairment of deferred tax assets may result from significant negative industry or economic trends, a decrease in earnings performance and projections of future taxable income, adverse changes in laws or regulations and a variety of other factors. Impairment of deferred tax assets could have a material adverse impact on our results of operations and financial condition.
A cybersecurity incident may adversely impact our financial condition, results of operations and reputation
We face global cybersecurity risks and threats, which range from inadvertent release of sensitive information to sophisticated and targeted measures directed at us. Our operations involve use of multiple systems that process, store and transmit sensitive information about our customers, suppliers, employees, financial position, operating results and strategies. While we are not aware of any material cyber-attacks or breaches of our systems to date, we have and continue to implement measures to safeguard our systems and mitigate potential risks, but there is no assurance that such actions will be sufficient to prevent cyber-attacks or security breaches that manipulate or improperly use our systems, compromise sensitive information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations.
Risk Factors Relating to the Regulatory Environment
Environmental regulations may cause us to incur significant compliance costs
Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state and federal environmental laws and regulations in the U.S. and other countries relating to, among other matters:
Waste disposal;
Air emissions;
Waste water and storm water management and treatment;
Soil and groundwater contamination remediation;
Global climate change;
Discharge, storage, handling and disposal of hazardous materials; and
Employee health and safety.
We are also required to obtain environmental permits from governmental authorities for certain operations. Violation of or failure to obtain permits or comply with these laws or regulations could result in our business being fined or otherwise sanctioned by regulators or becoming subject to litigation by private parties. Our operations use, handle and generate hazardous substances. In addition, previous operations by others at facilities that we currently or formerly owned, operated or otherwise used may have caused contamination from hazardous substances. As a result, we are exposed to possible claims under environmental laws and regulations, especially for the remediation of waterways and soil or groundwater contamination. These laws can impose liability for the cleanup of hazardous substances even if the owner or operator was neither aware of nor responsible for the release of the hazardous substances. We have, in the past, been found not to be in compliance with certain of these laws and regulations, and have incurred liabilities, expenditures, fines and penalties associated with such violations. Future environmental compliance costs may increase because of new laws and regulations, changing interpretations and stricter enforcement of current regulations by regulatory authorities, uncertainty regarding adequate pollution control levels, the future costs of pollution control technology and issues related to global climate change. Further, the level of activity by regulatory authorities and non-governmental organizations has increased in recent years. Environmental compliance costs and potential environmental liabilities could have a material adverse effect on our financial condition and results of operations. See the risk factor “Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity” in this Item 1A.
Governmental agencies may refuse to grant or renew our licenses and permits, thus restricting our ability to operate
We conduct certain of our operations subject to licenses, permits and approvals from state and local governments. Governmental agencies often resist the establishment of certain types of facilities in their communities, including auto parts facilities. In addition, from time to time, both the U.S. and foreign governments impose regulations and restrictions on trade in the markets in which we operate. In some countries, governments can require us to apply for certificates or registration before allowing shipment of recycled metal to customers in those countries. There can be no assurance that future approvals, licenses and permits will be granted or that we will be able to maintain and renew the approvals, licenses and permits we currently hold. Failure to obtain these approvals could cause us to limit or discontinue operations in these locations or prevent us from developing or acquiring new facilities, which could have a material adverse effect on our financial condition and results of operations.

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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Compliance with existing and new greenhouse gas emission regulations may adversely impact our operating results
Increased regulation regarding climate change and GHG emissions could impose significant costs on our business and our customers and suppliers, including increased energy, capital equipment, environmental monitoring and reporting and other costs in order to comply with regulations concerning and limitations imposed on climate change and GHG emissions. The potential costs of allowances, offsets or credits that may be part of “cap and trade” programs or similar future regulatory measures are still uncertain. Any adopted future climate change and GHG regulations could negatively impact our ability (and that of our customers and suppliers) to compete with companies situated in areas not subject to such limitations. Until the timing, scope and extent of any future regulation becomes known, we cannot predict the effect on our financial condition, operating performance or ability to compete. Furthermore, even without such regulation, increased awareness and any adverse publicity in the global marketplace about the GHGs emitted by companies in the metals recycling and steel manufacturing industries could harm our reputation and reduce customer demand for our products. See “Business - Environmental Matters” in Part I, Item 1 of this report for further detail.
Risk Factors Relating to Our Employees
Reliance on employees subject to collective bargaining may restrict our ability to operate
Approximately 22% of our full-time employees are represented by unions under collective bargaining agreements, including substantially all of the manufacturing employees at our SMB steel manufacturing facility. As these agreements expire, we may not be able to negotiate extensions or replacements of such agreements on acceptable terms. Any failure to reach an agreement with one or more of our unions may result in strikes, lockouts or other labor actions, including work slowdowns or stoppages, which could have a material adverse effect on our results of operations.
The underfunded status of our multiemployer pension plans may cause us to increase our contributions to the plans
As discussed in Note 16 – Employee Benefits in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report, we contribute to the Steelworkers Western Independent Shops Pension Plan (“WISPP”), a multiemployer plan benefiting union employees of SMB. Because we have no current intention of withdrawing from the WISPP, we have not recognized a withdrawal liability in our consolidated financial statements. However, if such a liability were triggered, it could have a material adverse effect on our results of operations, financial position, liquidity and cash flows. Our contributions to the WISPP could also increase as a result of a diminished contribution base due to the insolvency or withdrawal of other employers who currently contribute to it, the inability or failure of withdrawing employers to pay their withdrawal liability or other funding deficiencies, as we would need to fund the retirement obligations of these employers.
In 2004, the Internal Revenue Service (“IRS”) approved a seven-year extension of the period over which the WISPP may amortize unfunded liabilities, conditioned upon maintenance of certain minimum funding levels. Based on the actuarial valuation for the WISPP as of October 1, 2013, the funded percentage (based on the ratio of the market value of assets to the accumulated benefits liability (present value of accrued benefits) using the valuation method prescribed by the IRS) was 76.6%, which is below the targeted funding ratio specified in the agreement with the IRS. In 2014, the WISPP obtained relief from the specified funding requirements from the IRS, without which the IRS could have revoked the amortization extension retroactively to the 2002 plan year resulting in a material liability for the Company’s share of the resulting funding deficiency.

ITEM 1B. UNRESOLVED STAFF COMMENTS
None.


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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


ITEM 2. PROPERTIES
Our facilities and administrative offices by type, including their total acreage, were as follows as of August 31, 2014:
Division
No. of
Facilities
 
Acreage
Leased
 
Owned
 
Total
Corporate offices – Domestic
1

 

 

 

Metals Recycling Business:
 
 
 
 
 
 
 
Domestic:
 
 
 
 
 
 
 
Collection and processing
40

 
48

 
701

 
749

Collection
8

 
7

 
23

 
30

Inactive
9

 
2

 
29

 
31

Foreign:(2)
 
 
 
 
 
 
 
Collection and processing
4

 
33

 
4

 
37

Collection
3

 
14

 
3

 
17

Inactive
3

 
20

 

 
20

Auto Parts Business:
 
 
 
 
 
 
 
Domestic:(1)
 
 
 
 
 
 
 
Administrative offices and other
3

 
5

 

 
5

Stores
54

 
639

 
136

 
775

Inactive
1

 

 
1

 
1

Foreign stores(2)
8

 
71

 

 
71

Steel Manufacturing Business:
 
 
 
 
 
 
 
Domestic:
 
 
 
 
 
 
 
Steel mill and administrative offices
2

 

 
85

 
85

Inactive
1

 

 
51

 
51

Total company:
 
 
 
 
 
 
 
Domestic
119

 
701

 
1,026

 
1,727

Foreign(2)
18

 
138

 
7

 
145

Total(3)
137

 
839

 
1,033

 
1,872

_____________________________
(1)
We jointly own 36 acres in California at three of our sites with minority interest partners.
(2)
All foreign facilities are located in Canada.
(3)
For long-lived assets by geography, see Note 21 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.

We consider all properties, both owned and leased, to be well-maintained, in good operating condition and suitable and adequate to carry on our business.

ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various litigation matters that arise in the ordinary course of business involving normal and routine claims, including environmental compliance matters. Except in connection with our status as a potentially responsible party with respect to the Portland Harbor Superfund Site, which is described in Note 11 – Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report and is incorporated into this item, management currently believes that the ultimate outcome of these proceedings, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations, cash flows or business.
In fiscal 2013, the Commonwealth of Massachusetts advised us of alleged violations of environmental requirements, including but not limited to those related to air emissions and hazardous waste management, at our operations in the Commonwealth. We have been discussing resolution of the alleged violations with the Commonwealth's representatives and have reached an agreement in principle to resolve the alleged violations. No enforcement proceeding has been filed to date and we do not believe that the outcome of this matter will be material to our financial position, results of operations, cash flows or liquidity.


19 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information about our executive officers is incorporated by reference from Part III, Item 10 of this annual report.

20 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the symbol SCHN. There were 210 holders of record of Class A common stock on October 23, 2014. Our Class A common stock has been trading since November 16, 1993. The following table sets forth the high and low trading stock prices reported on NASDAQ and the dividends paid per share for the periods indicated.
 
Fiscal 2014
 
High Price
 
Low Price
 
Dividends Per Share
First Quarter
$
31.46

 
$
25.15

 
$
0.188

Second Quarter
$
32.67

 
$
25.08

 
$
0.188

Third Quarter
$
29.22

 
$
24.92

 
$
0.188

Fourth Quarter
$
28.21

 
$
24.32

 
$
0.188

 
Fiscal 2013
 
High Price
 
Low Price
 
Dividends Per Share
First Quarter
$
32.04

 
$
26.77

 
$
0.188

Second Quarter
$
31.90

 
$
27.70

 
$
0.188

Third Quarter
$
29.64

 
$
23.62

 
$
0.188

Fourth Quarter
$
27.22

 
$
23.38

 
$
0.188


Our Class B common stock is not publicly traded. There were 2 holders of record of Class B common stock on October 23, 2014.
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 2014, we had repurchased approximately 6.9 million shares of our Class A common stock under the program. We did not repurchase any shares of our Class A common stock in fiscal 2014, leaving approximately 2.1 million shares available for repurchase under existing authorizations.
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 10b5-1 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.
The following graph and related information compares cumulative total shareholder return on our Class A common stock for the five-year period from September 1, 2009 through August 31, 2014, with the cumulative total return for the same period of (i) the S&P 500 Index, (ii) the S&P Steel Index and (iii) the NASDAQ Composite Index. These comparisons assume an investment of $100 at the commencement of the period and that all dividends are reinvested. The stock performance outlined in the performance graph below is not necessarily indicative of our future performance, and we do not endorse any predictions as to future stock performance.


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Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


 
Year Ended August 31,
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Schnitzer Steel Industries(1)
$
100

 
$
82

 
$
85

 
$
52

 
$
49

 
$
55

S&P 500
100

 
105

 
124

 
147

 
174

 
218

S&P Steel Index
100

 
103

 
109

 
78

 
80

 
103

NASDAQ
100

 
106

 
131

 
157

 
187

 
241

_____________________________
(1)
Because we operate in three distinct but related businesses, we have no direct market peer issuers.

22 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


ITEM 6. SELECTED FINANCIAL DATA
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
2011
 
2010
STATEMENT OF OPERATIONS DATA:
 
 
 
 
 
 
 
 
 
(in thousands, except per share and dividend data)
 
 
 
 
 
 
 
 
Revenues
$
2,543,583

 
$
2,621,911

 
$
3,340,938

 
$
3,459,194

 
$
2,301,240

Operating income (loss)(1)
$
20,316

 
$
(327,789
)
 
$
53,668

 
$
185,964

 
$
125,897

Income (loss) from continuing operations
$
8,734

 
$
(280,023
)
 
$
28,917

 
$
123,637

 
$
84,508

Income (loss) from discontinued operations, net of tax(2)
$
857

 
$

 
$

 
$
(101
)
 
$
(13,832
)
Net income (loss) attributable to SSI
$
5,924

 
$
(281,442
)
 
$
27,404

 
$
118,355

 
$
66,750

Income (loss) per share from continuing operations attributable to SSI (diluted)
$
0.19

 
$
(10.56
)
 
$
0.99

 
$
4.24

 
$
2.86

Net income (loss) per share attributable to SSI (diluted)
$
0.22

 
$
(10.56
)
 
$
0.99

 
$
4.23

 
$
2.37

Dividends declared per common share
$
0.750

 
$
0.750

 
$
0.410

 
$
0.068

 
$
0.068

OTHER DATA:
 
 
 
 
 
 
 
 
 
Shipments (in thousands)(3):
 
 
 
 
 
 
 
 
 
Recycled ferrous metal (tons)
4,122

 
4,309

 
5,115

 
5,329

 
4,231

Recycled nonferrous metal (pounds)
554,808

 
520,442

 
628,652

 
568,560

 
478,786

Finished steel products (tons)
533

 
488

 
447

 
439

 
444

Average net selling price(3)(4):
 
 
 
 
 
 
 
 
 
Recycled ferrous metal (per ton)
$
353

 
$
358

 
$
415

 
$
416

 
$
328

Recycled nonferrous metal (per pound)
$
0.86

 
$
0.93

 
$
0.94

 
$
1.06

 
$
0.83

Finished steel products (per ton)
$
677

 
$
680

 
$
715

 
$
697

 
$
587

Number of auto parts stores(2)
62

 
61

 
51

 
50

 
45

Cars purchased by APB (in thousands)
380

 
356

 
339

 
353

 
329

 
 
 
 
 
 
 
 
 
 
 
August 31,
 
2014
 
2013
 
2012
 
2011
 
2010
BALANCE SHEET DATA (in thousands):
 
 
 
 
 
 
 
 
 
Total assets
$
1,355,210

 
$
1,405,512

 
$
1,763,573

 
$
1,890,169

 
$
1,343,418

Long-term debt, net of current maturities
$
318,842

 
$
372,663

 
$
334,629

 
$
403,287

 
$
99,240

Redeemable noncontrolling interest
$

 
$

 
$
22,248

 
$
19,053

 
$

_____________________________
(1)
The operating loss in fiscal 2013 includes a goodwill impairment charge of $321 million, other asset impairment charges of $13 million and restructuring charges of $8 million. Operating income in fiscal 2014 includes other asset impairment charges of $1 million and restructuring charges and other exit-related costs of $7 million.
(2)
In fiscal 2010, the Company sold its full-service used auto parts operation, which had been operated as part of the Auto Parts Business reporting segment. The Company concluded that the divestiture met the definition of a discontinued operation. Accordingly, the results of this discontinued operation have been removed from other data for all periods presented. In fiscal 2014, the Company released an environmental liability associated with the disposed operations.
(3)
Tons for recycled ferrous metal are long tons (2,240 pounds) and for finished steel products are short tons (2,000 pounds).
(4)
In accordance with generally accepted accounting principles, the Company reports revenues that include amounts billed for freight to customers; however, average net selling prices are shown net of amounts billed for freight.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section includes a discussion of our operations for the three fiscal years ended August 31, 2014, 2013 and 2012. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with the Consolidated Financial Statements and the related notes thereto in Part II, Item 8 of this report and the Selected Financial Data contained in Part II, Item 6 of this report.

Business
We are one of North America’s largest recyclers of ferrous and nonferrous scrap metal, a leading recycler of used and salvaged vehicles and a manufacturer of finished steel products.
We operate in three reporting segments: the Metals Recycling Business (“MRB”), the Auto Parts Business (“APB”) and the Steel Manufacturing Business (“SMB”), which collectively provide an end-of-life cycle solution for a variety of products through our integrated businesses. We use operating income (loss) to measure our segment performance. Restructuring charges and other exit-related costs are not allocated to the segment operating income (loss) because we do not include this information in our measurement of the segments’ performance. Corporate expense consists primarily of unallocated expense for management and administrative services that benefit all three reporting segments. As a result of this unallocated expense, the operating income (loss) of each reporting segment does not reflect the operating income (loss) the reporting segment would report as a stand-alone business. For further information regarding our reporting segments, including financial information about geographic areas, see Note 21 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
MRB buys, collects, processes, recycles, sells and brokers ferrous scrap metal (containing iron) to foreign and domestic steel producers, including SMB, and nonferrous scrap metal (not containing iron) to both foreign and domestic markets. MRB processes mixed and large pieces of scrap metal into smaller pieces by crushing, sorting, shearing, shredding and torching, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs.
APB procures used and salvaged vehicles and sells serviceable used auto parts from these vehicles through its self-service auto parts stores. The remaining portions of the vehicles, primarily autobodies and major parts containing ferrous and nonferrous materials, are sold to metal recyclers, including MRB where geographically feasible.
SMB operates a steel mini-mill that produces a wide range of finished steel products. SMB’s scrap metal requirements are sourced through MRB, which SMB purchases at rates that approximate export market prices for shipments from the West Coast of the U.S. SMB uses its mini-mill near Portland, Oregon to melt recycled metal and other raw materials to produce finished steel products. SMB also maintains a mill depot in Southern California.
Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. Our deep water port facilities on both the East and West Coasts of the U.S. (in Everett, Massachusetts; Providence, Rhode Island; Oakland, California; Portland, Oregon; and Tacoma, Washington) and access to public deep water port facilities (in Kapolei, Hawaii; and Salinas, Puerto Rico) allow us to efficiently meet the global demand for recycled ferrous metal by shipping bulk cargoes to steel manufacturers located in Asia, Europe, Africa, the Middle East (“EAME”), and Central America. Our exports of nonferrous recycled metal are shipped in containers through various public docks to specialty steelmakers, foundries, aluminum sheet and ingot manufacturers, copper refineries and smelters, brass and bronze ingot manufacturers and wire and cable producers globally. We also transport both ferrous and nonferrous metals by truck, rail and barge in order to transfer scrap metal between our facilities for further processing, to load shipments at our export facilities and to meet regional domestic demand.
Key economic factors and trends affecting the industries in which we operate
We sell recycled metals to the global steel industry for the production of finished steel. Our financial results largely depend on supply of raw materials in the U.S. and Western Canada and demand for recycled metal in foreign and domestic markets and for finished steel products in the Western U.S. and Canada. Changes in supply and demand conditions affect market prices for and volumes of recycled ferrous and nonferrous metal in global markets and for steel products in the Western U.S. and Canada and can have a significant impact on the results of operations for all three reporting segments. Weak export demand and limited availability of raw materials has contributed to lower sales volumes for recycled metals in recent years.
Beginning in early fiscal 2012, our markets were impacted by a slowdown of economic activity globally. Macroeconomic uncertainty resulted in deteriorating market conditions for global steel manufacturers and volatile pricing swings with an overall downward trend in commodity prices and export selling prices of recycled materials. The persistently low economic growth in the U.S. contributed to constrained scrap flows in our MRB and APB domestic supply markets which, combined with increased

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scrap recycling capacity and competition in certain regional markets, led to margin compression. In addition, a relatively stronger U.S. dollar value increased competitive pressure on MRB’s export activity.
Strategic Factors
As we continue to closely monitor economic conditions, we remain focused on the following core strategies to meet our business objectives:
Use of our seven deep water ports and ground-based transportation to directly access customers around the world and to meet demand wherever it is greatest;
Synergistic growth and continuous productivity improvement and cost reduction initiatives which further integrate our operations and drive significant cost savings and efficiencies;
Growth through acquisitions and greenfield development in existing and new geographic regions that generate attractive returns; and
Continued investment in and benefit from technologies and process improvements which increase the separation and recovery of recycled materials from our shredding process.
Our strategy is focused on enhancing the inherent synergies within our integrated operations while continuing to improve productivity and grow our operations in core regions where we have a significant market presence and competitively advantageous port access. APB is a key supplier to MRB, and we opportunistically look to enhance the geographic proximity of operations within the two businesses. MRB and APB historically have had an integrated presence in the Northwestern U.S. and in Northern California, near MRB’s export facilities in Tacoma, Washington, Portland, Oregon and Oakland, California, which benefit from the synergies of this enhanced access to supply.
In early fiscal 2014, we completed multi-year strategic investments in Western Canada, which enabled MRB and APB’s synergistic expansion into British Columbia and Alberta with seven metals collection and processing facilities, including a new shredder, as well as eight auto parts stores. APB’s facilities in Western Canada provide crushed autobodies to MRB’s new franchise in Western Canada in addition to shipping to its Tacoma, Washington facility. In fiscal 2014, we opened our first greenfield auto parts store in Johnston, Rhode Island, which, combined with three stores in Massachusetts and Rhode Island acquired in fiscal 2013, expands APB's presence in the Northeastern U.S. and enables a new source of supply for MRB’s Northeastern regional operations which include 13 metals recycling and processing facilities.
During fiscal 2014 we continued to implement enhancements to the synergies between these businesses by integrating certain operational processes.
Executive Overview of Financial Results
We generated consolidated revenues of $2.5 billion in fiscal 2014, a decrease of 3% from the $2.6 billion of consolidated revenues in the prior year. Overall consolidated revenues decreased primarily due to lower average net selling prices for ferrous and nonferrous metal and reduced sales volumes of export ferrous metal as a result of continued weak economic conditions globally that adversely impacted export demand for recycled metal, which was only partially offset by higher volumes for domestic sales of recycled ferrous metal, nonferrous metal, and finished steel products.
Consolidated operating income was $20 million in fiscal 2014, which included restructuring charges and other exit-related costs of $7 million and other asset impairment charges of $1 million, compared to a consolidated operating loss of $328 million in the prior year, which included a goodwill impairment charge of $321 million, other asset impairment charges of $13 million and restructuring charges of $8 million. Adjusted consolidated operating income in fiscal 2014, excluding restructuring and other exit-related costs and other asset impairment charges, was $29 million, an increase of $15 million, or 103%, compared to adjusted consolidated operating income of $14 million in fiscal 2013, excluding goodwill impairment, other asset impairment and restructuring charges (see the reconciliation of Adjusted operating income (loss) in Non-GAAP Financial Measures at the end of Item 7). Export selling prices for recycled ferrous metal were subject to downward pressure in fiscal 2014, leading to overall lower average export selling prices compared to the prior year. The significant benefits from productivity initiatives, primarily impacting MRB, were largely offset by the continued challenging ferrous and nonferrous market conditions and the impact of prolonged constrained supply conditions for raw materials in our domestic markets. Consolidated operating results in fiscal 2014 also benefited from an increase in operating income at SMB of $12 million primarily as a result of improved demand for finished steel products leading to higher sales volumes and benefits from productivity improvements.
In fiscal 2014, we achieved $29 million in cost savings related to the restructuring and productivity initiatives announced and initiated in the first quarter and expanded in the second quarter of fiscal 2014 to reduce our annual operating expenses by approximately $40 million, with the full annual benefit expected to be achieved in fiscal 2015. The reduction in expenses is from

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a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs and other productivity improvements. We plan to initiate and implement additional productivity initiatives at APB in fiscal 2015 to improve profitability through a combination of revenue drivers and cost reduction initiatives. Our targeted annual improvement is approximately $7 million, with approximately 50% of that amount expected to benefit the second half of fiscal 2015 and the full annual run rate achieved in fiscal 2016.
Net income from continuing operations attributable to SSI in fiscal 2014 was $5 million, or $0.19 per diluted share, compared to net loss attributable to SSI of $281 million, or $(10.56) per diluted share, in the prior year. Adjusted net income from continuing operations attributable to SSI, excluding restructuring charges and other exit-related costs and asset impairments, was $12 million, or $0.44 per diluted share, for fiscal 2014, compared to adjusted net loss from continuing operations attributable to SSI of $2 million, or $(0.07) per diluted share, in the prior year (see the reconciliation of Adjusted net income (loss) from continuing operations attributable to SSI in Non-GAAP Financial Measures at the end of Item 7).
The following items summarize our consolidated financial performance for fiscal 2014:
Revenues of $2.5 billion, compared to $2.6 billion in the prior year;
Operating income of $20 million, compared to operating loss of $328 million in the prior year;
Adjusted operating income of $29 million, an increase of $15 million, or 103%, compared to the prior year (see the reconciliation of Adjusted consolidated operating income (loss) in Non-GAAP Financial Measures at the end of Item 7);
Net income from continuing operations attributable to SSI of $5 million, or $0.19 per diluted share, compared to net loss of $281 million, or $(10.56) per diluted share, in the prior year; and
Adjusted net income from continuing operations attributable to SSI of $12 million, or $0.44 per diluted share, compared to adjusted net loss of $2 million, or $(0.07) per diluted share, in the prior year (see the reconciliation of Adjusted net income (loss) from continuing operations attributable to SSI in Non-GAAP Financial Measures at the end of Item 7); and
Net income attributable to SSI of $6 million, or $0.22 per diluted share, compared to net loss of $281 million, or $(10.56) per diluted share, in the prior year.
The following items summarize our consolidated cash flow and balance sheet information for fiscal 2014:
Net cash provided by operating activities of $141 million, compared to $39 million in the prior year;
Debt, net of cash, of $294 million, compared to $368 million as of the prior year-end (see the reconciliation of Debt, net of cash, in Non-GAAP Financial Measures at the end of Item 7); and
Dividends paid of $20 million compared to $20 million in the prior year.
The following items highlight the financial results for our operating segments for the year ended August 31, 2014:
MRB revenues of $2.1 billion and operating income of $30 million, compared to revenues of $2.2 billion and operating loss of $312 million for the year ended August 31, 2013. Adjusted operating income for MRB was $31 million in fiscal 2014, compared to $23 million in fiscal 2013 (see the reconciliation of Adjusted MRB operating income (loss) in Non-GAAP Financial Measures at the end of Item 7);
APB revenues of $328 million and operating income of $21 million, compared to revenues of $313 million and operating income of $25 million for the year ended August 31, 2013; and
SMB revenues of $389 million and operating income of $19 million, compared to revenues of $352 million and operating income of $7 million for the year ended August 31, 2013.

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Results of Operations
 
For the Year Ended August 31,
 
 
 
 
 
 
 
% Increase/(Decrease)
($ in thousands)
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Revenues:
 
 
 
 
 
 
 
 
 
Metals Recycling Business
$
2,102,935

 
$
2,210,484

 
$
2,948,707

 
(5
)%
 
(25
)%
Auto Parts Business
327,569

 
313,306

 
316,884

 
5
 %
 
(1
)%
Steel Manufacturing Business
388,640

 
352,454

 
333,227

 
10
 %
 
6
 %
Intercompany revenue eliminations(1)
(275,561
)
 
(254,333
)
 
(257,880
)
 
8
 %
 
(1
)%
Total revenues
2,543,583

 
2,621,911

 
3,340,938

 
(3
)%
 
(22
)%
Cost of goods sold:
 
 
 
 
 
 
 
 
 
Metals Recycling Business
1,989,024

 
2,095,747

 
2,780,844

 
(5
)%
 
(25
)%
Auto Parts Business
248,216

 
233,835

 
228,784

 
6
 %
 
2
 %
Steel Manufacturing Business
362,843

 
339,625

 
328,900

 
7
 %
 
3
 %
Intercompany cost of goods sold eliminations(1)
(275,260
)
 
(253,816
)
 
(258,812
)
 
8
 %
 
(2
)%
Total cost of goods sold
2,324,823

 
2,415,391

 
3,079,716

 
(4
)%
 
(22
)%
Selling, general and administrative expense:
 
 
 
 
 
 
 
 
 
Metals Recycling Business
84,036

 
93,563

 
106,462

 
(10
)%
 
(12
)%
Auto Parts Business
57,919

 
54,932

 
54,796

 
5
 %
 
 %
Steel Manufacturing Business
7,259

 
6,288

 
6,408

 
15
 %
 
(2
)%
Corporate(2)
41,999

 
38,750

 
37,512

 
8
 %
 
3
 %
Total selling, general and administrative expense
191,213

 
193,533

 
205,178

 
(1
)%
 
(6
)%
Income from joint ventures:
 
 
 
 
 
 
 
 
 
Metals Recycling Business
(1,136
)
 
(1,330
)
 
(2,471
)
 
(15
)%
 
(46
)%
Change in intercompany profit elimination(3)
(60
)
 
147

 
(165
)
 
NM

 
NM

Total income from joint ventures
(1,196
)
 
(1,183
)
 
(2,636
)
 
1
 %
 
(55
)%
Goodwill impairment charge - Metals Recycling Business

 
321,000

 

 
NM

 
NM

Other asset impairment charges:
 
 
 
 
 
 
 
 
 
Metals Recycling Business
928

 
13,053

 

 
(93
)%
 
NM

Corporate
532

 

 

 
NM

 
NM

Total other asset impairment charges
1,460

 
13,053

 

 
(89
)%
 
NM

Operating income (loss):
 
 
 
 
 
 
 
 
 
Metals Recycling Business
30,083

 
(311,549
)
 
63,872

 
NM

 
NM

Auto Parts Business
21,434

 
24,539

 
33,304

 
(13
)%
 
(26
)%
Steel Manufacturing Business
18,538

 
6,541

 
(2,081
)
 
183
 %
 
NM

Segment operating income (loss)
70,055

 
(280,469
)
 
95,095

 
NM

 
NM

Restructuring charges and other exit related costs(4)
(6,967
)
 
(7,906
)
 
(5,012
)
 
(12
)%
 
58
 %
Corporate expense(2)
(42,531
)
 
(38,750
)
 
(37,512
)
 
10
 %
 
3
 %
Change in intercompany profit elimination(5)
(241
)
 
(664
)
 
1,097

 
(64
)%
 
NM

Total operating income (loss)
$
20,316

 
$
(327,789
)
 
$
53,668

 
NM

 
NM

_____________________________ 
NM = Not Meaningful
(1)
MRB sells recycled ferrous metal to SMB at rates per ton that approximate West Coast U.S. export market prices. In addition, APB sells ferrous and nonferrous material to MRB at prices that approximate local market rates. These intercompany revenues and costs of goods sold are eliminated in consolidation.

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(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 (loss) of each segment does not reflect the operating income (loss) the segment would report as a stand-alone business.
(3)
The joint ventures sell recycled metal to MRB at prices that approximate local market rates, which produces intercompany profit. This intercompany profit is eliminated while the products remain in inventory and is not recognized until the finished products are sold to third parties.
(4)
Restructuring charges consist of expense for severance, contract termination and other restructuring costs that management does not include in its measurement of the performance of the operating segments. Other exit-related costs consist of asset impairments related to site closures.
(5)
Intercompany profits are not recognized until the finished products are sold to third parties; therefore, intercompany profit is eliminated while the products remain in inventory.

Revenues
Fiscal 2014 compared with fiscal 2013
Consolidated revenues for fiscal 2014 decreased primarily due to lower average net selling prices for ferrous and nonferrous metal and reduced sales volumes of export ferrous metal as a result of continued weak economic conditions globally that negatively impacted export demand for recycled metal, which was only partially offset by higher volumes for domestic sales of recycled ferrous metal, nonferrous metal, and finished steel products. Export selling prices of recycled ferrous metal declined sharply for shipments in the middle of fiscal 2014 as a result of weaker global demand and the impact of severe winter weather conditions on the domestic markets, partially offset by a modest recovery in export selling prices for shipments near the end of the fiscal year. Lower sales volumes were primarily due to a combination of weaker export demand and competition for available raw materials which continued to adversely impact supply, primarily in the Metals Recycling Business.
Fiscal 2013 compared with fiscal 2012
Consolidated revenues for fiscal 2013 decreased due to lower sales volumes and lower average net selling prices for recycled ferrous metal. During fiscal 2013, demand for recycled scrap metal continued to soften due primarily to weak global macroeconomic conditions, which led to a decline in selling prices as compared to fiscal 2012. Selling prices of recycled ferrous metal declined sharply at the beginning of fiscal 2013 and, after experiencing a slight increase in the second quarter, steadily declined throughout the remainder of fiscal 2013. In addition, the lower price environment adversely impacted the supply of raw materials compared to fiscal 2012, which contributed to the lower sales volumes.
Operating Income (Loss)
Fiscal 2014 compared with fiscal 2013
Consolidated operating income in fiscal 2014 was $20 million, which included restructuring charges and other exit-related costs of $7 million and other asset impairment charges of $1 million, compared to a consolidated operating loss of $328 million in the prior year, which included a goodwill impairment charge of $321 million, other asset impairment charges of $13 million and restructuring charges of $8 million. Adjusted consolidated operating income in fiscal 2014 was $29 million, an increase of $15 million, or 103%, compared to adjusted consolidated operating income of $14 million in fiscal 2013 (see the reconciliation of Adjusted operating income (loss) in Non-GAAP Financial Measures at the end of Item 7). Export selling prices for recycled ferrous metal were subject to downward pressure in fiscal 2014, leading to overall lower average export selling prices compared to the prior year. The benefits from productivity initiatives, primarily impacting MRB, were largely offset by the continued challenging ferrous and nonferrous market conditions and the impact of prolonged constrained supply conditions for raw materials in our domestic markets. Consolidated operating results in fiscal 2014 also benefited from an increase in operating income at SMB of $12 million primarily as a result of improved demand for finished steel products leading to higher sales volumes and benefits from productivity improvements. At APB, the impact of purchase costs of end-of-life vehicles decreasing at a slower rate than commodity selling prices during fiscal 2014 continued to compress operating margins leading to a decrease in operating income of $3 million compared to the prior year.
Operating results in fiscal 2014 included a reduction of $2 million in selling, general and administrative ("SG&A") expense. Restructuring and cost-saving initiatives primarily benefited MRB, whose SG&A expense declined by $10 million mainly from headcount reductions and lower professional and outside services. This was partially offset by higher incentive compensation and share-based compensation expense compared to the prior year and SG&A expense associated with new store locations acquired or opened by APB over the last two fiscal years.

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In the fourth quarter of fiscal 2013, an interim impairment test of goodwill allocated to our reporting units resulted in a non-cash goodwill impairment charge of $321 million at the MRB reporting unit. In addition, during the fourth quarter of fiscal 2013, we recorded impairment charges of $13 million on various other assets. In fiscal 2014, we recorded other asset impairment charges of $1 million on a combination of assets held for sale and other long-lived assets. During the first quarter of fiscal 2014, we elected to change the annual goodwill impairment testing date from February 28 to July 1 of each year. We most recently performed an assessment of the goodwill carried in the MRB and APB reporting units as of July 1, 2014. For each of the reporting units, the calculated fair value exceeded its carrying value, thus indicating that the goodwill balances were not impaired as of July 1, 2014. See further discussion in the Critical Accounting Policies section at the end of Part II, Item 7 of this report.
Consolidated operating income in fiscal 2014 also included restructuring charges and other exit-related costs of $7 million, consisting of severance, contract termination, other restructuring costs and exit-related impairments, compared to restructuring charges of $8 million in fiscal 2013. These charges include restructuring initiatives under two separate plans announced in the fourth quarter of fiscal 2012 (the “Q4’12 Plan”) and the first quarter of fiscal 2014 (the “Q1’14 Plan”), respectively.
The Q4'12 Plan initiatives, which were completed by the end of fiscal 2013, achieved a reduction in operating costs of approximately $25 million on an annualized basis, comprising approximately $18 million of SG&A expense and $7 million of cost of goods sold.
In the first quarter of fiscal 2014, we initiated the Q1’14 Plan and began implementing restructuring and productivity initiatives to reduce our annual operating expenses by approximately $30 million, which was subsequently increased to $40 million later in the fiscal year. We achieved approximately $29 million of benefit in fiscal 2014 with the full annual benefit expected to be achieved in fiscal 2015. The majority of the reduction in operating expenses is expected to occur at MRB and results from a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs and other productivity improvements. We expect to incur restructuring charges of approximately $6 million in connection with the Q1'14 Plan, which were substantially incurred in fiscal 2014. The remaining charges are expected to be incurred by the end of fiscal 2017. The vast majority of these charges require us to make cash payments. In addition to the restructuring charges recorded in connection with these initiatives, during fiscal 2014 we incurred other exit-related costs of $1 million consisting of asset impairments related to site closures.
Restructuring charges and other exit-related costs for the fiscal years ended August 31, 2014, 2013 and 2012 were comprised of the following (in thousands):
 
Year Ended August 31,
 
2014
 
2013
 
2012
 
Q4’12 Plan
 
Q1’14 Plan
 
Total Charges
 
Q4’12 Plan
 
Q1’14 Plan
 
Total Charges
 
Q4’12 Plan
 
Q1’14 Plan
 
Total Charges
Restructuring charges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Severance costs
$
(44
)
 
$
4,651

 
$
4,607

 
$
2,443

 
$

 
$
2,443

 
$
2,741

 
$

 
$
2,741

Contract termination costs
675

 
709

 
1,384

 
3,229

 

 
3,229

 
440

 

 
440

Other restructuring costs

 
410

 
410

 
2,234

 

 
2,234

 
1,831

 

 
1,831

Total restructuring charges
631

 
5,770

 
6,401

 
7,906

 

 
7,906

 
5,012

 

 
5,012

Other exit-related costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset impairments

 
566

 
566

 

 

 

 

 

 

Total exit-related costs

 
566

 
566

 

 

 

 

 

 

Total restructuring charges and exit-related costs
$
631

 
$
6,336

 
$
6,967

 
$
7,906

 
$

 
$
7,906

 
$
5,012

 
$

 
$
5,012

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total restructuring charges to date
$
13,549

 
$
5,770

 
$
19,319

 
$
12,918

 
$

 
$
12,918

 
$
5,012

 
$

 
$
5,012

We do not include restructuring charges and other exit-related costs in the measurement of the performance of our operating segments.
See Note 12 - Restructuring Charges and Other Exit-Related Costs in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Fiscal 2013 compared with fiscal 2012
Consolidated operating loss in fiscal 2013 was $328 million, which included a goodwill impairment charge of $321 million, other asset impairment charges of $13 million and restructuring charges of $8 million, compared to consolidated operating income of $54 million in fiscal 2012. Adjusted consolidated operating income in fiscal 2013, excluding the goodwill impairment charge, other asset impairment charges and the restructuring charges, was $14 million, a decrease of $45 million, or 76%, compared to adjusted consolidated operating income of $59 million in fiscal 2012 (see the reconciliation of Adjusted consolidated operating

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income (loss) in Non-GAAP Financial Measures at the end of Item 7). Operating results in fiscal 2013 were negatively impacted by the reduction in sales volumes compared to fiscal 2012, which benefited from higher sales volumes and higher average net selling prices resulting in less margin compression compared to fiscal 2013. The constrained supply of raw materials in our domestic markets, coupled with a more pronounced softening of demand for scrap metal in the export markets compared to the U.S., caused purchase prices for raw materials to decrease less than export selling prices, contributing to the compression in operating margins in fiscal 2013. Furthermore, in the declining selling price environment, average inventory costs did not decrease as quickly as purchase costs for raw materials, resulting in an adverse effect on cost of goods sold and a further compression of operating margins compared to fiscal 2012. Consolidated operating results in fiscal 2013 also included $5 million of operating losses at APB, including transaction, integration and startup costs, related to the eleven store locations acquired or opened during fiscal 2013. These decreases were offset by an increase in operating income at SMB of $9 million compared to fiscal 2012 primarily as a result of slightly improved demand leading to higher sales volumes and increased utilization levels.
Operating results in fiscal 2013 benefited from a reduction in SG&A expense of $12 million, or 6%, from fiscal 2012, primarily as a result of the restructuring initiatives and other operating efficiencies announced in the fourth quarter of fiscal 2012 and implemented in fiscal 2013. The decrease compared to fiscal 2012 was driven primarily by a reduction of $5 million in employee compensation expense and $4 million in professional and outside services. The reduction in consolidated SG&A expense was achieved despite the incremental expense attributable to the eleven store locations acquired or opened by APB during fiscal 2013.
In the fourth quarter of fiscal 2013, we identified the combination of the continued challenging market conditions, the constrained supply of raw materials, our recent financial performance and the lack of recovery of our market capitalization as a triggering event requiring an interim impairment test of goodwill allocated to our reporting units. For the APB reporting unit, the calculated fair value using the income approach substantially exceeded its carrying value. For the MRB reporting unit, the first step of the impairment test showed that the reporting unit’s fair value was less than its carrying amount, indicating a potential impairment. Based on the second step of the impairment test, we recorded a non-cash goodwill impairment charge of $321 million at MRB. See Critical Accounting Policies and Estimates in Part II, Item 7 of this report.
During the fourth quarter of fiscal 2013, we also recorded impairment charges of $13 million on various other assets at MRB, including the impairment of a contractual receivable of $8 million as a result of the debtor’s inability to repay the amount owed under agreements entered into for the extraction of scrap metal through demolition activities. We also identified impairments of $5 million on a combination of assets held for sale, a joint venture investment and other long-lived assets.
Interest Expense
Interest expense was $11 million, $10 million and $12 million for fiscal 2014, 2013 and 2012, respectively. The decrease from fiscal 2012 to fiscal 2013 was primarily due to decreased average borrowings and lower average interest rates under our bank credit facilities compared to the prior year period. For more information about our outstanding debt balances, see Note 9 – Long-Term Debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Income Tax Expense (Benefit)
Income tax expense (benefit) was $2 million, $(57) million and $14 million for fiscal 2014, 2013 and 2012, respectively.
Our effective tax rate in fiscal 2014 was an expense of 19% and was lower than the U.S. federal statutory rate of 35%. The effective tax rate benefited from a fixed asset tax basis study performed during fiscal 2014 which resulted in the recognition of a tax benefit of $2 million, as well as the aggregate impact of excluding income associated with noncontrolling interests, foreign income taxed at different rates, and certain deductions and credits. Other significant items impacting the effective tax rate included the recognition of a valuation allowance against certain foreign and state deferred tax assets and the recognition of a liability for unrecognized tax benefits of $2 million. The valuation allowance on deferred tax assets of certain foreign and state tax jurisdictions increased by $2 million compared to the prior year and was recognized as a result of negative evidence, including recent losses in certain foreign and state jurisdictions, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax benefit will not be realized. Realization of the foreign subsidiaries' deferred tax assets is dependent upon generating sufficient taxable income in the foreign tax jurisdiction in future years to benefit from the reversal of net deductible temporary differences and from the utilization of net operating losses.
Our effective tax rate for fiscal 2013 was a benefit of 17% and differed from the U.S. federal statutory rate of 35% primarily due to the recognition of an expense of $29 million to record a valuation allowance on deferred tax assets mainly related to a foreign subsidiary, the impact of the non-deductible portion of the goodwill impairment charge and the impact of the foreign tax rate differential on operating losses recorded by our foreign subsidiaries. The deferred tax assets at the foreign subsidiary for which a valuation allowance was recorded were related primarily to deductible temporary differences created in fiscal 2013 by the goodwill impairment charge and by net operating losses at the subsidiary.

30 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


In fiscal 2012 the effective tax rate was an expense of 33% and differed from the U.S. federal statutory rate of 35% primarily due to state tax benefits and research and development credits, partially offset by the adverse impact of foreign subsidiaries’ results taxed at different tax rates.
We will continue to regularly assess the realizability of deferred tax assets. Changes in historical earnings performance and future earnings projections, among other factors, may cause us to adjust our valuation allowance on deferred tax assets, which would impact our results of operations in the period we determine that these factors have changed. As of August 31, 2014, we believe that it is more likely than not that we will realize the benefits of our deferred tax assets, net of valuation allowances.
See Note 18 - Income Taxes in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further discussion.
Discontinued Operations
In fiscal 2010, we disposed of a component of our business which qualified for separate classification as a discontinued operation. In fiscal 2014, we released certain environmental liabilities that arose from and were directly related to the operations of the component prior to the disposal, resulting in recognition of a $1 million gain from discontinued operations, net of tax, or $0.03 per diluted share, in the Consolidated Statement of Operations.



31 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Financial results by reporting 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 21 – Segment Information in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Metals Recycling Business
 
For the Year Ended August 31,
 
 
 
 
 
 
 
% Increase/(Decrease)
($ in thousands, except for prices)
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Ferrous revenues
$
1,581,045

 
$
1,677,035

 
$
2,297,580

 
(6
)%
 
(27
)%
Nonferrous revenues
494,745

 
501,655

 
614,467

 
(1
)%
 
(18
)%
Other
27,145

 
31,794

 
36,660

 
(15
)%
 
(13
)%
Total segment revenues
2,102,935

 
2,210,484

 
2,948,707

 
(5
)%
 
(25
)%
Cost of goods sold
1,989,024

 
2,095,747

 
2,780,844

 
(5
)%
 
(25
)%
Selling, general and administrative expense
84,036

 
93,563

 
106,462

 
(10
)%
 
(12
)%
Income from joint ventures
(1,136
)
 
(1,330
)
 
(2,471
)
 
(15
)%
 
(46
)%
Goodwill impairment charge

 
321,000

 

 
NM

 
NM

Other asset impairment charges
928

 
13,053

 

 
(93
)%
 
NM

Segment operating income (loss)
$
30,083

 
$
(311,549
)

$
63,872

 
NM

 
NM

Average recycled ferrous metal sales prices ($/LT):(1)
 
 
 
 
 
 
 
 
 
Domestic
$
358

 
$
358

 
$
406

 
 %
 
(12
)%
Foreign
$
350

 
$
359

 
$
417

 
(3
)%
 
(14
)%
Average
$
353

 
$
358

 
$
415

 
(1
)%
 
(14
)%
Ferrous sales volume (LT, in thousands):
 
 
 
 
 
 
 
 
 
Domestic
1,323

 
1,142

 
1,187

 
16
 %
 
(4
)%
Foreign
2,799

 
3,167

 
3,928

 
(12
)%
 
(19
)%
Total ferrous sales volume (LT, in thousands)
4,122

 
4,309

 
5,115

 
(4
)%
 
(16
)%
Average nonferrous sales price ($/pound)(1)
$
0.86

 
$
0.93

 
$
0.94

 
(8
)%
 
(1
)%
Nonferrous sales volumes (pounds, in thousands)
554,808

 
520,442

 
628,652

 
7
 %
 
(17
)%
Outbound freight included in cost of goods sold (in thousands)
$
144,377

 
$
148,683

 
$
196,924

 
(3
)%
 
(24
)%
_____________________________
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.

Fiscal 2014 compared with fiscal 2013
Revenues
The 6% decrease in ferrous revenues was primarily due to lower average net selling prices and reduced sales volumes of export ferrous metal as a result of continued weak economic conditions globally that adversely impacted export demand for recycled metal, which was only partially offset by higher sales volumes for domestic sales of recycled ferrous metal. Export selling prices of recycled ferrous metal declined sharply for shipments in the middle of fiscal 2014 as a result of weaker global demand and the impact of severe winter weather conditions on the domestic markets, partially offset by a slight recovery in export selling prices for shipments near the end of the fiscal year. A combination of weaker export demand and competition for available raw materials continued to adversely impact supply, which contributed to the lower ferrous sales volumes.

The decrease in nonferrous revenues was primarily due to lower average selling prices as a result of continued weak economic conditions, which more than offset the beneficial impact on sales volumes of improved recovery of nonferrous materials processed through our enhanced processing technologies.

32 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Segment Operating Income (Loss)
Operating income for fiscal 2014 was $30 million, compared to an operating loss of $312 million in the prior year. Adjusted operating income in fiscal 2014, excluding other asset impairment charges of $1 million, was $31 million, an increase of $9 million, or 38%, compared to adjusted operating income in fiscal 2013 (see the reconciliation of Adjusted MRB operating income (loss) in Non-GAAP Financial Measures at the end of Item 7). Export selling prices for recycled ferrous metal were subject to downward pressure in fiscal 2014, leading to overall lower average export selling prices compared to the prior year. The benefits from productivity improvements impacting cost of goods sold at MRB were largely offset by the continued challenging ferrous and nonferrous market conditions and the impact of prolonged constrained supply conditions for raw materials leading to a modest improvement in adjusted operating results. Operating results in fiscal 2014 benefited from restructuring and cost-saving initiatives at MRB leading to a reduction in SG&A expenses of $10 million. The decrease compared to the prior year was driven primarily by a reduction of $4 million in employee compensation expense from headcount reduction and $3 million in professional and outside services costs.
In fiscal 2014, we recorded other asset impairment charges at MRB of $1 million on assets held for sale.
Fiscal 2013 compared with fiscal 2012
Revenues
The decrease of 27% in ferrous revenues was due to lower sales volumes and lower average net selling prices for ferrous metal. During fiscal 2013, demand for recycled ferrous metal continued to soften due primarily to weak global macroeconomic conditions, which led to a decline in selling prices as compared to fiscal 2012. Selling prices of recycled ferrous metal declined sharply at the beginning of fiscal 2013 and, after experiencing a slight increase in the second quarter, steadily declined throughout the remainder of fiscal 2013. In addition, the lower price environment adversely impacted the supply flow of raw materials compared to fiscal 2012 which contributed to the lower sales volumes.
The decrease in nonferrous revenues was primarily due to lower sales volumes as a result of reduced volumes of processed scrap metal, which more than offset the beneficial impact of improved recovery of nonferrous materials processed through our enhanced processing technologies.
Segment Operating Income (Loss)
Operating loss for fiscal 2013 was $312 million, compared to operating income of $64 million in fiscal 2012. Adjusted operating income in fiscal 2013, excluding a goodwill impairment charge of $321 million and other asset impairment charges of $13 million, was $23 million, a decrease of $41 million, or 65%, compared to adjusted operating income in fiscal 2012 (see the reconciliation of Adjusted MRB operating income (loss) in Non-GAAP Financial Measures at the end of Item 7). Operating results in fiscal 2013 were negatively impacted by the reduction in sales volumes compared fiscal 2012, which benefited from higher sales volumes and higher average net selling prices resulting in less margin compression compared to fiscal 2013. The constrained supply of raw materials in our domestic markets, coupled with a more pronounced softening of demand for scrap metal in the export markets compared to the U.S., caused purchase prices for raw materials to decrease less than export selling prices, contributing to the compression in operating margins in fiscal 2013. Furthermore, in the declining selling price environment, average inventory costs did not decrease as quickly as purchase costs for raw materials, resulting in an adverse effect on cost of goods sold and a further compression of operating margins compared to fiscal 2012.
SG&A expense decreased by $13 million, or 12% from the prior year, primarily as a result of the restructuring initiatives and other operating efficiencies announced in the fourth quarter of fiscal 2012 and implemented in fiscal 2013. The decrease compared to fiscal 2012 was driven primarily by a reduction of $5 million in employee compensation expense and $3 million in professional and outside services.
In the fourth quarter of fiscal 2013, we identified a triggering event requiring an interim impairment test of goodwill allocated to the MRB reporting unit. The first step of the impairment test showed that the reporting unit’s fair value was less than its carrying amount, indicating a potential impairment. Based on the second step of the impairment test, we recorded a non-cash goodwill impairment charge of $321 million at MRB. In addition, we recorded impairment charges totaling $13 million on other assets, including the impairment of a contractual receivable of $8 million as a result of the debtor’s inability to repay the amount owed in accordance with the terms of an agreement entered into for the extraction of scrap metal through demolition activities, and impairments of $5 million on a combination of assets held for sale, a joint venture investment and other long-lived assets.

33 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


Auto Parts Business
 
For the Year Ended August 31,
 
 
 
 
 
 
 
% Increase/(Decrease)
($ in thousands)
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Revenues
$
327,569

 
$
313,306

 
$
316,884

 
5
 %
 
(1
)%
Cost of goods sold
248,216

 
233,835

 
228,784

 
6
 %
 
2
 %
Selling, general and administrative expense
57,919

 
54,932

 
54,796

 
5
 %
 
 %
Segment operating income
$
21,434

 
$
24,539

 
$
33,304

 
(13
)%
 
(26
)%
Number of stores at period end
62

 
61

 
51

 
2
 %
 
20
 %
Cars purchased (in thousands)
380

 
356

 
339

 
7
 %
 
5
 %
Fiscal 2014 compared with fiscal 2013
Revenues
The increase in revenues by $14 million, or 5%, was primarily due to additional volumes from stores acquired or opened during fiscal 2013 and fiscal 2014, partially offset by the adverse effects of lower commodity selling prices as a result of weaker global demand.
Segment Operating Income
Operating income for fiscal 2014 decreased by $3 million, or 13%, compared to the prior year. The benefits on operating margins from higher volumes achieved in fiscal 2014 were more than offset by a compression in operating margins primarily due to lower ferrous and nonferrous commodity selling prices and increased SG&A expense of $3 million, mainly due to the addition of new stores in fiscal 2013 and 2014.
Fiscal 2013 compared with fiscal 2012
Revenues
The decrease in revenues by $4 million or 1% was driven primarily by lower average commodity prices, partially offset by higher sales volumes primarily generated by the eleven new store locations acquired or opened during fiscal 2013.
Segment Operating Income
Operating income for fiscal 2013 decreased by $9 million, or 26%, compared to fiscal 2012. The compression in operating margins was primarily related to car purchase costs decreasing at a slower rate than ferrous and nonferrous selling prices due to supply constraints of end-of-life vehicles. Operating income for fiscal 2013 included $5 million of operating losses, including transaction, integration and startup costs, related to the eleven store locations acquired or opened during the year.
SG&A expense remained consistent with fiscal 2012, as the positive impact of the restructuring initiatives and other operational efficiencies implemented in fiscal 2013 and decreased legal expenses were offset by incremental expenses related to the eleven store locations acquired or opened in fiscal 2013.
Steel Manufacturing Business
 
 
For the Year Ended August 31,
 
 
 
 
 
 
 
 
% Increase/(Decrease)
($ in thousands, except price)
 
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Revenues(1)
 
$
388,640

 
$
352,454

 
$
333,227

 
10
 %
 
6
 %
Cost of goods sold
 
362,843

 
339,625

 
328,900

 
7
 %
 
3
 %
Selling, general and administrative expense
 
7,259

 
6,288

 
6,408

 
15
 %
 
(2
)%
Segment operating income (loss)
 
$
18,538

 
$
6,541

 
$
(2,081
)
 
183
 %
 
NM

Finished goods average sales price ($/ST)(2)
 
$
677

 
$
680

 
$
715

 
 %
 
(5
)%
Finished steel products sold (ST, in thousands)
 
533

 
488

 
447

 
9
 %
 
9
 %
Rolling mill utilization
 
70
%
 
66
%
 
58
%
 
6
 %
 
14
 %
_____________________________
ST = Short Ton, which is 2,000 pounds

34 / Schnitzer Steel Industries, Inc. Form 10-K 2014

Table of Contents              SCHNITZER STEEL INDUSTRIES, INC.


NM = Not Meaningful
(1)
Revenues include sales of semi-finished goods (billets) and finished steel products.
(2)
Price information is shown after netting the cost of freight incurred to deliver the product to the customer.
Fiscal 2014 compared with fiscal 2013
Revenues
Revenues increased by $36 million, or 10%, compared to the prior year primarily due to increased sales volumes for finished steel products as a result of higher demand in West Coast markets mainly driven by improved non-residential construction. These benefits were partially offset by slightly lower average sales prices as a result of the impact of reduced costs of raw materials.
Segment Operating Income
Operating income for fiscal 2014 was $19 million, a improvement of $12 million compared to $7 million in the prior year. The significantly improved results were primarily due to higher sales volumes, the impact of raw material cost of goods sold decreasing at a faster rate than the average sales price of finished steel products, and benefits from operational efficiencies and productivity improvements coupled with increased rolling mill utilization levels. The improved results were partially offset by recognition of bad debt expense of $1 million in fiscal 2014.
Fiscal 2013 compared with fiscal 2012
Revenues
Revenues increased by 6% compared to fiscal 2012 primarily due to higher volumes of finished steel products as a result of slightly higher demand in our West Coast markets mainly driven by improved non-residential construction, partially offset by lower average sales prices as a result of the impact of reduced costs of raw materials.
Segment Operating Income (Loss)
Operating income for fiscal 2013 was $7 million, an improvement of $9 million compared to an operating loss of $2 million in fiscal 2012. The improved results were primarily due to slightly higher demand leading to higher sales volumes and increased utilization levels, coupled with improved operational efficiencies.
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 $26 million and $13 million as of August 31, 2014 and 2013, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, acquisitions, dividends and share repurchases. We also use excess cash on hand to reduce amounts outstanding under our credit facilities. As of August 31, 2014, debt, net of cash, was $294 million compared to $368 million as of August 31, 2013