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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
(State of Incorporation)
93-0341923
(I.R.S. Employer Identification No.)
299 SW Clay St., Suite 350
Portland, OR
(Address of principal executive offices)
97201
(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
(Title of Each Class)
The NASDAQ Global Select Market
(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 ]
Non-Accelerated Filer [ ]
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.
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
FORWARD LOOKING STATEMENTS
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
PART IV
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15
Exhibits and Financial Statement Schedules
SIGNATURES
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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
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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,
2 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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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
North America
Europe(1)
Africa
South America
Sales to SMB
$
1,049,531
55 % $
1,161,086
57 % $
1,598,889
672,831
285,540
76,122
18,911
35 %
15 %
4 %
1 %
(188,103)
(10)%
609,684
381,867
53,841
4,006
(178,341)
2,032,143
30 %
19 %
3 %
— %
(9)%
100 % $
728,338
480,723
130,469
10,288
(183,906)
2,764,801
58 %
26 %
17 %
5 %
1 %
(7)%
100 %
Total (net of intercompany)
$
1,914,832
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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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:
Foreign
Domestic
Total
2014
2013
2012
Revenues(1)
$ 1,088,546
492,499
$ 1,581,045
Volume(2)
2,799
1,323
4,122
Revenues(1)
$ 1,255,636
421,399
$ 1,677,035
Volume(2)
3,167
1,142
4,309
Revenues(1)
$ 1,799,991
497,589
$ 2,297,580
Volume(2)
3,928
1,187
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:
Foreign
Domestic
Total
2014
2013
2012
Revenues(1)
342,040
$
152,705
$
494,745
Volume(2)
395,853
158,955
554,808
Revenues(1)
345,973
$
155,682
$
501,655
Volume(2)
369,869
150,573
520,442
Revenues(1)
420,378
$
194,089
$
614,467
Volume(2)
451,163
177,489
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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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
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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):
Domestic
Foreign
Sales to MRB
Total (net of intercompany)
Distribution
2014
319,306
8,263
(87,458)
240,111
$
$
2013
305,035
8,271
(75,992)
237,314
$
$
2012
295,618
21,266
(73,974)
242,910
$
$
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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SCHNITZER STEEL INDUSTRIES, INC.
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:
Finished steel products
_____________________________
2014
2013
2012
Revenues(1)
377,678
$
Volume(2)
533,147
Revenues(1)
346,982
$
Volume(2)
487,542
Revenues(1)
332,719
$
Volume(2)
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):
Domestic
Foreign(1)
Total
____________________________
(1) Consists entirely of sales to Canada.
Distribution
2014
354,420
34,220
388,640
$
$
2013
304,598
47,856
352,454
$
$
2012
290,710
42,517
333,227
$
$
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;
13 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
•
•
•
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
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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.
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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.
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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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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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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
Corporate offices – Domestic
Metals Recycling Business:
Domestic:
Collection and processing
Collection
Inactive
Foreign:(2)
Collection and processing
Collection
Inactive
Auto Parts Business:
Domestic:(1)
Administrative offices and other
Stores
Inactive
Foreign stores(2)
Steel Manufacturing Business:
Domestic:
Steel mill and administrative offices
Inactive
Total company:
Domestic
Foreign(2)
Total(3)
_____________________________
No. of
Facilities
Leased
Acreage
Owned
Total
1
40
8
9
4
3
3
3
54
1
8
2
1
119
18
137
—
48
7
2
33
14
20
5
639
—
71
—
—
701
138
839
—
701
23
29
4
3
—
—
136
1
—
85
51
—
749
30
31
37
17
20
5
775
1
71
85
51
1,026
7
1,033
1,727
145
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.
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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
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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.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2014
High Price
Low Price
Dividends Per Share
$
$
$
$
31.46
32.67
29.22
28.21
High Price
$
$
$
$
32.04
31.90
29.64
27.22
$
$
$
$
$
$
$
$
25.15
25.08
24.92
$
$
$
24.32
$
Fiscal 2013
0.188
0.188
0.188
0.188
Low Price
Dividends Per Share
26.77
27.70
23.62
23.38
$
$
$
$
0.188
0.188
0.188
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.
21 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
2009
2010
2011
2012
2013
2014
Year Ended August 31,
Schnitzer Steel Industries(1)
S&P 500
$
S&P Steel Index
NASDAQ
_____________________________
100
100
100
100
$
82
$
85
$
52
$
49
$
105
103
106
124
109
131
147
78
157
174
80
187
55
218
103
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
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 6. SELECTED FINANCIAL DATA
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share and dividend data)
2014
Year Ended August 31,
2012
2011
2013
2010
$ 2,543,583
$ 2,621,911
$ 3,340,938
$ 3,459,194
$ 2,301,240
(327,789) $
(280,023) $
53,668
28,917
$
$
185,964
123,637
$
$
125,897
84,508
Revenues
Operating income (loss)(1)
Income (loss) from continuing operations
Income (loss) from discontinued
operations, net of tax(2)
Net income (loss) attributable to SSI
Income (loss) per share from continuing
operations attributable to SSI (diluted)
Net income (loss) per share attributable to
SSI (diluted)
Dividends declared per common share
OTHER DATA:
Shipments (in thousands)(3):
Recycled ferrous metal (tons)
Recycled nonferrous metal (pounds)
Finished steel products (tons)
Average net selling price(3)(4):
Recycled ferrous metal (per ton)
Recycled nonferrous metal (per
pound)
Finished steel products (per ton)
Number of auto parts stores(2)
Cars purchased by APB (in thousands)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,316
8,734
857
5,924
0.19
0.22
0.750
4,122
554,808
533
353
0.86
677
62
380
— $
(281,442) $
— $
27,404
(10.56) $
0.99
(10.56) $
$
0.750
0.99
0.410
4,309
520,442
488
5,115
628,652
447
$
$
$
358
0.93
680
61
356
415
0.94
715
51
339
$
$
$
$
$
$
$
(101) $
$
118,355
(13,832)
66,750
$
$
$
$
$
$
4.24
4.23
0.068
5,329
568,560
439
416
1.06
697
50
353
2.86
2.37
0.068
4,231
478,786
444
328
0.83
587
45
329
2014
2013
August 31,
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
Redeemable noncontrolling interest
$
$
318,842
$
372,663
$
334,629
— $
— $
22,248
$
$
403,287
19,053
$
$
99,240
—
_____________________________
(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.
23 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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
24 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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
25 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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 $7 million for the year ended August 31, 2013.
26 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
Results of Operations
($ in thousands)
Revenues:
For the Year Ended August 31,
% Increase/(Decrease)
2014
2013
2012
2014 vs 2013
2013 vs 2012
Metals Recycling Business
$ 2,102,935
$ 2,210,484
$ 2,948,707
Auto Parts Business
Steel Manufacturing Business
Intercompany revenue eliminations(1)
Total revenues
Cost of goods sold:
Metals Recycling Business
Auto Parts Business
Steel Manufacturing Business
Intercompany cost of goods sold
eliminations(1)
Total cost of goods sold
Selling, general and administrative expense:
Metals Recycling Business
Auto Parts Business
Steel Manufacturing Business
Corporate(2)
327,569
313,306
316,884
388,640
(275,561)
2,543,583
352,454
(254,333)
2,621,911
333,227
(257,880)
3,340,938
1,989,024
2,095,747
2,780,844
248,216
362,843
233,835
339,625
228,784
328,900
(275,260)
2,324,823
(253,816)
2,415,391
(258,812)
3,079,716
84,036
57,919
7,259
41,999
93,563
54,932
6,288
38,750
106,462
54,796
6,408
37,512
Total selling, general and administrative
expense
191,213
193,533
205,178
Income from joint ventures:
Metals Recycling Business
Change in intercompany profit elimination(3)
Total income from joint ventures
(1,136)
(60)
(1,196)
(1,330)
147
(1,183)
(2,471)
(165)
(2,636)
Goodwill impairment charge - Metals Recycling
Business
Other asset impairment charges:
Metals Recycling Business
Corporate
Total other asset impairment charges
Operating income (loss):
Metals Recycling Business
Auto Parts Business
Steel Manufacturing Business
Segment operating income (loss)
Restructuring charges and other exit related
costs(4)
Corporate expense(2)
Change in intercompany profit elimination(5)
Total operating income (loss)
$
_____________________________
—
321,000
928
532
1,460
30,083
21,434
18,538
70,055
(6,967)
(42,531)
(241)
20,316
13,053
—
13,053
(311,549)
24,539
6,541
(280,469)
(7,906)
(38,750)
(664)
—
—
—
—
63,872
33,304
(2,081)
95,095
(5,012)
(37,512)
1,097
$ (327,789) $
53,668
(5)%
5 %
10 %
8 %
(3)%
(5)%
6 %
7 %
8 %
(4)%
(10)%
5 %
15 %
8 %
(1)%
(15)%
NM
1 %
NM
(93)%
NM
(89)%
NM
(13)%
183 %
NM
(12)%
10 %
(64)%
NM
(25)%
(1)%
6 %
(1)%
(22)%
(25)%
2 %
3 %
(2)%
(22)%
(12)%
— %
(2)%
3 %
(6)%
(46)%
NM
(55)%
NM
NM
NM
NM
NM
(26)%
NM
NM
58 %
3 %
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.
27 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
(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.
28 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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
Q1’14
Plan
Q4’12
Plan
Total
Charges
Q4’12
Plan
2013
Q1’14
Plan
Total
Charges
Q4’12
Plan
2012
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
Other restructuring costs
Total restructuring charges
Other exit-related costs:
Asset impairments
Total exit-related costs
Total restructuring charges and
exit-related costs
675
—
631
—
—
709
410
5,770
566
566
1,384
410
6,401
566
566
3,229
2,234
7,906
— 3,229
— 2,234
— 7,906
440
1,831
5,012
—
440
— 1,831
— 5,012
—
—
—
—
—
—
—
—
—
—
—
—
$
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
29 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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
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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 $0.03
per diluted share, in the Consolidated Statement of Operations.
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SCHNITZER STEEL INDUSTRIES, INC.
Financial results by reporting segment
We operate our business across three reporting segments: MRB, APB and SMB. Additional financial information relating to these
reporting segments is contained in Note 21 – Segment Information in the Notes to the Consolidated Financial Statements in Part
II, Item 8 of this report.
Metals Recycling Business
($ in thousands, except for prices)
2014
2013
2012
2014 vs 2013
2013 vs 2012
For the Year Ended August 31,
% Increase/(Decrease)
Ferrous revenues
Nonferrous revenues
Other
Total segment revenues
Cost of goods sold
Selling, general and administrative expense
Income from joint ventures
Goodwill impairment charge
Other asset impairment charges
Segment operating income (loss)
Average recycled ferrous metal sales prices ($/
LT):(1)
Domestic
Foreign
Average
Ferrous sales volume (LT, in thousands):
Domestic
Foreign
Total ferrous sales volume (LT, in
thousands)
Average nonferrous sales price ($/pound)(1)
Nonferrous sales volumes (pounds, in
thousands)
Outbound freight included in cost of goods
sold (in thousands)
_____________________________
LT = Long Ton, which is 2,240 pounds
$
$
$
$
$ 1,581,045
$ 1,677,035
$ 2,297,580
494,745
27,145
2,102,935
1,989,024
84,036
(1,136)
—
928
30,083
$
501,655
31,794
2,210,484
2,095,747
93,563
(1,330)
321,000
13,053
(311,549) $
614,467
36,660
2,948,707
2,780,844
106,462
(2,471)
—
—
63,872
358
350
353
$
$
$
358
359
358
$
$
$
1,323
2,799
4,122
1,142
3,167
4,309
$
0.86
$
0.93
$
406
417
415
1,187
3,928
5,115
0.94
554,808
520,442
628,652
$
144,377
$
148,683
$
196,924
(6)%
(1)%
(15)%
(5)%
(5)%
(10)%
(15)%
NM
(93)%
NM
— %
(3)%
(1)%
16 %
(12)%
(4)%
(8)%
7 %
(3)%
(27)%
(18)%
(13)%
(25)%
(25)%
(12)%
(46)%
NM
NM
NM
(12)%
(14)%
(14)%
(4)%
(19)%
(16)%
(1)%
(17)%
(24)%
(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
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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 $5 million on a combination of assets held for sale, a joint venture investment and other long-lived assets.
33 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
Auto Parts Business
($ in thousands)
Revenues
Cost of goods sold
Selling, general and administrative expense
Segment operating income
Number of stores at period end
Cars purchased (in thousands)
Fiscal 2014 compared with fiscal 2013
Revenues
For the Year Ended August 31,
% Increase/(Decrease)
2014
2013
2012
2014 vs 2013
2013 vs 2012
$
327,569
$
313,306
$
316,884
248,216
57,919
233,835
54,932
$
21,434
$
24,539
$
62
380
61
356
228,784
54,796
33,304
51
339
5 %
6 %
5 %
(13)%
2 %
7 %
(1)%
2 %
— %
(26)%
20 %
5 %
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 $5 million of operating losses, including transaction,
integration and startup costs, related to the eleven store locations acquired or opened during the year.
SG&A expense remained consistent with fiscal 2012, as the positive impact of the restructuring initiatives and other operational
efficiencies implemented in fiscal 2013 and decreased legal expenses were offset by incremental expenses related to the eleven
store locations acquired or opened in fiscal 2013.
Steel Manufacturing Business
($ in thousands, except price)
Revenues(1)
Cost of goods sold
Selling, general and administrative expense
Segment operating income (loss)
Finished goods average sales price ($/ST)(2)
Finished steel products sold (ST, in thousands)
Rolling mill utilization
_____________________________
ST = Short Ton, which is 2,000 pounds
For the Year Ended August 31,
2014
$ 388,640
362,843
7,259
18,538
677
$
$
2013
$ 352,454
339,625
6,288
6,541
680
$
$
2012
$ 333,227
328,900
6,408
(2,081)
715
$
$
% Increase/(Decrease)
2014 vs 2013
10 %
7 %
15 %
183 %
— %
2013 vs 2012
6 %
3 %
(2)%
NM
(5)%
533
70%
488
66%
447
58%
9 %
6 %
9 %
14 %
34 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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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 (refer to Non-GAAP Financial Measures below), a decrease of $75 million
primarily as a result of the positive cash flows generated by operating activities. Our cash balances as of August 31, 2014 and
2013 include $4 million and $7 million, respectively, which are indefinitely reinvested in Puerto Rico and Canada.
Operating Activities
Net cash provided by operating activities in fiscal 2014 was $141 million, compared to $39 million in fiscal 2013 and $245 million
in fiscal 2012.
Cash provided by operating activities in fiscal 2014 included a decrease in inventories of $36 million due to the timing of shipments.
Uses of cash included an increase of $16 million in accounts receivable due to the timing of shipments and collections.
Cash provided by operating activities in fiscal 2013 included a decrease in inventories of $47 million due to lower volumes of
material purchases. Uses of cash included an increase of $79 million in accounts receivable due to the timing of shipments and
collections and a decrease in accounts payable of $11 million due to lower levels of material purchases and timing of payments.
Cash provided by operating activities in fiscal 2012 included a decrease in inventories of $94 million due to lower volumes of
material purchases and a decrease of $82 million in accounts receivable due to lower sales volumes and the timing of collections.
Uses of cash included a decrease in accounts payable of $26 million due to lower levels of material purchases and timing of
payments and a decrease in accrued income taxes of $20 million due to lower financial results compared to the prior fiscal year.
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SCHNITZER STEEL INDUSTRIES, INC.
Investing Activities
Net cash used in investing activities in fiscal 2014 was $41 million, compared to $112 million in fiscal 2013 and $84 million in
fiscal 2012.
Cash used in investing activities in fiscal 2014 included $39 million in capital expenditures to upgrade our equipment and
infrastructure.
Cash used in investing activities in fiscal 2013 included $90 million in capital expenditures, including investments in the
construction of a new shredder, advanced processing equipment and related infrastructure for our facility in Surrey, British
Columbia, which commenced shredding operations in the third quarter of fiscal 2013, and construction of a new nonferrous
processing facility in Puerto Rico, which commenced operations in the first quarter of fiscal 2014. Cash used in investing activities
also included $25 million for acquisitions.
Cash used in investing activities in fiscal 2012 included $79 million in capital expenditures, primarily to expand facilities and
upgrade our equipment and infrastructure.
Financing Activities
Net cash used in financing activities for fiscal 2014 was $88 million, compared with $4 million in fiscal 2013 and $120 million
in fiscal 2012.
Cash used in financing activities in fiscal 2014 included $20 million for cash dividends and $64 million in net repayments of debt
(refer to Non-GAAP Financial Measures below).
Cash used in financing activities in fiscal 2013 included $20 million for cash dividends and $25 million for the purchase of the
redeemable noncontrolling interest in the third quarter of fiscal 2013. Sources of cash included $43 million in net borrowings of
debt (refer to Non-GAAP Financial Measures below) mainly used to support higher working capital requirements and acquisitions.
Cash used in financing activities in 2012 included $69 million in net repayments of debt (refer to Non-GAAP Financial Measures
below) using cash generated from operations, $33 million for the repurchase of outstanding shares of our Class A common stock
and $11 million for cash dividends.
Credit Facilities
Following is a summary of our outstanding balances and availability on credit facilities and long-term debt (in thousands):
Unsecured, uncommitted credit line
Bank unsecured revolving credit facility(1)
Tax-exempt economic development revenue bonds due January 2021
Other debt obligations
_____________________________
Outstanding
as of
8/31/2014
Remaining
Availability
$
$
$
$
— $
25,000
305,000
$
387,768
7,700
1,010
N/A
N/A
(1) Remaining availability is net of $5 million of outstanding stand-by letters of credit as of August 31, 2014.
Our unsecured committed bank credit facility, which provides for revolving loans of $670 million and C$30 million, matures in
April 2017 pursuant to a credit agreement with Bank of America, N.A. as administrative agent, and other lenders party thereto.
Interest rates on outstanding indebtedness under the agreement are based, at our option, on either the London Interbank Offered
Rate (or the Canadian equivalent) plus a spread of between 1.25% and 2.25%, with the amount of the spread based on a pricing
grid tied to our leverage ratio, or the greater of the prime rate, the federal funds rate plus 0.5% or the British Bankers Association
LIBOR Rate plus 1.75%. In addition, annual commitment fees are payable on the unused portion of the credit facility at rates
between 0.15% and 0.35% based on a pricing grid tied to our leverage ratio.
We had borrowings outstanding under the credit facility of $305 million and $360 million as of August 31, 2014 and 2013,
respectively. The weighted average interest rate on amounts outstanding under this facility was 1.91% and 1.98% as of August
31, 2014 and 2013, respectively.
We also have an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. that expires on March 1, 2015.
Interest rates are set by the bank at the time of borrowing. We had no borrowings outstanding under this facility as of August 31,
2014 and $9 million in borrowings outstanding as of August 31, 2013.
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We use these credit facilities to fund working capital requirements, acquisitions, capital expenditures, dividends and share
repurchases. The two bank credit agreements contain various representations and warranties, events of default and financial and
other covenants which could limit or restrict our ability to create liens, raise additional capital, enter into transactions with affiliates,
acquire and dispose of businesses, guarantee debt, and consolidate or merge. The financial covenants include a consolidated fixed
charge coverage ratio, defined as the four-quarter rolling sum of consolidated adjusted EBITDA less defined maintenance capital
expenditures divided by consolidated fixed charges, and a consolidated leverage ratio, defined as consolidated funded indebtedness
divided by the sum of consolidated net worth and consolidated funded indebtedness. We refer to the Forms 8-K dated February
14, 2011 and April 16, 2012, which include as attachments copies of the unsecured committed bank credit agreement, as amended,
for the detailed methodology for calculating the financial covenants.
As of August 31, 2014, we were in compliance with these financial covenants. The consolidated fixed charge coverage ratio is
required to be no less than 1.50 to 1 and was 2.53 to 1 as of August 31, 2014. The consolidated leverage ratio is required to be no
more than 0.55 to 1 and was 0.30 to 1 as of August 31, 2014. While we expect to remain in compliance with these covenants, there
can be no assurances that we will be able to do so in the event of a sustained deterioration from current market conditions or other
negative factors which adversely impact our results of operations and financial position, and lead to a trend of consolidated net
losses. If we do not maintain compliance with our financial covenants and are unable to obtain an amendment or waiver from our
lenders, a breach of either covenant would constitute an event of default and allow the lenders to exercise remedies under the
agreements, the most severe of which is the termination of the credit facility under our committed bank credit agreement and
acceleration of the amounts owed under both agreements. In such case, we would be required to evaluate available alternatives
and take appropriate steps to obtain alternative funds. There can be no assurance that any such alternative funds, if sought, could
be obtained or, if obtained, would be adequate or on acceptable terms.
In addition, as of August 31, 2014 and 2013, we had $8 million of long-term tax-exempt bonds outstanding that mature in January
2021.
Capital Expenditures
Capital expenditures totaled $39 million, $90 million and $79 million for fiscal 2014, 2013 and 2012, respectively. Our capital
expenditures in fiscal 2014 included completion of our investment in the construction of a new nonferrous processing facility in
Puerto Rico, which commenced operations in September 2013. In addition, we made further investments in infrastructure to
improve efficiency, increase capacity, improve worker safety, enhance environmental systems and replace equipment. Fiscal 2013
capital expenditures included investments in the construction of a new shredder, advanced processing equipment and related
infrastructure for our facility in Surrey, British Columbia, which began operations in the third quarter of fiscal 2013, and the
substantial portion of construction of the new nonferrous processing facility in Puerto Rico.
We currently plan to invest approximately $40 million in capital expenditures on upgrades in fiscal 2015, similar to to the upgrades
in fiscal 2014, exclusive of any capital expenditures for growth projects, using cash generated from operations and available lines
of credit.
Environmental Compliance
Our commitment to sustainable recycling and operating our business in an environmentally responsible manner requires us to
continue to invest in facilities that improve our environmental presence in the communities in which we operate. As part of our
capital expenditures, we invested $8 million, $5 million and $13 million for environmental projects in fiscal 2014, 2013 and 2012,
respectively. We plan to invest up to $12 million in capital expenditures for environmental projects in fiscal 2015. These projects
include investments in storm water systems and equipment to ensure ongoing compliance with air quality and other environmental
regulations.
We have been identified by the United States Environmental Protection Agency (“EPA”) as one of the potentially responsible
parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor
Superfund site (“the Site”). A group of PRPs is conducting an investigation and study to identify and characterize the contamination
at the Site and develop alternative approaches to remediation of the contamination. On March 30, 2012 the group submitted to
the EPA a draft feasibility study (“draft FS”) based on approximately ten years of work and $100 million in costs classified as
investigation-related. The draft FS identifies ten possible remedial alternatives which range in estimated cost from approximately
$170 million to $250 million (net present value) for the least costly alternative to approximately $1.08 billion to $1.76 billion (net
present value) for the most costly and estimates a range of two to 28 years to implement the remedial work, depending on the
selected alternative. The draft FS does not determine who is responsible for remediation costs, define the precise cleanup boundaries
or select remedies. The draft FS is being 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
37 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
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. 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 reasonably possible to estimate the amount or range of
costs which we are likely or which are reasonably possible to incur in connection with the Site, although such costs could be
material to our financial position, results of operations, future cash flows and liquidity. Any material liabilities recorded in the
future related to the Site could result in our failure to maintain compliance with certain covenants in our debt agreements. Significant
cash outflows in the future related to the Site could reduce the amounts available for borrowing that could otherwise be used for
investment in capital expenditures, acquisitions, dividends and share repurchases. See Contingencies – Environmental in Note 11
– Commitments and Contingencies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report.
Share Repurchase Program
Pursuant to our amended share repurchase program, we have existing authorization to repurchase up to 2.1 million shares of our
Class A common stock when we deem such repurchases to be appropriate. We evaluate long- and short-range forecasts as well as
anticipated sources and uses of cash before determining the course of action in our share repurchase program. Prior to fiscal 2014,
we had repurchased approximately 6.9 million shares of the 9 million shares authorized for repurchase under the program. We did
not repurchase any of our Class A common stock in fiscal 2014.
Assessment of Liquidity and Capital Resources
Historically, our available cash resources, internally generated funds, credit facilities and equity offerings have financed our
acquisitions, capital expenditures, working capital and other financing needs.
We generally believe our current cash resources, internally generated funds, existing credit facilities and access to the capital
markets will provide adequate short-term and long-term liquidity needs for acquisitions, capital expenditures, working capital,
share repurchases, dividends, joint ventures, debt service requirements and environmental obligations. However, in the event of
a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and
take appropriate steps to obtain sufficient additional funds. There can be no assurance that any such supplemental funding, if
sought, could be obtained or, if obtained, would be adequate or on acceptable terms.
Off-Balance Sheet Arrangements
None.
Contractual Obligations and Commitments
We have certain contractual obligations to make future payments. The following table summarizes these future obligations as of
August 31, 2014 (in thousands):
2015
2016
Payment Due by Period
2018
2019
2017
Thereafter
Total
Contractual Obligations
Long-term debt(1)
Interest payments on long-term debt(2)
Capital leases, including interest
Operating leases
Purchase obligations(3)
Other(4)
Total
_____________________________
$
40
$
84
$ 305,089
$
5,894
1,310
22,065
42,130
216
5,889
1,180
17,586
11,183
243
3,945
1,181
15,235
11,183
342
95
60
1,181
12,051
11,779
304
$
100
$
8,302
$313,710
54
1,202
9,220
11,183
301
224
6,330
35,371
20,452
2,627
16,066
12,384
111,528
107,910
4,033
$ 71,655
$ 36,165
$ 336,975
$ 25,470
$ 22,060
$
73,306
$565,631
(1) Long-term debt represents the principal amounts of all outstanding long-term debt, maturities of which extend to 2028.
(2)
Interest payments on long-term debt are based on interest rates in effect as of August 31, 2014. As contractual interest rates and the amount of debt outstanding
is variable in certain cases, actual cash payments may differ from the estimates provided.
(3) Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the
duration of the agreement, including purchases of inventory items to be sold in the ordinary course of business.
(4) Other contractual obligations consist of pension funding obligations and other accrued liabilities.
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SCHNITZER STEEL INDUSTRIES, INC.
We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance
bonds. At August 31, 2014, we had $16 million outstanding under these arrangements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires us to make certain judgments, estimates, and assumptions regarding uncertainties that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. An accounting policy is deemed
to be critical if it requires an accounting estimate to be made based on assumptions and judgments about matters that are inherently
uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate
that are reasonably likely to occur could materially impact our consolidated financial statements. We deem critical accounting
policies to be those that are most important to the portrayal of our financial condition and results of operations. Because of the
uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting
policies. We are not currently aware of any reasonably likely events or circumstances that would result in materially different
amounts being reported.
Our critical accounting estimates include those related to goodwill, environmental costs, inventories, accounting for business
combinations and revenue recognition.
Goodwill
We evaluate goodwill for impairment annually and upon the occurrence of certain triggering events or substantive changes in
circumstances that indicate that the fair value of goodwill may be impaired. Impairment of goodwill is tested at the reporting unit
level. A reporting unit is an operating segment or one level below an operating segment (referred to as a ‘component’). We have
determined that our reporting units for which goodwill has been allocated are equivalent to our operating segments, as all of the
components of each segment meet the criteria for aggregation. Our goodwill balances are allocated to MRB and APB. SMB has
no goodwill.
When testing goodwill for impairment, we have the option to first assess qualitative factors to determine whether the existence
of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit
is less than its carrying amount. If we elect to perform a qualitative assessment and determine that an impairment is more likely
than not, we are then required to perform the two-step quantitative impairment test, otherwise no further analysis is required. We
also may elect not to perform the qualitative assessment and, instead, proceed directly to the two-step quantitative impairment
test. In the first step of the quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If the
carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of
the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation. If the carrying
amount of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount
equal to that excess.
We estimate the fair value of the reporting units using an income approach based on the present value of expected future cash
flows utilizing a market-based weighted average cost of capital (“WACC”) determined separately for each reporting unit. To
estimate the present value of the cash flows that extend beyond the final year of the discounted cash flow model, we employ a
terminal value technique, whereby we use estimated operating cash flows minus capital expenditures, adjust for changes in working
capital requirements in the final year of the model, and then discount these estimated cash flows by the WACC to establish the
terminal value.
The determination of fair value using the income approach requires judgment and involves the use of significant estimates and
assumptions about expected future cash flows derived from internal forecasts and the impact of market conditions on those
assumptions. Critical assumptions primarily include revenue growth rates driven by future commodity prices and volume
expectations, operating margins, capital expenditures, working capital requirements, tax rates, terminal growth rates, discount
rates, benefits associated with a taxable transaction and synergistic benefits available to market participants.
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 partial goodwill impairment charge of $321 million at the MRB reporting
unit.
In the first quarter of fiscal 2014, we changed the annual goodwill impairment testing date from February 28 to July 1 of each
year. We believe this new testing date is preferable because it allows us to better align the annual goodwill impairment testing
procedures with our year-end financial reporting, as well as our annual budgeting cycle and allows us visibility into fourth quarter
39 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
operating results which are typically significant to our annual performance. This change in accounting principle did not delay,
accelerate or cause us to avoid an impairment charge. We performed the fiscal 2014 annual goodwill impairment test as of July
1, 2014, proceeding directly to the first step of the quantitative impairment test.
For the MRB reporting unit with goodwill of $147 million as of July 1, 2014, the calculated fair value exceeded the carrying value
by approximately 13%. The projections used in the income approach for MRB took into consideration the challenging market
conditions for recycled metals, including the continued constrained supply of scrap metal and level of competition in our domestic
markets, the generally weak macroeconomic indicators in the markets in which our customers are based, and the cyclical nature
of our industry. The projections assumed a recovery of operating margins over a multi-year period, eventually returning to levels
of profitability in the range of average historical levels. The market-based WACC used in the income approach for MRB was
12.87%, which included an additional Company risk premium of 1% to reflect the uncertainty in connection with the extent and
pace of improvements in market conditions and future Company performance. The terminal growth rate used in the discounted
cash flow model was 2% based on long-term domestic economic growth expectations. Assuming all other components of the fair
value estimate were held constant, an increase in the WACC in excess of 1%, or weaker than anticipated improvements in either
operating margins or volumes, could result in a failure of the Step 1 quantitative impairment test for the MRB reporting unit.
For the APB reporting unit with goodwill of $180 million as of July 1, 2014, the calculated fair value exceeded the carrying value
by approximately 17%. The projections used in the income approach for APB took into consideration the impact of weak market
conditions for ferrous and nonferrous commodities, the cost of obtaining adequate supply flows of end-of-life vehicles and the
trends of self-serve parts sales in certain regional markets. The projections assumed a recovery of operating margins from current
levels over a multi-year period, but to less than the peak levels of operating margin experienced in fiscal year 2010 and 2011. The
market-based WACC used in the income approach for APB was 11.19%. The terminal growth rate used in the discounted cash
flow model was 1%. Assuming all other components of the fair value estimate were held constant, an increase in the WACC in
excess of 1.25% or weaker than anticipated improvements in operating margins could result in a failure of the Step 1 quantitative
impairment test for the APB reporting unit.
We also use a market approach based on earnings multiple data and our Company’s market capitalization to corroborate our
reporting units’ valuations. We reconcile the Company’s market capitalization to the aggregated estimated fair value of our reporting
units, including consideration of a control premium representing the estimated amount a market participant would pay to obtain
a controlling interest. The implied control premium resulting from the difference between our market capitalization (based on the
average trading price of our Class A common stock for the two-week period ended July 1, 2014) and the higher aggregated estimated
fair value of our reporting units was within the historical range of average and mean premiums observed on historical transactions
within the steel-making, scrap processing and metals industries. We identified specific reconciling items, including market
participant synergies, which supported the implied control premium as of July 1, 2014.
Subsequent to our annual impairment test date of July 1, 2014 and fiscal year-end of August 31, 2014, the quoted market price of
our Class A common stock declined in the second half of September and during October 2014. We believe the current quoted
market price of our Class A common stock is impacted by the soft global macroeconomic indicators and the weak current market
conditions in the metals recycling industry and does not fully reflect the underlying value of the Company’s reporting units, the
recycled metals industry’s long-term fundamentals and the earnings potential of our business. However, if the quoted market price
of our Class A common stock were to decline further or remain at the current levels for a sustained period of time, this may trigger
an interim evaluation of goodwill which could result in future goodwill impairment charges.
Further, as a result of the inherent uncertainty associated with forming the estimates described above, actual results could differ
from those estimates. Future events and changing market conditions may impact our assumptions as to future revenue growth
rates, pace and extent of operating margin and volume recovery, market-based WACC and other factors that may result in changes
in our estimates of the reporting units' fair value. Although we believe the assumptions used in testing our reporting units’ goodwill
for impairment are reasonable, it is possible that market and economic conditions could deteriorate further or not improve as
expected. Additional declines or a lack of recovery of market conditions in the metals recycling industry from current levels, a
trend of weaker than anticipated Company 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 future goodwill impairment
charges that, if incurred, could have a material adverse effect on our financial condition and results of operations.
Environmental Costs
We operate in industries that inherently possess environmental risks. To manage these risks, we employ both our own environmental
staff and outside consultants. Environmental staff and finance personnel meet regularly to discuss environmental risks. We estimate
future costs for known environmental remediation requirements and accrue for them on an undiscounted basis when it is probable
40 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
that we have incurred a liability and the related costs can be reasonably estimated but the timing of incurring the estimated costs
is unknown. The regulatory and government management of these projects is complex, which is one of the primary factors that
make it difficult to assess the cost of potential and future remediation. When only a wide range of estimated amounts can be
reasonably established and no other amount within the range is better than any other, the low end of the range is recorded in the
financial statements. If further developments or resolution of an environmental matter result in facts and circumstances that are
significantly different than the assumptions used to develop these liabilities, the accrual for environmental remediation could be
materially understated or overstated. Adjustments to these liabilities are made when additional information becomes available that
affects the estimated costs to study or remediate any environmental issues or when expenditures for which accruals are established
are made. The factors we consider in the recognition and measurement of environmental liabilities include:
•
•
•
•
•
Current regulations, both at the time the liability is established and during the course of the investigation or
remediation process, which specify standards for acceptable remediation;
Information about the site which becomes available as the site is studied and remediated;
The professional judgment of senior-level internal staff, who take into account similar, recent instances of
environmental remediation issues, and studies of our sites, among other considerations;
Technologies available that can be used for remediation; and
The number and financial condition of other potentially responsible parties and the extent of their responsibility
for the costs of study and remediation.
Our accrued environmental liabilities as of August 31, 2014 included $1 million related to third party investigation costs for the
Portland Harbor Superfund site. 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 it is likely or reasonably possible that we may incur in connection with the Site, although such costs could
be material to our financial position, results of operations, cash flows and liquidity. Therefore, no additional amounts have been
accrued. 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.
Inventories
Our inventories primarily consist of scrap metal (ferrous, nonferrous, processed and unprocessed), nonferrous recovered joint
product, used and salvaged vehicles, semi-finished steel products (billets) and finished steel products (primarily rebar, merchant
bar and wire rod). Inventories are stated at the lower of cost or market. We consider estimated future selling prices when determining
the estimated net realizable value for our inventory. As MRB generally sells its export recycled ferrous metal under contracts that
provide for shipment within 30 to 60 days after the price is agreed, we utilize the selling prices under committed contracts and
sales orders for determining the estimated market price of quantities on hand.
The accounting process we use to record metal quantities relies on significant estimates. With respect to unprocessed metal
inventory, we rely on weighed quantities that are reduced by estimated amounts that are moved into production. These estimates
utilize estimated recoveries and yields that are based on historical trends. Over time, these estimates are reasonably good indicators
of what is ultimately produced; however, actual recoveries and yields can vary depending on product quality, moisture content
and source of the unprocessed metal. If ultimate recoveries and yields are significantly different than estimated, the value of our
inventory could be materially overstated or understated. To assist in validating the reasonableness of these estimates, we periodically
review shrink factors and perform monthly physical inventory estimates. However, due to variations in product density, holding
period and production processes utilized to manufacture the product, physical inventories will not necessarily detect all variances.
To mitigate this risk, we adjust the ferrous physical inventories when the volume of a commodity is low and a physical inventory
count can more accurately estimate the remaining volume.
Business Combinations
In a business combination, we recognize the assets acquired, the liabilities assumed, and any noncontrolling interests in the acquiree
at the acquisition date, measured at their fair values as of that date, generally using a market-based income approach. Measuring
assets and liabilities at fair value requires us to determine the price that would be paid by a third party market participant based
on the highest and best use of the assets or interests acquired. We utilize management estimates that incorporate input from an
independent third party valuation firm in our determination of these fair values. Such estimates and valuations require us to make
significant assumptions, including projections of future events and operating performance and determining the highest and best
use of the assets or interests acquired. Acquisition costs are expensed as incurred.
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SCHNITZER STEEL INDUSTRIES, INC.
Revenue Recognition
We recognize revenue when we have a contract or purchase order from a customer with a fixed price, the title and risk of loss
transfer to the buyer and collectibility is reasonably assured. Title for both metal and finished steel products transfers based on
contract terms. A significant portion of our ferrous export sales of recycled metal are made with letters of credit, reducing credit
risk. However, domestic recycled ferrous metal sales, nonferrous sales and sales of finished steel are generally made on open
account. Nonferrous export sales typically require a deposit prior to shipment. All sales made on open account are evaluated for
collectibility prior to revenue recognition. Additionally, when detailed documents support revenue recognition based on transfer
of title and risk of loss we recognize revenues on partially loaded shipments, which requires an estimate of the product weight
involved in any partial shipments at period end. For APB, retail revenues are recognized when customers pay for parts, and
wholesale product revenues are recognized when customer weight certificates are received following shipment. Historically, there
have been very few sales returns and adjustments that impact the ultimate collection of revenues; therefore, no material provisions
have been made when the sale is recognized. We present taxes assessed by governmental authorities collected from customers on
a net basis. Therefore, the taxes are excluded from revenue and are shown as a liability on our Consolidated Balance Sheets until
remitted. See the discussion on credit risk contained in Item 7A of this report.
Recently Issued Accounting Standards
For a description of recent accounting pronouncements that may have an impact on our financial condition, results of operations
or cash flows, see Note 3 – Recent Accounting Pronouncements in the Notes to the Consolidated Financial Statements in Part II,
Item 8 of this report.
Non-GAAP Financial Measures
Debt, net of cash
Debt, net of cash is the difference between (i) the sum of long-term debt and short-term debt (i.e., total debt) and (ii) cash and cash
equivalents. We believe that debt, net of cash is a useful measure for investors because, as cash and cash equivalents can be used,
among other things, to repay indebtedness, netting this against total debt is a useful measure of our leverage.
The following is a reconciliation of debt, net of cash (in thousands):
Short-term borrowings
Long-term debt, net of current maturities
Total debt
Less: cash and cash equivalents
Total debt, net of cash
Net borrowings (repayment) of debt
August 31, 2014 August 31, 2013 August 31, 2012
$
$
523
$
9,174
$
318,842
319,365
25,672
372,663
381,837
13,481
293,693
$
368,356
$
683
334,629
335,312
89,863
245,449
Net borrowings (repayment) of debt is the sum of borrowings from long-term debt, repayments of long-term debt, proceeds from
line of credit, and repayment of line of credit. We present this amount as the net change in our borrowings (repayment) for the
period because we believe it is useful for investors as a meaningful presentation of the change in debt.
The following is a reconciliation of net borrowings (repayment) of debt (in thousands):
Borrowings from long-term debt
Proceeds from line of credit
Repayment of long-term debt
Repayment of line of credit
Net borrowings (repayment) of debt
Fiscal 2014
313,207
$
Fiscal 2013
265,858
$
Fiscal 2012
439,070
$
469,500
(368,496)
(478,000)
(63,789) $
545,500
(230,923)
(537,000)
43,435
$
495,500
(507,745)
(495,500)
(68,675)
$
Adjusted operating income (loss), adjusted net income (loss) and adjusted diluted earnings per share
We present adjusted consolidated operating income (loss) and adjusted operating income (loss) for the MRB segment because we
believe these measures provide a meaningful presentation of our results from our core underlying business operations excluding
adjustments for goodwill and other asset impairment charges and restructuring charges and other exit-related costs that are not
42 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
related to our core underlying business operational performance and improve period-to-period comparability of our results from
our core underlying business operations.
The following is a reconciliation of consolidated adjusted operating income (loss) and MRB operating income (loss) (in thousands):
Fiscal 2014
Fiscal 2013
Fiscal 2012
Consolidated operating income (loss):
As reported
Goodwill impairment charge
Other asset impairment charges
Restructuring charges and other exit-related costs
Adjusted
MRB operating income (loss):
As reported
Goodwill impairment charge
Other asset impairment charges
Adjusted
$
20,316
$
—
1,460
6,967
(327,789) $
321,000
13,053
7,906
28,743
$
14,170
$
30,083
$
—
928
(311,549) $
321,000
13,053
$
$
$
53,668
—
—
5,012
58,680
63,872
—
—
31,011
$
22,504
$
63,872
We present adjusted net income (loss) from continuing operations attributable to SSI and adjusted diluted earnings per share from
continuing operations attributable to SSI because we believe these measures provide a meaningful presentation of the our results
from our core underlying business operations excluding adjustments for goodwill and other asset impairments, restructuring charges
and other exit-related costs, and valuation allowances on deferred tax assets that are not related to our core underlying business
operational performance and improve the period-to-period comparability of our results from its core underlying business operations.
The following is a reconciliation of adjusted net income (loss) from continuing operations attributable to SSI and adjusted diluted
earnings per share from continuing operations attributable to SSI (in thousands, except per share data):
Fiscal 2014
Fiscal 2013
Fiscal 2012
Net income (loss) from continuing operations attributable to SSI:
As reported
Goodwill impairment charge, net of tax
Other asset impairment charges, net of tax
Restructuring charges and other exit-related costs, net of tax
Valuation allowance on deferred tax assets
$
5,067
$
—
949
5,911
—
Adjusted
$
11,927
$
Diluted earnings per share from continuing operations attributable to SSI:
As reported
Goodwill impairment charge, net of tax, per share
Other asset impairment charges, net of tax, per share
Restructuring charges and other exit-related costs, net of tax, per share
Valuation allowance on deferred tax assets, per share
Adjusted(1)
____________________________
(1) Does not foot due to rounding.
0.19
—
0.04
0.22
—
$
0.44
$
(281,442) $
254,473
27,404
3,222
8,819
5,311
11,043
(1,796) $
—
—
206
30,832
(10.56)
9.55
0.33
0.20
0.41
(0.07) $
0.99
0.12
—
—
0.01
1.12
We believe that these non-GAAP financial measures allow for a better understanding of our operating and financial performance.
These non-GAAP financial measures should be considered in addition to, but not as a substitute for, the most directly comparable
U.S. GAAP measures. Although we find these non-GAAP financial measures useful in evaluating the performance of our business,
our reliance on these measures is limited because the adjustments often have a material impact on our consolidated financial
statements presented in accordance with GAAP. Therefore, we typically use these adjusted amounts in conjunction with our GAAP
results to address these limitations.
43 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Commodity Price Risk
We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products, ferrous
and nonferrous metals, including scrap metal, autobodies and other commodities. The timing and magnitude of industry cycles
are difficult to predict and are impacted by general economic conditions. We respond to increases and decreases in forward selling
prices by adjusting purchase prices on a timely basis. We actively manage our exposure to commodity price risk and monitor the
actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. Sales contracts
are based on prices negotiated with our customers, and generally orders are placed 30 to 60 days ahead of shipment date. However,
financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or
when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter
based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling
prices, a 10% decrease in the selling price of inventory would not have had a material NRV impact on any of our operating segments
as of August 31, 2014.
Interest Rate Risk
We are exposed to market risk associated with changes in interest rates related to our debt obligations. Our credit line and revolving
credit facility are subject to variable interest rates and therefore have exposure to changes in interest rates. If market interest rates
had changed 10% from actual interest rate levels in fiscal 2014 or 2013, the effect on our interest expense and net income would
not have been material.
Credit Risk
Credit risk relates to the risk of loss that might occur as a result of non-performance by counterparties of their contractual obligations
to take delivery of scrap metal and finished steel products and to make financial settlements of these obligations, or to provide
sufficient quantities of scrap metal or payment to settle advances, loans and other contractual receivables in connection with
demolition and scrap extraction projects. We manage our exposure to credit risk through a variety of methods, including shipping
ferrous scrap metal exports under letters of credit, collection of deposits prior to shipment for certain nonferrous export customers,
establishment of credit limits for sales on open terms and designation of collateral and financial guarantees securing advances,
loans and other contractual receivables.
MRB generally ships ferrous bulk sales to foreign customers under contracts supported by letters of credit issued or confirmed
by banks it deems creditworthy. The letters of credit ensure payment by the customer. As MRB generally sells its export recycled
ferrous metal under contracts or orders that generally provide for shipment within 30 to 60 days after the price is agreed, MRB’s
customers typically do not have difficulty obtaining letters of credit from their banks in periods of rising ferrous prices, as the
value of the letters of credit are collateralized by the value of the inventory on the ship. However, in periods of significantly
declining prices, MRB’s customers may not be able to obtain letters of credit for the full sales value of the inventory to be shipped.
As such, we may need to extend credit on open terms for the difference between the sales value under the contract and the value
supported by the letter of credit. In addition, we could be exposed to loss if a customer fails to pay or the bank providing the letter
of credit fails.
As of August 31, 2014 and 2013, 39% and 49%, respectively, of our trade accounts receivable balance were covered by letters of
credit. Of the remaining balance, 96% was less than 60 days past due as of August 31, 2014 and 2013.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency exchange rate risk, mainly associated with sales transactions and related accounts receivable
denominated in the U.S. dollar by our Canadian subsidiary with a functional currency of the Canadian dollar. In certain instances,
we use derivatives to manage some portion of this risk. Our derivatives are agreements with independent counterparties that
provide for payments based on a notional amount. As of August 31, 2014, all of our derivative transactions were related to actual
or anticipated economic transactions in the normal course of business. A change in foreign exchange rates by 10% would have
changed the fair value of these contracts reported in our Condensed Consolidated Balance Sheets by $2 million at August 31,
2014.
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SCHNITZER STEEL INDUSTRIES, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Annual Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting,
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and
principal financial officers and effected by the Company’s Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting includes policies and procedures that relate to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; provide reasonable
assurance that transactions are recorded as necessary to permit the preparation of the Company’s consolidated financial statements
in accordance with generally accepted accounting principles and that the receipts and expenditures of the Company are being
made only in accordance with authorization of the Company’s management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have
a material effect on the Company’s consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projection
of any evaluation of effectiveness to future periods is subject to the risk that controls may become inadequate because of changes
in conditions or that the degree of compliance with the policies and procedures may deteriorate.
Management of the Company assessed the effectiveness of the Company’s internal control over financial reporting using the
criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on its assessment, management determined that the Company’s internal control over
financial reporting was effective as of August 31, 2014.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the Company’s consolidated financial
statements included in this Annual Report, also audited the effectiveness of the Company’s internal control over financial reporting
as of August 31, 2014, as stated in their report included herein.
Tamara L. Lundgren
President and Chief Executive Officer
October 28, 2014
Richard D. Peach
Senior Vice President and Chief Financial Officer
October 28, 2014
45 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Schnitzer Steel Industries, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations,
comprehensive income (loss), equity and cash flows present fairly, in all material respects, the financial position of Schnitzer
Steel Industries, Inc. and its subsidiaries at August 31, 2014 and 2013, and the results of their operations and their cash flows
for each of the three years in the period ended August 31, 2014 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial statement schedule index appearing under Item 15(a)(2)
presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of August 31, 2014, based on criteria established in Internal Control - Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and financial statement schedules, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express
opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Portland, Oregon
October 28, 2014
46 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Deferred income taxes
Refundable income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Investments in joint venture partnerships
Goodwill
Intangibles, net
Other assets
Total assets
Liabilities and Equity
Current liabilities:
Short-term borrowings
Accounts payable
Accrued payroll and related liabilities
Environmental liabilities
Accrued income taxes
Other accrued liabilities
Total current liabilities
Deferred income taxes
Long-term debt, net of current maturities
Environmental liabilities, net of current portion
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Schnitzer Steel Industries, Inc. (“SSI”) shareholders’ equity:
Preferred stock – 20,000 shares $1.00 par value authorized, none issued
Class A common stock – 75,000 shares $1.00 par value authorized,
26,384 and 26,171 shares issued and outstanding
Class B common stock – 25,000 shares $1.00 par value authorized,
306 and 393 shares issued and outstanding
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total SSI shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See Notes to the Consolidated Financial Statements.
47 / Schnitzer Steel Industries, Inc. Form 10-K 2014
August 31,
2014
2013
$
25,672
189,359
216,172
6,865
1,756
24,108
463,932
523,433
14,624
325,903
9,835
17,483
$ 1,355,210
$
13,481
188,270
236,049
3,750
3,521
22,159
467,230
564,426
14,808
327,264
13,264
18,520
$ 1,405,512
$
$
523
103,453
32,127
1,062
3,202
36,903
177,270
22,746
318,842
47,287
13,088
579,233
9,174
96,348
24,002
754
388
35,468
166,134
22,929
372,663
49,040
13,547
624,313
—
—
26,384
26,171
306
19,164
737,571
(12,641)
770,784
5,193
775,977
$ 1,355,210
393
7,476
751,879
(9,361)
776,558
4,641
781,199
$ 1,405,512
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenues
Operating expense:
Cost of goods sold
Selling, general and administrative
Income from joint ventures
Goodwill impairment charge
Other asset impairment charges
Restructuring charges and other exit-related costs
Operating income (loss)
Interest expense
Other income, net
Income (loss) from continuing operations before income taxes
Income tax (expense) benefit
Income (loss) from continuing operations
Income from discontinued operations, net of tax
Net income (loss)
Net income attributable to noncontrolling interests
Net income (loss) attributable to SSI
Basic:
Income (loss) per share from continuing operations attributable to SSI
Income per share from discontinued operations attributable to SSI
Net income (loss) per share attributable to SSI
Diluted:
Income (loss) per share from continuing operations attributable to SSI
Income per share from discontinued operations attributable to SSI
Net income (loss) per share attributable to SSI
Weighted average number of common shares:
Basic
Diluted
Dividends declared per common share
Year Ended August 31,
2013
2012
2014
$ 2,543,583
$ 2,621,911
$ 3,340,938
2,324,823
2,415,391
3,079,716
191,213
(1,196)
—
1,460
6,967
20,316
(10,804)
1,223
10,735
(2,001)
8,734
857
9,591
(3,667)
5,924
0.19
0.03
0.22
0.19
0.03
0.22
$
$
$
$
$
193,533
(1,183)
321,000
13,053
7,906
(327,789)
(9,743)
83
(337,449)
57,426
(280,023)
—
(280,023)
(1,419)
(281,442) $
(10.56) $
—
(10.56) $
(10.56) $
—
(10.56) $
205,178
(2,636)
—
—
5,012
53,668
(11,880)
1,168
42,956
(14,039)
28,917
—
28,917
(1,513)
27,404
1.00
—
1.00
0.99
—
0.99
26,834
27,000
26,656
26,656
0.750
$
0.750
$
27,317
27,553
0.410
$
$
$
$
$
$
See Notes to the Consolidated Financial Statements.
48 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments(1)
Cash flow hedges, net(2)
Pension obligations, net(3)
Total other comprehensive loss, net of tax
Comprehensive income (loss)
Less amounts attributable to noncontrolling interests:
Net income attributable to noncontrolling interests
Foreign currency translation adjustment attributable to
redeemable noncontrolling interest
Total amounts attributable to noncontrolling interests
Comprehensive income (loss) attributable to SSI
_____________________________
Year Ended August 31,
2013
2012
2014
$
9,591
$ (280,023) $
28,917
(4,240)
179
781
(3,280)
6,311
(9,051)
20
3,289
(5,742)
(285,765)
(2,143)
(116)
(2,220)
(4,479)
24,438
(3,667)
(1,419)
(1,513)
—
(3,667)
2,644
$
(1,030)
(2,449)
$ (288,214) $
350
(1,163)
23,275
(1) Net of tax expense (benefit) of $0 thousand, $(387) thousand and $(109) thousand for each respective period.
(2) Net of tax expense (benefit) of $(5) thousand, $23 thousand and $(24) thousand for each respective period.
(3) Net of tax expense (benefit) of $468 thousand, $1,890 thousand and $(1,290) thousand for each respective period.
See Notes to the Consolidated Financial Statements.
49 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands)
Common Stock
Class A
Class B
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total SSI
Shareholders’
Equity
Noncontrolling
Interests
Total
Equity
24,241
$ 24,241
3,060
$
3,060
$
762
$ 1,065,109
$
1,540
$
1,094,712
$
6,524
$ 1,101,236
Balance as of August 31, 2011
Net income(1)
Other comprehensive loss, net of tax(2)
Distributions to noncontrolling interests
Share repurchases
Restricted stock withheld for taxes
Issuance of restricted stock
Stock options exercised
—
—
—
—
—
—
(1,124)
(1,124)
(69)
199
25
(69)
199
25
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Class B common stock converted to Class A common stock
1,947
1,947
(1,947)
(1,947)
Share-based compensation expense
Excess tax deficiency from stock options exercised and
restricted stock units vested
Cash dividends
Balance as of August 31, 2012
Net income (loss)(1)
Other comprehensive loss, net of tax(2)
Distributions to noncontrolling interests
Restricted stock withheld for taxes
Issuance of restricted stock
Stock options exercised
Class B common stock converted to Class A common stock
Share-based compensation expense
Excess tax deficiency from stock options exercised and
restricted stock units vested
Adjustments to fair value of redeemable noncontrolling interest
Cash dividends
—
—
—
—
—
—
—
—
—
—
—
—
25,219
25,219
1,113
1,113
—
—
—
—
—
—
(102)
(102)
319
15
720
—
—
—
—
319
15
720
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(720)
(720)
—
—
—
—
—
—
—
—
—
—
—
(6,570)
(2,238)
(199)
583
—
9,618
(1,140)
—
816
—
—
—
(2,571)
(319)
301
—
11,475
(2,226)
—
—
27,404
—
—
(25,500)
—
—
—
—
—
—
(10,989)
1,056,024
(281,442)
—
—
—
—
—
—
—
—
(2,449)
(20,254)
—
(4,129)
—
—
—
—
—
—
—
—
—
27,404
(4,129)
—
(33,194)
(2,307)
—
608
—
9,618
(1,140)
(10,989)
(2,589)
1,080,583
—
(6,772)
—
—
—
—
—
—
—
—
—
(281,442)
(6,772)
—
(2,673)
—
316
—
11,475
(2,226)
(2,449)
(20,254)
2,676
—
(4,087)
—
—
—
—
—
—
—
—
5,113
2,322
—
(2,794)
—
—
—
—
—
—
—
—
30,080
(4,129)
(4,087)
(33,194)
(2,307)
—
608
—
9,618
(1,140)
(10,989)
1,085,696
(279,120)
(6,772)
(2,794)
(2,673)
—
316
—
11,475
(2,226)
(2,449)
(20,254)
50 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
Common Stock
Class A
Class B
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total SSI
Shareholders’
Equity
Noncontrolling
Interests
Total
Equity
Balance as of August 31, 2013
26,171
26,171
393
393
7,476
Net income
Other comprehensive loss, net of tax
Distributions to noncontrolling interests
Restricted stock withheld for taxes
Issuance of restricted stock
Stock options exercised
Class B common stock converted to Class A common stock
Share-based compensation expense
Excess tax deficiency from stock options exercised and
restricted stock units vested
Cash dividends
Balance as of August 31, 2014
_____________________________
—
—
—
(59)
176
9
87
—
—
—
—
—
—
(59)
176
9
87
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(87)
(87)
—
—
—
—
—
—
—
—
—
(1,519)
(176)
231
—
14,506
(1,354)
751,879
5,924
—
—
—
—
—
—
—
—
—
(20,232)
(9,361)
—
(3,280)
—
—
—
—
—
—
—
—
776,558
5,924
(3,280)
—
(1,578)
—
240
—
14,506
(1,354)
(20,232)
4,641
3,667
—
(3,115)
—
—
—
—
—
—
—
781,199
9,591
(3,280)
(3,115)
(1,578)
—
240
—
14,506
(1,354)
(20,232)
26,384
$ 26,384
306
$
306
$
19,164
$
737,571
$
(12,641) $
770,784
$
5,193
$
775,977
(1) Net income attributable to noncontrolling interests at August 31, 2013 and 2012 excludes $(903) thousand and $(1,163) thousand, respectively, allocable to the redeemable noncontrolling interest, which, prior to its purchase
on March 8, 2013, was reported in the mezzanine section of the Consolidated Balance Sheets. See Note 13 - Redeemable Noncontrolling Interest for further detail.
(2) Other comprehensive loss, net of tax for the years ended August 31, 2013 and 2012 excludes $(1,030) thousand and $350 thousand, respectively, relating to the redeemable noncontrolling interest, which, prior to its purchase
on March 8, 2013, was reported in the mezzanine section of the Consolidated Balance Sheets. See Note 13 - Redeemable Noncontrolling Interest for further detail.
See Notes to the Consolidated Financial Statements.
51 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Year Ended August 31,
2013
2012
2014
$
9,591
$
(280,023) $
28,917
Goodwill impairment charge
Other asset impairment charges
Exit-related asset impairment charges
Depreciation and amortization
Deferred income taxes
Undistributed equity in earnings of joint ventures
Share-based compensation expense
Excess tax benefit from share-based payment arrangements
(Gain) loss on the disposal of assets
Unrealized foreign exchange (gain) loss, net
Bad debt expense, net
Changes in assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Income taxes
Prepaid expenses and other current assets
Intangibles and other long-term assets
Accounts payable
Accrued payroll and related liabilities
Other accrued liabilities
Environmental liabilities
Other long-term liabilities
Distributed equity in earnings of joint ventures
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions, net of cash acquired
Joint venture payments, net
Proceeds from sale of assets
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from line of credit
Repayment of line of credit
Borrowings from long-term debt
Repayment of long-term debt
Debt financing fees
Repurchase of Class A common stock
Taxes paid related to net share settlement of share-based payment arrangements
Excess tax benefit from share-based payment arrangements
Stock options exercised
Contributions from noncontrolling interest
Distributions to noncontrolling interest
Contingent consideration paid relating to business acquisitions
Dividends paid
Purchase of noncontrolling interest
Net cash used in financing activities
Effect of exchange rate changes on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents as of beginning of year
Cash and cash equivalents as of end of year
$
—
1,460
566
79,209
(3,815)
(1,196)
14,506
(194)
(1,126)
240
449
(16,360)
36,264
4,129
(2,453)
996
9,409
8,114
(91)
(1,581)
1,825
1,310
141,252
(39,147)
(2,160)
(3,765)
3,841
(41,231)
469,500
(478,000)
313,207
(368,496)
—
—
(1,578)
194
240
—
(3,115)
—
(20,126)
—
(88,174)
344
12,191
13,481
25,672
$
321,000
13,053
—
83,070
(59,102)
(1,183)
11,475
(343)
131
1,583
584
(79,118)
46,826
2,440
(13,852)
977
(10,901)
2,720
(1,770)
(146)
113
1,755
39,289
(90,381)
(25,366)
(2,194)
5,491
(112,450)
545,500
(537,000)
265,858
(230,923)
—
—
(2,673)
343
316
1,970
(2,794)
—
(20,010)
(24,734)
(4,147)
926
(76,382)
89,863
13,481
$
—
—
—
82,256
8,321
(2,307)
8,793
(817)
(135)
(334)
688
81,701
94,095
(20,018)
(4,010)
(82)
(26,074)
(13,161)
6,500
(2,201)
253
2,405
244,790
(78,560)
(6,567)
(92)
953
(84,266)
495,500
(495,500)
439,070
(507,745)
(1,282)
(33,194)
(2,307)
817
608
4,008
(4,087)
(4,485)
(11,455)
—
(120,052)
(71)
40,401
49,462
89,863
52 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest
Income taxes paid (refunds received), net
Schedule of noncash investing and financing transactions:
Purchases of property, plant and equipment included in current liabilities
Year Ended August 31,
2013
2012
2014
$
$
$
8,838
69
7,249
$
$
$
8,542
$
(483) $
10,968
24,517
8,922
$
15,826
See Notes to the Consolidated Financial Statements.
53 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Nature of Operations
Founded in 1906, Schnitzer Steel Industries, Inc. (the “Company”), 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 Company operates in three reporting segments as follows: the Metals Recycling Business (“MRB”), the Auto Parts Business
(“APB”) and the Steel Manufacturing Business (“SMB”). MRB buys, collects, processes, recycles, sells and brokers recycled
metal through its operation of one of the largest metals recycling businesses in North America. APB is one of the country’s leading
networks of self-service used auto parts stores. Additionally, APB is a supplier of ferrous and nonferrous material including
autobodies to MRB, which processes the autobodies into sellable recycled metal. SMB purchases recycled metal from MRB and
uses its mini-mill to process the recycled metal into finished steel products.
As of August 31, 2014, all of the Company’s facilities were located in the United States (“U.S.”) and its territories and Canada.
Note 2 – Summary of Significant Accounting Policies
Revision of Previously Issued Financial Statements
In the first quarter of fiscal 2014, an error was identified in the classification of the cash outflow of $24.7 million for the purchase
of a noncontrolling interest in a subsidiary as a use of cash in investing activities that, under generally accepted accounting
principles, should have been reflected as a use of cash in financing activities in the Company’s consolidated statement of cash
flows included in the previously reported financial statements for the year ended August 31, 2013 included in the 2013 Annual
Report on Form 10-K.
The Company assessed the materiality of this classification error under the guidance in ASC 250-10 relating to SEC’s Staff
Accounting Bulletin (“SAB”) No. 99, Materiality, and concluded that the previously issued financial statements for the year ended
August 31, 2013 were not materially misstated. The Company also evaluated the impact of correcting the error through an adjustment
to its financial statements and concluded, based on the guidance within ASC 250-10 relating to SAB No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, to revise its previously
issued financial statements to reflect the impact of the correction of the classification error. The consolidated statement of cash
flows for the year ended August 31, 2013 presented in the accompanying Consolidated Financial Statements has been corrected.
The revision had no impact on the Company’s consolidated balance sheets, consolidated results of operations, earnings (loss) per
share and net cash provided by operating activities in the consolidated statement of cash flows.
The effect of the revision on the line items within the Company’s consolidated statement of cash flows for the year ended August
31, 2013 is as follows (in thousands):
Investing Activities
Purchase of noncontrolling interest
Net cash used in investing activities
Financing Activities
Purchase of noncontrolling interest
Net cash provided by (used in) financing activities
Principles of Consolidation
Year Ended August 31, 2013
As Reported
Adjustments
As Revised
$
(24,734) $
(137,184)
24,734
$
24,734
—
(112,450)
—
20,587
(24,734)
(24,734)
(24,734)
(4,147)
The Consolidated Financial Statements include the accounts of the Company and its majority-owned and wholly-owned
subsidiaries. The equity method of accounting is used for investments in joint ventures over which the Company has significant
influence but does not have effective control. All significant intercompany account balances, transactions, profits and losses have
been eliminated. All transactions and relationships with potential variable interest entities are evaluated to determine whether the
Company is the primary beneficiary of the entities, therefore requiring consolidation. The Company does not have any variable
interest entities requiring consolidation.
54 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Accounting Changes
In February 2013, an accounting standards update was issued that amends the reporting of amounts reclassified out of accumulated
other comprehensive income. This standard does not change the current requirements for reporting net income or other
comprehensive income in the financial statements. However, the guidance requires an entity to provide information about the
amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement
where net income is presented or in the notes to the financial statements. The Company adopted the new requirement in the first
quarter of fiscal 2014 with no impact to the Consolidated Financial Statements, except for the change in presentation. The Company
has elected to present amounts reclassified out of accumulated other comprehensive income in the notes to the financial statements.
See Note 14 - Accumulated Other Comprehensive Loss for further detail.
During the first quarter of fiscal 2014, the Company elected to change its annual goodwill impairment testing date from February
28 to July 1 of each year. See Note 7 - Goodwill and Other Intangible Assets, net for further detail.
Cash and Cash Equivalents
Cash and cash equivalents include short-term securities that are not restricted by third parties and have an original maturity date
of 90 days or less. Included in accounts payable are book overdrafts representing outstanding checks in excess of funds on deposit
of $35 million and $31 million as of August 31, 2014 and 2013, respectively.
Accounts Receivable, net
Accounts receivable represent amounts due from customers on product and other sales. These accounts receivable, which are
reduced by an allowance for doubtful accounts, are recorded at the invoiced amount and do not bear interest. The Company
evaluates the collectability of its accounts receivable based on a combination of factors, including whether sales were made pursuant
to letters of credit. In cases where management is aware of circumstances that may impair a specific customer’s ability to meet
its financial obligations, management records a specific allowance against amounts due and reduces the net recognized receivable
to the amount the Company believes will be collected. For all other customers, the Company maintains an allowance that considers
the total receivables outstanding, historical collection rates and economic trends. Accounts are written off when all efforts to collect
have been exhausted. The allowance for doubtful accounts was $3 million as of August 31, 2014 and 2013.
Inventories, net
The Company’s inventories primarily consist of scrap metal (ferrous, nonferrous, processed and unprocessed), nonferrous recovered
joint product (nonferrous arising from the manufacturing process), used and salvaged vehicles, semi-finished steel products (billets)
and finished steel products (primarily rebar, merchant bar and wire rod). Inventories are stated at the lower of cost or market. MRB
determines the cost of ferrous and nonferrous inventories using the average cost method and capitalizes substantially all direct
costs and yard costs into inventory. MRB allocates material and production costs to joint products using the gross margin method.
APB determines the cost for used and salvaged vehicle inventory based on the average price the Company pays for a vehicle and
capitalizes the vehicle cost into inventory. SMB determines the cost of its finished steel product inventory based on weighted
average costs and capitalizes all direct and indirect costs of manufacturing into inventory. Indirect costs of manufacturing include
general plant costs, maintenance and yard costs. The Company considers estimated future selling prices when determining the
estimated net realizable value for its inventory. As MRB generally sells its export recycled ferrous metal under contracts that
provide for shipment within 30 to 60 days after the price is agreed, it utilizes the selling prices under committed contracts and
sales orders for determining the estimated market price of quantities on hand that will be shipped under these contracts and orders.
The Company performs periodic physical inventories to verify the quantity of inventory on hand. Due to variations in product
density, holding period and production processes utilized to manufacture the product, physical inventories will not necessarily
detect all variances for metal inventory such that estimates of quantities are required. To mitigate this risk, the Company adjusts
its ferrous physical inventories when the volume of a commodity is low and a physical inventory count can more accurately
estimate the remaining volume.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost. Expenditures for major additions and improvements are capitalized, while
routine repair and maintenance costs are expensed as incurred. Interest related to the construction of qualifying assets is capitalized
as part of the construction costs and was not material to any of the periods presented. When assets are retired or sold, the related
cost and accumulated depreciation are removed from the accounts and resulting gains or losses are generally included in operating
expenses. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the remaining lease term.
55 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of August 31, 2014, the useful lives used for depreciation and amortization were as follows:
Machinery and equipment
Land improvements
Buildings and leasehold improvements
Office equipment
Enterprise Resource Planning (“ERP”) systems
Useful Life
(In Years)
3 to 40
3 to 35
5 to 40
2 to 20
11 to 17
Long-lived assets held and used by the Company 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 the Company’s estimate of future
undiscounted cash flows of the operations related to the assets, an impairment is recorded for the difference between the carrying
value and the fair value of the assets. During the year ended August 31, 2014, the Company recorded an impairment charge on
long-lived assets held and used of $1 million, a portion of which is reported within other asset impairment charges and the remainder
reported within restructuring charges and exit-related costs in the Consolidated Statements of Operations. There were no material
impairments to the carrying value of long-lived assets held and used during the years ended August 31, 2013 and 2012.
Investments in Joint Venture Partnerships
As of August 31, 2014 and 2013, the Company had five 50%-owned joint venture interests which were accounted for under the
equity method of accounting and presented as part of MRB operations. The Company’s investments in equity method joint ventures
have resulted in cumulative undistributed earnings of $10 million and $11 million as of August 31, 2014 and 2013, respectively.
A loss in value of an investment in a joint venture partnership that is other than a temporary decline is recognized. Management
considers all available evidence to evaluate the realizable value of its investments including the length of time and the extent to
which the fair value has been less than cost, the financial condition and near-term prospects of the joint venture business, and the
Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair
value. Once management determines that an other-than-temporary impairment exists, the investment is written down to its fair
value, which establishes a new cost basis. The Company determines fair value using Level 3 inputs under the fair value hierarchy
using an income approach based on a discounted cash flow analysis.
During the fiscal year ended August 31, 2013, the Company recorded an impairment charge related to an investment in a joint
venture partnership of $2 million, which is reported within other asset impairment charges in the Consolidated Statements of
Operations. See Note 20 - Related Party Transactions for further detail on transactions with joint ventures.
Goodwill and Other Intangible Assets, net
Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed
in a business combination measured at fair value. The Company evaluates goodwill for impairment annually and upon the occurrence
of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired.
Impairment of goodwill is tested at the reporting unit level. A reporting unit is an operating segment or one level below an operating
segment (referred to as a component). The Company has determined that its reporting units for which goodwill has been allocated
are equivalent to the Company’s operating segments, as all of the components of each operating segment meet the criteria for
aggregation.
When testing goodwill for impairment, the Company has the option to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a
reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines that an
impairment is more likely than not, the Company is then required to perform the two-step quantitative impairment test, otherwise
no further analysis is required. The Company also may elect not to perform the qualitative assessment and, instead, proceed directly
to the two-step quantitative impairment test.
In the first step of the two-step quantitative impairment test, the fair value of a reporting unit is compared to its carrying value. If
the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of
measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of
the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the
implied fair value of goodwill, an impairment loss will be recognized in an amount equal to that excess.
The Company estimates the fair value of its reporting units using an income approach based on the present value of expected
future cash flows, including terminal value, utilizing a market-based weighted average cost of capital (“WACC”) determined
56 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
separately for each reporting unit. The determination of fair value involves the use of significant estimates and assumptions,
including revenue growth rates driven by future commodity prices and volume expectations, operating margins, capital
expenditures, working capital requirements, tax rates, terminal growth rates, discount rates, benefits associated with a taxable
transaction and synergistic benefits available to market participants. In addition, to corroborate the reporting units’ valuation, the
Company uses a market approach based on earnings multiple data and a reconciliation of the Company’s estimate of the aggregate
fair value of the reporting units to the Company’s market capitalization, including consideration of a control premium.
For the years ended August 31, 2014 and 2013, in accordance with an accounting standard update adopted in fiscal 2013, the
Company tested indefinite-lived intangible assets by first assessing qualitative factors to determine whether it was necessary to
perform the quantitative impairment test. Under the adopted standard, if the Company believes, as a result of its qualitative
assessment, that it is more-likely-than-not that the fair value of the indefinite-lived intangible asset is less than its carrying amount,
the quantitative impairment test is required. Otherwise, no further testing is required. For the year ended August 31, 2012, using
the standard in place prior to fiscal 2013, the Company tested indefinite-lived intangible assets for impairment by either comparing
the carrying value of the intangible to the projected discounted cash flows from the intangible or using the relief from royalties
method. If the carrying value exceeded the projected discounted cash flows attributed to the indefinite-lived intangible asset, the
carrying value was no longer considered recoverable and the Company recorded an impairment. The Company did not record any
material impairment charges on indefinite-lived intangible assets in any of the periods presented.
The Company tests intangible assets subject to amortization for impairment when certain triggering events or circumstances
indicate that their carrying value may be impaired. If the carrying value exceeds the Company’s estimate of future undiscounted
cash flows of the operations related to the assets, an impairment is recorded for the difference between the carrying value and the
fair value of the asset. The Company did not record any impairment charges on intangible assets subject to amortization in any of
the periods presented.
See Note 7 – Goodwill and Other Intangible Assets, net for further detail.
Acquisitions
The Company recognizes the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date. Contingent purchase consideration is recorded at fair value at the
date of acquisition. Any excess purchase price over the fair value of the net assets acquired is recorded as goodwill. Within one
year from the date of acquisition, the Company may update the value allocated to the assets acquired and liabilities assumed and
the resulting goodwill balances as a result of information received regarding the valuation of such assets and liabilities that was
not available at the time of purchase. Measuring assets and liabilities at fair value requires the Company to determine the price
that would be paid by a third party market participant based on the highest and best use of the assets or interests acquired. Acquisition
costs are expensed as incurred. See Note 6 – Business Combinations for further detail.
Other Assets
The Company’s other assets, exclusive of prepaid expenses, consist primarily of receivables from insurers, notes and other
contractual receivables, and assets held for sale. Other assets are reported within either prepaid expenses and other current assets
or other assets in the Consolidated Balance Sheets based on their expected use either during or beyond the current operating cycle
of one year from the reporting date.
Receivables from insurers represent the portion of insured losses expected to be recovered from the Company’s insurance carriers
and are recorded at the time the Company records a liability for an insured loss. The receivable is recorded at an amount not to
exceed the recorded loss and only if the terms of legally enforceable insurance contracts support that the insurance recovery will
not be disputed and is deemed collectible.
Notes receivable consist primarily of loans to entities in the business of extracting scrap metal through demolition and other
activities. Repayment of these loans is in either cash or scrap metal. Other contractual receivables consist primarily of amounts
due from scrap and demolition entities under financial guarantee arrangements. The Company performs periodic reviews of its
notes and other contractual receivables to identify credit risks and to assess the overall collectability of the receivables, which
typically involves consideration of the value of collateral in the form of scrap metal extracted from demolition and construction
projects. A note or other contractual receivable is considered impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due in accordance with the contractual terms of the agreement. Once a
note or other contractual receivable has been identified as impaired, it is measured based on the present value of payments expected
to be received, discounted at the receivable’s contractual interest rate, or for arrangements that are solely dependent on collateral
for repayment, the estimated fair value of the collateral less estimated costs to sell. If the carrying value of the receivable exceeds
its recoverable amount, an impairment is recorded for the difference. During the fiscal year ended August 31, 2013, the Company
57 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
recorded an impairment charge related to other contractual receivables of $8 million, which represents the full amount of the
allowance for credit losses on notes and other contractual receivables as of August 31, 2014 and 2013, and which is reported within
other asset impairment charges in the fiscal 2013 Consolidated Statement of Operations.
A long-lived asset is classified as held for sale upon meeting criteria specified in the accounting standards. An asset classified as
held for sale is measured at the lower of its carrying amount or fair value less cost to sell. An impairment loss is recognized for
any initial or subsequent write-down of the asset to its fair value less cost to sell. The Company determines fair value using Level
3 inputs under the fair value hierarchy consisting of information provided by brokers and other external sources along with
management’s own assumptions. During the fiscal years ended August 31, 2014 and 2013, the Company recorded an impairment
charge related to assets held for sale of $1 million and $3 million, respectively, which is reported within other asset impairment
charges in the Consolidated Statements of Operations.
Other Asset Impairment Charges
The following impairment charges were recorded within other asset impairment charges in the Consolidated Statements of
Operations for the years ended August 31 (in thousands):
Investment in joint venture partnership
Contractual receivable
Assets held for sale
Other
Total
Restructuring Charges
2014
2013
— $
—
928
532
2,411
7,803
2,526
313
1,460
$
13,053
$
$
Restructuring charges consist of severance, contract termination and other restructuring-related costs. A liability for severance
costs is typically recognized when the plan of termination has been communicated to the affected employees and is measured at
its fair value at the communication date. Contract termination costs consist primarily of costs that will continue to be incurred
under operating leases for their remaining terms without economic benefit to the Company. A liability for contract termination
costs is recognized at the date the Company ceases using the rights conveyed by the lease contract and is measured at its fair value,
which is determined based on the remaining contractual lease rentals reduced by estimated sublease rentals. A liability for other
restructuring-related costs is measured at its fair value in the period in which the liability is incurred. See Note 12 - Restructuring
Charges and Other Exit-Related Costs for further detail.
Accrued Workers’ Compensation Costs
The Company is self-insured for workers’ compensation claims with exposure limited by various stop-loss insurance policies. The
Company estimates the costs of workers’ compensation claims based on the nature of the injury incurred and on guidelines
established by the applicable state. An accrual is recorded based upon the amount of unpaid claims as of the balance sheet date.
Accrued amounts recorded for individual claims are reviewed periodically as treatment progresses and adjusted to reflect additional
information that becomes available. The estimated cost of claims incurred but not reported is included in the accrual. The Company
accrued $9 million and $10 million for the estimated cost of unpaid workers’ compensation claims as of August 31, 2014 and
2013, respectively, which are included in other accrued liabilities in the Consolidated Balance Sheets.
Environmental Liabilities
The Company estimates future costs for known environmental remediation requirements and accrues for them on an undiscounted
basis when it is probable that the Company has incurred a liability and the related costs can be reasonably estimated but the timing
of incurring the estimated costs is unknown. The Company considers various factors when estimating its environmental liabilities.
Adjustments to the liabilities are recorded to selling, general and administrative expense and made when additional information
becomes available that affects the estimated costs to study or remediate any environmental issues or when expenditures are made
for which liabilities were established. Legal costs incurred in connection with environmental contingencies are expensed as incurred.
When only a wide range of estimated amounts can be reasonably established and no other amount within the range is a better
estimate than another, the low end of the range is recorded in the financial statements. In a number of cases, it is possible that the
Company may receive reimbursement through insurance or from other potentially responsible parties for a site. In these situations,
recoveries of environmental remediation costs from other parties are recognized when the claim for recovery is either realized or
realizable. The amounts recorded for environmental liabilities are reviewed periodically as site assessment and remediation
progresses at individual sites and adjusted to reflect additional information that becomes available. Due to evolving remediation
58 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
technology, changing regulations, possible third party contributions, the subjective nature of the assumptions used and other factors,
amounts accrued could vary significantly from amounts paid. See “Contingencies – Environmental” in Note 11 – Commitments
and Contingencies for further detail.
Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, debt and derivative
contracts. The Company uses the market approach to value its financial assets and liabilities, determined using available market
information. The net carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short term nature of these instruments. For long-term debt, which is primarily at variable interest rates, fair value
is estimated using observable inputs (Level 2) and approximates its carrying value. Derivative contracts are reported at fair value.
See Note 10 - Fair Value Measurements and Note 15 - Derivative Financial Instruments for further detail.
Fair Value Measurements
Fair value is measured using inputs from the three levels of the fair value hierarchy. Classification within the hierarchy is determined
based on the lowest level input that is significant to the fair value measurement. The three levels are described as follows:
• Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities.
• Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the determination of the fair value
of the asset or liability, either directly or indirectly.
• Level 3 – Unobservable inputs that are significant to the determination of fair value of the asset or liability.
When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize
the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. See Note
7 - Goodwill and Other Intangible Assets, net, Note 10 - Fair Value Measurements, Note 13 - Redeemable Noncontrolling Interest
and Note 15 - Derivative Financial Instruments for further detail.
Derivatives
The Company records derivative instruments in prepaid expenses and other current assets or other accrued liabilities in the
Consolidated Balance Sheets at fair value, and changes in the fair value are either recognized in other comprehensive income
(loss) in the Consolidated Statements of Comprehensive Income (Loss) or net income (loss) in the Consolidated Statements of
Operations, as applicable, depending on the nature of the underlying exposure, whether the derivative has been designated as a
hedge and, if designated as a hedge, the extent to which the hedge is effective. Amounts included in accumulated other
comprehensive loss are reclassified to earnings in the period in which earnings are impacted by the hedged items, in the period
that the hedged transaction is deemed no longer likely to occur, or in the period that the derivative is terminated. For cash flow
hedges, a formal assessment is made, both at the hedge’s inception and on an ongoing basis, to determine whether the derivatives
that are designated as hedging instruments have been highly effective in offsetting changes in the cash flows of hedged items and
whether those derivatives may be expected to remain highly effective in future periods. To the extent the hedge is determined to
be ineffective, the ineffective portion is immediately recognized in earnings. When available, quoted market prices or prices
obtained through external sources are used to measure a derivative instrument’s fair value. The fair value of these instruments is
a function of underlying forward commodity prices, related volatility, counterparty creditworthiness and duration of the contracts.
Cash flows from derivatives are recognized in the Consolidated Statements of Cash Flows in a manner consistent with the underlying
transactions. See Note 10 - Fair Value Measurements and Note 15 - Derivative Financial Instruments for further detail.
Derivative contracts for commodities used in normal business operations that are settled by physical delivery, among other criteria,
are eligible for and may be designated as normal purchases and normal sales. Contracts that qualify as normal purchases or normal
sales are not marked-to-market. The Company does not use derivative instruments for trading or speculative purposes.
Foreign Currency Translation and Transactions
Assets and liabilities of the Company’s operations in Canada are translated into U.S. dollars at the period-end exchange rate,
revenues and expenses of these operations are translated into U.S. dollars at the average exchange rate for the period, and cash
flows of these operations are translated into U.S. dollars using the exchange rates in effect at the time of the cash flows. Translation
adjustments are not included in determining net income (loss) for the period, but are recorded in accumulated other comprehensive
loss, a separate component of shareholders’ equity. Foreign currency transaction gains and losses are generated from the effects
of exchange rate changes on transactions denominated in a currency other than the functional currency of the Company, which is
the U.S. dollar. Gains and losses on foreign currency transactions are generally included in determining net income (loss) for the
period. The Company records these gains and losses in other income, net in the Consolidated Statements of Operations. Net realized
and unrealized foreign currency transaction gains (losses) were not material in any of the periods presented.
59 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Redeemable Noncontrolling Interest
The Company issued common stock of one of its subsidiaries to the noncontrolling interest holder of that subsidiary that, prior to
the Company’s purchase of that interest on March 8, 2013, had been redeemable both at the option of the holder and upon the
occurrence of an event that was not solely within the Company’s control. Since redemption of the noncontrolling interest was
outside of the Company’s control, this interest was presented on the Consolidated Balance Sheets in the mezzanine section under
the caption redeemable noncontrolling interest. If the interest had been redeemed, the Company would have been required to
purchase all of such interest at fair value on the date of redemption. Prior to its purchase by the Company on March 8, 2013, the
redeemable noncontrolling interest was presented at the greater of its carrying amount (adjusted for the noncontrolling interest’s
share of the allocation of income or loss of the subsidiary, dividends to and contributions from the noncontrolling interest) or its
fair value as of each measurement date. Any adjustments to the carrying amount of the redeemable noncontrolling interest for
changes in fair value prior to the Company’s purchase of the interest in March 2013 were recorded to retained earnings. See Note
13 – Redeemable Noncontrolling Interest for further detail.
Common Stock
Each share of Class A and Class B common stock is entitled to one vote. Additionally, each share of Class B common stock may
be converted to one share of Class A common stock. As such, the Company reserves one share of Class A common stock for each
share of Class B common stock outstanding. There are currently no meaningful distinctions between the rights of holders of Class
A shares and Class B shares.
Shareholder Rights Plan
Under its shareholder rights plan, the Company issued a dividend distribution of one preferred share purchase right (a “Right”)
for each share of Class A common stock or Class B common stock held by shareholders of record as of the close of business on
April 4, 2006. The Rights generally become exercisable if a person or group has acquired 15% or more of the Company’s outstanding
common stock or announces a tender offer or exchange offer which, if consummated, would result in ownership by a person or
group of 15% or more of the Company’s outstanding common stock (“Acquiring Person”). Each Right entitles shareholders to
buy one one-thousandth of a share of Series A Participating Preferred Stock (“Series A Shares”) of the Company at an exercise
price of $110, subject to adjustments. Holders of Rights (other than an Acquiring Person) are entitled to receive upon exercise
Series A Shares, or in lieu thereof, Class A common stock of the Company having a value of twice the Right’s then-current exercise
price. The Series A Shares are not redeemable by the Company and have voting privileges and certain dividend and liquidation
preferences. The Rights will expire on March 21, 2016, unless such date is extended or the Rights are redeemed or exchanged on
an earlier date.
Share Repurchases
The Company accounts for the repurchase of stock at par value. All shares repurchased are deemed retired. Upon retirement of
the shares, the Company records the difference between the weighted average cost of such shares and the par value of the stock
as an adjustment to additional paid-in capital, with the excess recorded to retained earnings when additional paid-in capital is not
sufficient.
Revenue Recognition
The Company recognizes revenue when it has a contract or purchase order from a customer with a fixed price, the title and risk
of loss transfer to the buyer and collectibility is reasonably assured. Title for both recycled metal and finished steel products
transfers based on contract terms. A significant portion of the Company’s ferrous export sales of recycled metal are made with
letters of credit, reducing credit risk. However, domestic recycled ferrous metal sales, nonferrous sales and sales of finished steel
are generally made on open account. Nonferrous export sales typically require a deposit prior to shipment. All sales made on open
account are evaluated for collectibility prior to revenue recognition. Additionally, the Company recognizes revenues on partially
loaded shipments when detailed documents support revenue recognition based on transfer of title and risk of loss. The Company
reports revenue net of the payments made to the supplier of scrap metal when the supplier, and not the Company, is responsible
for fulfillment, including the acceptability of the products purchased by the customer. For APB, retail revenues are recognized
when customers pay for parts, and wholesale product revenues are recognized when customer weight certificates are received
following shipments. Historically, there have been very few sales returns and adjustments that impact the ultimate collection of
revenues; therefore, no material provisions have been made when sales are recognized. The Company presents taxes assessed by
governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenues and are shown
as a liability on the Consolidated Balance Sheets until remitted.
60 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Freight Costs
The Company classifies shipping and handling costs billed to customers as revenue and the related costs incurred as a component
of cost of goods sold.
Share-Based Compensation
The Company recognizes compensation cost relating to share-based payment transactions with employees and non-employee
directors over the vesting period, with the cost measured based on the grant-date fair value of the equity instruments issued, net
of an estimated forfeiture rate. See Note 17 – Share-Based Compensation for further detail.
The Company recognizes service cost relating to share-based payment transactions with non-employees that are classified as
equity instruments based on the fair value of the equity instruments issued in the period in which performance of services is
complete, all performance conditions have been met and an obligation to compensate the non-employee exists, which may or may
not align with the timing of legal vesting of the equity instruments.
Income Taxes
Income taxes are accounted for using the asset and liability method. This requires the recognition of taxes currently payable or
refundable and the recognition of deferred tax assets and liabilities for the future tax consequences of events that are recognized
in one reporting period on the Consolidated Financial Statements but in a different reporting period on the tax returns. Tax credits
are recognized as a reduction of income tax expense in the year the credit arises. Valuation allowances are recorded to reduce
deferred tax assets when it is more likely than not that a tax benefit will not be realized. Tax benefits arising from uncertain tax
positions are recognized when it is more likely than not that the position will be sustained upon examination by the relevant tax
authorities. The amount recognized in the financial statements is the largest amount of tax benefit that is greater than 50 percent
likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The
Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. See Note 18 – Income
Taxes for further detail.
Net Income (Loss) per Share
Basic net income (loss) per share attributable to SSI is computed by dividing net income (loss) by the weighted average number
of outstanding common shares during the periods presented including vested deferred stock units (“DSUs”) and restricted stock
units (“RSUs”). Diluted net income (loss) per share attributable to SSI is computed by dividing net income by the weighted average
number of common shares outstanding, assuming dilution. Potentially dilutive common shares include the assumed exercise of
stock options and assumed vesting of performance shares, DSU and RSU awards using the treasury stock method. Certain of the
Company’s stock options, RSUs and performance share awards were excluded from the calculation of diluted net income per share
because they were antidilutive; however, these options and awards could be dilutive in the future. Net income attributable to
noncontrolling interests is deducted from income (loss) from continuing operations to arrive at net income (loss) from continuing
operations attributable to SSI for purposes of calculating net income (loss) per share attributable to SSI. Income per share from
discontinued operations attributable to SSI is presented separately in the Consolidated Statements of Operations. See Note 19 –
Net Income (Loss) Per Share for further detail.
Use of Estimates
The preparation of the Company’s Consolidated Financial Statements in accordance with generally accepted accounting principles
in the U.S. of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and
reported amounts of revenue and expenses during the reporting period. Examples include valuation of assets received in acquisitions;
revenue recognition; the allowance for doubtful accounts; estimates of contingencies, including environmental liabilities; goodwill
and intangible asset valuation; valuation of investments in joint venture partnerships; other asset valuation; inventory valuation;
redeemable noncontrolling interest valuation; pension plan assumptions; and the assessment of the valuation of deferred income
taxes and income tax contingencies. Actual results may differ from estimated amounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and
cash equivalents, accounts receivable and notes and other contractual receivables and derivative financial instruments. The majority
of cash and cash equivalents are maintained with two major financial institutions (Bank of America and Wells Fargo Bank, N.A.).
Balances with these institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of August 31,
2014. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse
customers make up the Company’s customer base. The Company controls credit risk through credit approvals, credit limits, letters
61 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
of credit or other collateral, cash deposits and monitoring procedures. The Company is exposed to a residual credit risk with respect
to open letters of credit by virtue of the possibility of the failure of a bank providing a letter of credit. The Company had $74
million and $94 million of open letters of credit as of August 31, 2014 and 2013, respectively. The counterparties to the Company's
derivative financial instruments are major financial institutions.
Discontinued Operations
In the fourth quarter of fiscal 2014, the Company released an environmental liability associated with a component disposed of
through sale in a prior period. The release was the result of a periodic review of the Company's estimate of future environmental
remediation costs associated with the disposed sites, for which it bears responsibility based on contractual agreements. The release
resulted in a gain of $1 million, net of tax of less than $1 million, which was classified within discontinued operations in the
Consolidated Statements of Operations. Environmental liabilities related to discontinued operations were immaterial as of August
31, 2014 and 2013.
Note 3 – Recent Accounting Pronouncements
In July 2013, an accounting standard update was issued that clarifies the financial statement presentation of certain unrecognized
tax benefits. The amendments require that an unrecognized tax benefit be presented as a reduction to a deferred tax asset for a net
operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that such carryforwards and losses
are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that
would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use,
and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should
be presented in the financial statements as a liability. The standard is effective for the Company beginning in the first quarter of
fiscal 2015. Upon adoption, the standard will impact the presentation of certain unrecognized tax benefits in the Company's
consolidated balance sheet with no impact on its consolidated results of operations and cash flows.
In April 2014, an accounting standard update was issued that amends the requirements for reporting discontinued operations,
which may include a component of an entity or a group of components of an entity. The amendments limit discontinued operations
reporting to disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity's
operations and financial results. The amendments require expanded disclosure about the assets, liabilities, revenues and expenses
of discontinued operations. Further, the amendments require an entity to disclose the pretax profit or loss of an individually
significant component that is being disposed of that does not qualify for discontinued operations reporting. The standard is effective
for the Company and is to be applied prospectively to all disposals or classifications as held for sale of components that occur
beginning in the first quarter of fiscal 2016, and interim periods within that fiscal year, and all businesses that, on acquisition, are
classified as held for sale that occur beginning in the first quarter of fiscal 2016, and interim periods within that fiscal year. Upon
adoption, the standard will impact how the Company assesses and reports discontinued operations.
In May 2014, an accounting standard update was issued that clarifies the principles for recognizing revenue. The guidance is
applicable to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Further, the guidance
requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty
of revenue that is recognized. The standard is effective for the Company beginning in the first quarter of fiscal 2018, including
interim periods within that fiscal year. Early application is not permitted. Upon becoming effective, the Company will apply the
amendments in the updated standard either retrospectively to each prior reporting period presented, or retrospectively with the
cumulative effect of initially applying the guidance recognized at the date of initial application. The Company is evaluating the
impact of adopting this standard on its consolidated financial position, results of operations and cash flows.
In June 2014, an accounting standard update was issued that resolves the diverse accounting treatment for share-based payment
awards that require a specific performance target to be achieved in order for the awards to vest. The amendments require that a
performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance
condition. Accordingly, the performance target should not be reflected in estimating the grant-date fair value of the award.
Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved
and should represent the compensation cost attributable to the period(s) during which the requisite service has already been
rendered. The standard is effective for the Company beginning in the first quarter of fiscal 2017. The Company expects no impact
from adopting this standard, as the Company already accounts for this type of share-based payment award in a manner consistent
with the amendments.
62 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 4 – Inventories, net
Inventories, net consisted of the following as of August 31 (in thousands):
Processed and unprocessed scrap metal
Semi-finished goods (billets)
Finished goods
Supplies
Inventories, net
2014
2013
106,877
$
132,485
12,920
59,039
37,336
10,745
56,830
35,989
216,172
$
236,049
$
$
Note 5 – Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following as of August 31 (in thousands):
Machinery and equipment
Land and improvements
Buildings and leasehold improvements
Office equipment
ERP systems
Construction in progress
Property, plant and equipment, gross
Less: accumulated depreciation
Property, plant and equipment, net
2014
2013
714,636
261,447
123,869
50,148
15,056
18,149
1,183,305
(659,872)
523,433
$
$
696,776
251,793
114,313
47,995
15,246
36,292
1,162,415
(597,989)
564,426
$
$
Depreciation expense for property, plant and equipment, which includes amortization expense for assets under capital leases, was
$75 million, $78 million and $77 million for the years ended August 31, 2014, 2013 and 2012, respectively.
Note 6 – Business Combinations
During fiscal 2014, the Company made the following acquisition:
•
In November 2013, the Company 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 the Auto Parts Business’
presence in the Pacific Northwest and is near the Metals Recycling Business’ operations in Tacoma, Washington.
During fiscal 2013, the Company made the following acquisitions:
•
•
•
•
In December 2012, the Company 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, the Company 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, the Company acquired all of the equity interests of Freetown Self Serve Used Auto Parts,
LLC, Freetown Transfer Facility, LLC, Millis Used Auto Parts, Inc. and Millis Industries, Inc., which together
operated a used auto parts 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, the Company 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.
The aggregate consideration paid for the fiscal 2013 acquisitions was $26 million, which was allocated to tangible and identifiable
intangible assets acquired and liabilities assumed based on their respective estimated fair values on the date of acquisition. The
excess of the aggregate consideration paid over the fair value of the identifiable net assets acquired of $20 million was recorded
63 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as goodwill, of which $18 million is expected to be deductible for tax purposes. From the dates of acquisition through August 31,
2013, the acquired operations generated aggregate revenues from sales to third parties of $11 million and operating losses of $4
million, excluding the benefits realized from integrating the acquired businesses with existing operations located in geographic
proximity.
During fiscal 2012, the Company made the following acquisition:
•
In June 2012, the Company 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.
The acquisitions completed in fiscal 2014, 2013, and 2012, respectively, were not material to the Company’s financial position or
results of operations. Pro forma operating results for the fiscal 2014, 2013, and 2012 acquisitions are not presented, since the
aggregate results would not be significantly different than reported results.
The Company paid a premium (i.e., goodwill) over the fair value of the net tangible and identified intangible assets acquired in
the transactions described above for a number of reasons, including but not limited to the following:
•
•
•
The Company will benefit from the assets and capabilities of these acquisitions, including additional resources,
skills and industry expertise;
The acquired businesses increase the Company’s market presence in new and existing regions; and
The Company anticipates cost savings, efficiencies and synergies.
Note 7 – Goodwill and Other Intangible Assets, net
In the second quarter of fiscal 2013, the Company performed its annual goodwill impairment testing, proceeding directly to the
first step of the quantitative impairment test by comparing the fair value of each reporting unit with its carrying value, including
goodwill. As a result of this test, the Company determined that the fair value of each reporting unit for which goodwill was allocated
was in excess of its respective carrying value and, therefore, no goodwill impairment was identified.
In the fourth quarter of fiscal 2013, management identified the combination of the continued challenging market conditions, the
constrained supply of raw materials, the Company’s recent financial performance and the lack of recovery of the Company’s
market capitalization as a triggering event requiring an interim impairment test of goodwill allocated to its reporting units. The
first step of the impairment test showed that the fair value of the MRB reporting unit was less than its carrying amount, indicating
a potential impairment. Based on the second step of the impairment test, the Company concluded that the implied fair value of
goodwill for the MRB reporting unit was less than its carrying amount, resulting in a partial impairment charge of MRB’s goodwill
totaling $321 million.
During the first quarter of fiscal 2014, the Company elected to change its annual goodwill impairment testing date from February
28 to July 1 of each year. The Company believes this new testing date is preferable because it allows the Company to better align
the annual goodwill impairment testing procedures with the Company’s year-end financial reporting as well as its annual budgeting
cycle and allows the Company visibility into fourth quarter operating results which are typically significant to its annual
performance. This change in accounting principle did not delay, accelerate or cause the Company to avoid an impairment charge.
In the fourth quarter of fiscal 2014, the Company performed its annual goodwill impairment testing, proceeding directly to the
first step of the quantitative impairment test by comparing the fair value of each reporting unit with its carrying value, including
goodwill.
For the MRB reporting unit with goodwill of $147 million as of July 1, 2014, the calculated fair value exceeded the carrying value
by approximately 13%. The projections used in the income approach for MRB took into consideration the challenging market
conditions for recycled metals, including the continued constrained supply of scrap metal and level of competition in our domestic
markets, the generally weak macroeconomic indicators in the markets in which our customers are based, and the cyclical nature
of our industry. The projections assumed a recovery of operating margins over a multi-year period, eventually returning to levels
of profitability in the range of average historical levels. The market-based WACC used in the income approach for MRB was
12.87%, which included an additional Company risk premium of 1% to reflect the uncertainty in connection with the extent and
pace of improvements in market conditions and future Company performance. The terminal growth rate used in the discounted
cash flow model was 2% based on long-term domestic economic growth expectations. Assuming all other components of the fair
value estimate were held constant, an increase in the WACC in excess of 1%, or weaker than anticipated improvements in either
operating margins or volumes, could result in a failure of the Step 1 quantitative impairment test for the MRB reporting unit.
64 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the APB reporting unit with goodwill of $180 million as of July 1, 2014, the calculated fair value exceeded the carrying value
by approximately 17%. The projections used in the income approach for APB took into consideration the impact of weak market
conditions for ferrous and nonferrous commodities, the cost of obtaining adequate supply flows of end-of-life vehicles and the
trends of self-serve parts sales in certain regional markets. The projections assumed a recovery of operating margins from current
levels over a multi-year period, but to less than the peak levels of operating margin experienced in fiscal years 2010 and 2011.
The market-based WACC used in the income approach for APB was 11.19%. The terminal growth rate used in the discounted
cash flow model was 1%. Assuming all other components of the fair value estimate were held constant, an increase in the WACC
in excess of 1.25% or weaker than anticipated improvements in operating margins could result in a failure of the Step 1 quantitative
impairment test for the APB reporting unit.
The Company also used a market approach based on earnings multiple data and the Company’s market capitalization to corroborate
the reporting units’ valuations. The Company reconciled its market capitalization to the aggregated estimated fair value of its
reporting units, including consideration of a control premium representing the estimated amount a market participant would pay
to obtain a controlling interest. The implied control premium resulting from the difference between the Company's market
capitalization (based on the average trading price of our Class A common stock for the two-week period ended July 1, 2014) and
the higher aggregated estimated fair value of its reporting units was within the historical range of average and mean premiums
observed on historical transactions within the steel-making, scrap processing and metals industries. The Company identified
specific reconciling items, including market participant synergies, which supported the implied control premium as of July 1,
2014.
The determination of fair value of the reporting units used to perform the first step of the impairment test requires judgment and
involves significant estimates and assumptions about the expected future cash flows and the impact of market conditions on those
assumptions. Due to the inherent uncertainty associated with forming these estimates, actual results could differ from those
estimates. Future events and changing market conditions may impact the Company’s assumptions as to future revenue growth
rates, pace and extent of operating margin and volume recovery, market-based WACC and other factors that may result in changes
in the estimates of the Company’s reporting units’ fair value. Although management believes the assumptions used in testing the
Company’s reporting units’ goodwill for impairment are reasonable, it is possible that market and economic conditions could
deteriorate further or not improve as expected. Additional declines or a lack of recovery of market conditions in the metals recycling
industry from current levels, a trend of weaker than anticipated Company financial performance including the pace and extent of
operating margin and volume recovery, a lack of recovery in the Company’s 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 the impairment analysis and
may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on the Company’s financial
condition and results of operations.
The gross changes in the carrying amount of goodwill by reporting segment for the years ended August 31, 2014 and 2013 were
as follows (in thousands):
Balance as of August 31, 2012
Acquisitions
Purchase accounting adjustments
Foreign currency translation adjustment
Goodwill impairment charges
Balance as of August 31, 2013
Acquisitions
Purchase accounting adjustments
Foreign currency translation adjustment
Balance as of August 31, 2014
MRB
APB
Total
$
471,954
$
163,537
$
635,491
1,744
135
(5,620)
(321,000)
147,213
—
—
(1,105)
146,108
$
$
17,634
614
(1,734)
—
180,051
586
(51)
(791)
179,795
$
19,378
749
(7,354)
(321,000)
327,264
586
(51)
(1,896)
325,903
Accumulated goodwill impairment charges were $321 million as of August 31, 2014 and 2013.
65 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the Company’s intangible assets as of August 31 (in thousands):
2014
2013
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
Covenants not to compete
Supply contracts
Other intangible assets subject to amortization(1)
Indefinite-lived intangibles(2)
Total
$
$
18,747
$
2,264
3,263
1,173
25,447
$
(11,768) $
(2,109)
(1,735)
—
(15,612) $
20,183
$
2,264
3,783
1,173
27,403
$
(10,796)
(1,725)
(1,618)
—
(14,139)
_____________________________
(1) Other intangible assets subject to amortization include trade names, marketing agreements, employment agreements, leasehold interests, permits and licenses
and real property options.
(2)
Indefinite-lived intangibles include trade names, permits and licenses and real property options.
Total intangible asset amortization expense was $4 million for the year ended August 31, 2014 and $5 million for the years ended
August 31, 2013 and 2012.
The estimated amortization expense, based on current intangible asset balances, during the next five fiscal years and thereafter is
as follows (in thousands):
Years Ending August 31,
2015
2016
2017
2018
2019
Thereafter
Total
Note 8 – Short-Term Borrowings
Estimated
Amortization
Expense
$
$
2,666
1,580
778
458
307
2,872
8,661
The Company has an unsecured, uncommitted $25 million credit line with Wells Fargo Bank, N.A. that expires on March 1, 2015.
The Company had no borrowings outstanding under this credit line as of August 31, 2014, and $9 million in borrowings outstanding
as of August 31, 2013. Interest rates are set by the bank at the time of borrowing. The interest rate on amounts outstanding under
this credit line was 2.1% as of August 31, 2013. The credit agreement contains various representations and warranties, events of
default and financial and other covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio
and a maximum leverage ratio.
Note 9 – Long-Term Debt
Long-term debt consisted of the following as of August 31 (in thousands):
66 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Bank unsecured revolving credit facility, interest at LIBOR plus a spread
$
305,000
$
359,971
2014
2013
Tax-exempt economic development revenue bonds due January 2021, interest payable
monthly at a variable rate (0.1% as of August 31, 2014), secured by a letter of credit
Capital lease obligations due through April 2031
Other debt obligations
Total long-term debt
Less current maturities
Long-term debt, net of current maturities
7,700
5,655
1,010
319,365
(523)
318,842
$
$
7,700
5,666
—
373,337
(674)
372,663
The Company’s unsecured committed bank credit facility, which provides for revolving loans of $670 million and C$30 million,
matures in April 2017 pursuant to a credit agreement with Bank of America, N.A. as administrative agent, and other lenders party
thereto. Interest rates on outstanding indebtedness under the agreement are based, at the Company’s option, on either the London
Interbank Offered Rate (or the Canadian equivalent) plus a spread of between 1.25% and 2.25%, with the amount of the spread
based on a pricing grid tied to the Company’s leverage ratio, or the greater of the prime rate, the federal funds rate plus 0.5% or
the British Bankers Association LIBOR Rate plus 1.75%. In addition, annual commitment fees are payable on the unused portion
of the credit facility at rates between 0.15% and 0.35% based on a pricing grid tied to the Company’s leverage ratio. The Company
had borrowings outstanding under the credit facility of $305 million and $360 million as of August 31, 2014 and 2013, respectively.
The weighted average interest rate on amounts outstanding under this facility was 1.91% and 1.98% as of August 31, 2014 and
2013, respectively. The credit agreement contains various representations and warranties, events of default and financial and other
covenants, including covenants regarding maintenance of a minimum fixed charge coverage ratio and a maximum leverage ratio.
Principal payments on long-term debt and capital lease obligations during the next five fiscal years and thereafter are as follows
(in thousands):
Years Ending August 31,
2015
2016
2017
2018
2019
Thereafter
Total
Amounts representing interest and executory costs
Total less interest
Long-Term
Debt
Capital
Lease
Obligations
Total
$
$
40
84
305,089
95
100
8,302
313,710
—
$
313,710
$
1,310
$
1,180
1,181
1,181
1,202
6,330
12,384
(6,729)
5,655
$
1,350
1,264
306,270
1,276
1,302
14,632
326,094
(6,729)
319,365
The Company maintains stand-by letters of credit to provide for certain obligations including workers’ compensation and
performance bonds. As of August 31, 2014 and 2013, the Company had $16 million and $18 million outstanding under these
arrangements.
Note 10 - Fair Value Measurements
The following table presents information about the Company’s assets and liabilities measured at fair value as of August 31, 2014
and 2013, and indicates the fair value hierarchy of the valuation techniques utilized by the Company and the type of measurement.
67 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
Assets (Liabilities) at Fair Value
August 31, 2014
August 31, 2013
Fair Value
Measurement
Level
Type of
Measurement
Balance Sheet Classification
Assets:
Assets held for sale
Investment in joint venture
partnership
Foreign currency exchange
forward contracts
Total assets
Liabilities:
Contract termination costs
Foreign currency exchange
forward contracts
Total liabilities
$
$
$
$
— $
2,902
Level 3
Non-recurring
—
202
202
$
3,261
Level 3
Non-recurring
—
6,163
Level 2
Recurring
Prepaid expenses and other
current assets
Investments in joint venture
partnerships
Prepaid expenses and other
current assets
— $
(1,672)
Level 3
Non-recurring
Other accrued liabilities and
Other long-term liabilities
(46)
—
Level 2
Recurring
Other accrued liabilities
(46) $
(1,672)
Note 11 – Commitments and Contingencies
Commitments
The Company leases a portion of its capital equipment and certain of its facilities under leases that expire at various dates through
fiscal 2047. Rent expense was $27 million for fiscal 2014, and $28 million for fiscal 2013 and 2012, respectively.
The table below sets forth the Company’s future minimum obligations under non-cancelable operating leases as of August 31,
2014 (in thousands):
Years ending August 31,
2015
2016
2017
2018
2019
Thereafter
Total
Contingencies – Environmental
$
Operating
Leases
22,065
17,586
15,235
12,051
9,220
35,371
$
111,528
Changes in the Company’s environmental liabilities for the years ended August 31, 2014 and 2013 were as follows (in thousands):
Reporting
Segment
MRB
APB
Corporate
Liabilities
Established
(Released),
Net(1)
Balance
8/31/2012
Payments
and
Other
Ending
Balance
8/31/2013
Liabilities
Established
(Released),
Net(1)
Payments
and
Other
Ending
Balance
8/31/2014
Short-
Term
Long-
Term
$
30,859
$
(69) $
(270) $
30,520
$
199
$
(580) $
30,139
$
—
—
18,774
500
(847)
—
(105)
(112)
17,822
388
421
554
87
$ 29,718
17,268
301
16,200
—
47,059
$
2,574
500
3,005
Total
$
$
(270) $
49,794
$
(648) $
(797) $
48,349
$
1,062
$ 47,287
_____________________________
(1) During fiscal 2013, the Company recorded $3 million in purchase accounting for environmental liabilities related to properties acquired or leased in connection
with business combinations. Amounts recorded in purchase accounting in fiscal 2014 were immaterial.
68 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Metals Recycling Business
As of August 31, 2014, MRB had environmental liabilities of $30 million for the potential remediation of locations where it has
conducted business or has environmental liabilities from historical or recent activities.
Portland Harbor
In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible
parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor
Superfund site (the “Site”). The precise nature and extent of any cleanup of the Site, the parties to be involved, the process to be
followed for any cleanup and the allocation of the costs for any cleanup among responsible parties have not yet been determined,
but the process of identifying additional PRPs and beginning allocation of costs is underway. It is unclear to what extent the
Company will be liable for environmental costs or natural resource damage claims or third party contribution or damage claims
with respect to the Site. While the Company participated in certain preliminary Site study efforts, it is not party to the consent
order entered into by the EPA with certain other PRPs, referred to as the “Lower Willamette Group” (“LWG”), for a remedial
investigation/feasibility study (“RI/FS”).
During fiscal 2007, the Company and certain other parties agreed to an interim settlement with the LWG under which the Company
made a cash contribution to the LWG RI/FS. The Company has also joined with more than 80 other PRPs, including the LWG,
in a voluntary process to establish an allocation of costs at the Site. These parties have selected an allocation team and have entered
into an allocation process design agreement. The LWG has also commenced federal court litigation, which has been stayed, seeking
to bring additional parties into the allocation process.
In January 2008, the Natural Resource Damages Trustee Council (“Trustees”) for Portland Harbor invited the Company and other
PRPs to participate in funding and implementing the Natural Resource Injury Assessment for the Site. Following meetings among
the Trustees and the PRPs, a funding and participation agreement was negotiated under which the participating PRPs agreed to
fund the first phase of the natural resource damage assessment. The Company joined in that Phase I agreement and paid a portion
of those costs. The Company did not participate in funding the second phase of the natural resource damage assessment.
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 EPA’s selected remedy will be determined in a separate allocation process, which is currently underway.
Because there has not been a determination of the total cost of the investigations, the remediation that will be required, the amount
of natural resource damages or how the costs of the ongoing investigations and any remedy and natural resource damages will be
allocated among the PRPs, the Company believes it is not possible to reasonably estimate the amount or range of costs which it
is likely or reasonably possible that the Company may incur in connection with the Site, although such costs could be material to
the Company’s financial position, results of operations, cash flows and liquidity. Among the facts currently not known or available
are detailed information on the history of ownership of and the nature of the uses of and activities and operations performed on
each property within the Site, which are factors that will play a substantial role in determining the allocation of investigation and
remedy costs among the PRPs. The Company has insurance policies that it believes will provide reimbursement for costs it incurs
for defense and remediation in connection with the Site, although there is no assurance that those policies will cover all of the
costs which the Company may incur. The Company previously recorded a liability for its estimated share of the costs of the
investigation of $1 million.
The Oregon Department of Environmental Quality is separately providing oversight of voluntary investigations by the Company
involving the Company’s sites adjacent to the Portland Harbor which are focused on controlling any current “uplands” releases
of contaminants into the Willamette River. No liabilities have been established in connection with these investigations because
the extent of contamination (if any) and the Company’s responsibility for the contamination (if any) has not yet been determined.
69 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Other MRB Sites
As of August 31, 2014, the Company had environmental liabilities related to various MRB sites other than Portland Harbor of
$29 million. The liabilities relate to the potential future remediation of soil contamination, groundwater contamination and storm
water runoff issues and were not individually material at any site.
Auto Parts Business
As of August 31, 2014, the Company had environmental liabilities related to various APB sites of $18 million. The liabilities relate
to the potential future remediation of soil contamination, groundwater contamination and storm water runoff issues and were not
individually material at any site.
Steel Manufacturing Business
SMB’s electric arc furnace generates dust (“EAF dust”) that is classified as hazardous waste by the EPA because of its zinc and
lead content. As a result, the Company captures the EAF dust and ships it in specialized rail cars to a firm that applies a treatment
that allows the EAF dust to be delisted as hazardous waste so it can be disposed of as a non-hazardous solid waste.
SMB has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality
standards. The permit is based upon an annual production capacity of 950 thousand tons. The permit was first issued in 1998 and
has since been renewed through February 1, 2018.
SMB had no environmental liabilities as of August 31, 2014.
Other than the Portland Harbor Superfund site, which is discussed above, management currently believes that adequate provision
has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on
the Consolidated Financial Statements of the Company as a whole. Historically, the amounts the Company has ultimately paid for
such remediation activities have not been material in any given period.
In addition, the Company is party to various legal proceedings arising in the normal course of business. Management believes that
adequate provisions have been made for these contingencies. The Company does not anticipate that the resolution of legal
proceedings arising in the normal course of business will have a material adverse effect on its results of operations, financial
condition, or cash flows.
Note 12 - Restructuring Charges and Other Exit-Related Costs
In the fourth quarter of fiscal 2012, the Company undertook a number of restructuring initiatives designed to extract greater
synergies from the significant acquisitions and technology investments made in recent years, achieve further integration between
MRB and APB, and realign the Company’s organization to support its future growth and decrease operating expenses by
streamlining functions and reducing organizational layers (the “Q4'12 Plan”).
In the first quarter of fiscal 2014, the Company announced and began implementing additional restructuring initiatives to further
reduce its annual operating expenses through headcount reductions, productivity improvements, procurement savings and other
operational efficiencies (the “Q1'14 Plan”). The Company expects to incur restructuring charges of $6 million in connection with
these initiatives, with substantially all of the charges incurred by the end of fiscal 2014.
The Company incurred restructuring charges associated with the Q4'12 Plan and Q1'14 Plan of $6 million, $8 million and $5
million in fiscal 2014, 2013 and 2012, respectively. The remaining charges are expected to be incurred by the end of fiscal 2017.
The vast majority of the restructuring charges require the Company to make cash payments.
In addition to the restructuring charges recorded in connection with these initiatives, the Company incurred other exit-related costs
of $1 million, consisting of asset impairments related to site closures.
70 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
Restructuring charges and other exit-related costs were comprised of the following (in thousands):
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Year Ended August 31,
2014
Q1’14
Plan
Q4’12
Plan
Total
Charges
Q4’12
Plan
2013
Q1’14
Plan
Total
Charges
Q4’12
Plan
2012
Q1’14
Plan
Total
Charges
Restructuring charges:
Severance costs
Contract termination costs
Other restructuring costs
Total restructuring charges
Other exit-related costs:
Asset impairments
Total exit-related costs
Total restructuring charges and exit-
related costs
$ (44) $4,651
$ 4,607
$2,443
$ — $ 2,443
$2,741
$ — $ 2,741
675
—
631
—
—
709
410
5,770
566
566
1,384
410
6,401
566
566
3,229
2,234
7,906
— 3,229
— 2,234
— 7,906
440
1,831
5,012
—
440
— 1,831
— 5,012
—
—
—
—
—
—
—
—
—
—
—
—
$ 631
$6,336
$ 6,967
$7,906
$ — $ 7,906
$5,012
$ — $ 5,012
Total restructuring charges to date
Total expected restructuring charges
Total Charges
Q4’12 Plan
Q1’14 Plan
Total
$
$
13,549
13,600
$
$
5,770
6,150
$
$
19,319
19,750
The following illustrates the reconciliation of the restructuring liability by major type of costs for the years ended August 31, 2014
and 2013 (in thousands):
Q4’12 Plan
Balance
8/31/2012
Charges
Payments
and Other
Balance
8/31/2013
Charges
Payments
and Other
Balance
8/31/2014
Severance costs
Contract termination costs
Other restructuring costs
Total
$
$
2,477
$
2,443
$
(4,642) $
278
$
(44) $
(234) $
414
64
3,229
2,234
(616)
(2,298)
3,027
—
675
—
(2,713)
—
2,955
$
7,906
$
(7,556) $
3,305
$
631
$
(2,947) $
—
989
—
989
Severance costs
Contract termination costs
Other restructuring costs
Total
Severance costs
Contract termination costs
Other restructuring costs
Total
Q1’14 Plan
Balance
8/31/2013
Charges
Payments
and Other
Balance
8/31/2014
$
$
— $
4,651
$
(3,982) $
—
—
709
410
(209)
(410)
669
500
—
— $
5,770
$
(4,601) $
1,169
Total Charges to Date
Total Expected Charges
$
$
9,791
$
5,053
4,475
19,319
$
9,800
5,400
4,550
19,750
71 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
Restructuring charges and other exit-related costs by reporting segment were as follows (in thousands):
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Restructuring charges:
Metals Recycling Business
Auto Parts Business
Unallocated (Corporate)
Total restructuring charges
Other exit-related costs:
Metals Recycling Business
Total exit-related costs
Fiscal 2012
Charges
Fiscal 2013
Charges
Fiscal 2014
Charges
Total
Charges to
Date
Total
Expected
Charges
$
1,660
$
2,748
$
233
3,119
5,012
—
—
239
4,919
7,906
—
—
9,050
1,550
9,150
19,750
4,271
1,057
1,073
6,401
566
566
$
8,679
$
1,529
9,111
19,319
566
566
Total restructuring charges and other exit-related
costs
$
5,012
$
7,906
$
6,967
$
19,885
The Company does not allocate restructuring charges and other exit-related costs to the segments' operating results because
management does not include this information in its measurement of the performance of the operating segments.
Note 13 - Redeemable Noncontrolling Interest
In March 2011, the Company, through a wholly-owned acquisition subsidiary, acquired substantially all of the metals recycling
assets of a Canadian business. As part of the purchase consideration, the Company issued the seller common shares equal to 20%
of the issued and outstanding capital stock of the Company’s acquisition subsidiary. Under the terms of an agreement related to
the acquisition, the noncontrolling interest holder had the right to require the Company to purchase its interest in the Company’s
acquisition subsidiary for fair value upon the occurrence of certain triggering events.
On March 8, 2013, the Company entered into an agreement with the noncontrolling interest holder for the purchase of all of the
outstanding noncontrolling interest in the Company’s subsidiary for $25 million. In the second quarter of fiscal 2013, the Company
adjusted the redeemable noncontrolling interest to its fair value corresponding to the purchase price of $25 million. Prior to its
purchase, the noncontrolling interest was presented at its adjusted carry value, which approximated its fair value. The Company
determined fair value using Level 3 inputs under the fair value hierarchy using an income approach based on a discounted cash
flow analysis.
Following is a reconciliation of the changes in the redeemable noncontrolling interest for the year ended August 31, 2013 (in
thousands):
Balance - August 31, 2012
Net loss attributable to noncontrolling interest
Currency translation adjustment
Capital contributions from noncontrolling interest holder
Adjustment to fair value
Purchase
Balance - August 31, 2013
2013
22,248
(903)
(1,030)
1,970
2,449
(24,734)
—
$
$
72 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 14 – Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows as of August 31, 2014 and 2013 (in thousands):
Balance as of August 31, 2013
$
(6,423) $
(2,817) $
(121) $
(9,361)
Foreign
Currency
Translation
Adjustments
Pension
Obligations, net
Net Unrealized
Gain (Loss) on
Cash Flow
Hedges
Total
Other comprehensive income (loss) before
reclassifications
Income tax benefit (expense)
Other comprehensive income (loss) before
reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive loss
Income tax (benefit) expense
Amounts reclassified from accumulated other
comprehensive loss, net of tax
Net periodic other comprehensive income (loss)
Balance as of August 31, 2014
$
Note 15 – Derivative Financial Instruments
Foreign Currency Exchange Rate Risk Management
(4,240)
—
(4,240)
—
—
—
(4,240)
(10,663) $
(234)
74
(160)
1,483
(542)
941
781
(2,036) $
325
(81)
244
(151)
86
(65)
179
58
$
(4,149)
(7)
(4,156)
1,332
(456)
876
(3,280)
(12,641)
To manage exposure to foreign exchange rate risk, the Company may enter into foreign currency forward contracts to stabilize
the U.S. dollar amount of the transaction at settlement. When such contracts are not designated as hedging instruments for accounting
purposes, the realized and unrealized gains and losses on settled and unsettled forward contracts measured at fair value are
recognized as other income or expense in the Consolidated Statements of Operations.
In fiscal 2014, the Company entered into a series of foreign currency exchange forward contracts to sell U.S. dollars in order to
hedge a portion of its exposure to fluctuating rates of exchange on anticipated U.S. dollar-denominated sales by its Canadian
subsidiary with a functional currency of the Canadian dollar. The Company utilized intercompany foreign currency derivatives
and offsetting derivatives with external counterparties in order to designate the intercompany derivatives as hedging instruments.
Once the U.S. dollar-denominated sales have been recognized and the corresponding receivables collected, the Company utilized
foreign currency exchange forward contracts to sell Canadian dollars, achieving a result similar to net settling the contracts to sell
U.S. dollars. The foreign currency exchange forward contracts to sell Canadian dollars are not designated as hedging instruments.
As of August 31, 2014, the Company had foreign currency exchange forward contracts with external counterparties to buy Canadian
dollars for a total notional amount of $22 million, which have various settlement dates through December 31, 2014, and foreign
currency exchange forward contracts with external counterparties to sell Canadian dollars for a total notional amount of $6 million,
all of which have a settlement date of September 30, 2014. The contracts with external counterparties are reported at fair value in
the Consolidated Balance Sheets measured using quoted foreign currency exchange rates. See Note 10 - Fair Value Measurements
for further detail.
The fair value of derivative instruments in the Consolidated Balance Sheets are as follows (in thousands):
Foreign currency exchange forward contracts Prepaid expenses and other
current assets
Foreign currency exchange forward contracts
Other accrued liabilities
$
$
$
202
(46) $
—
—
Balance Sheet Location
August 31, 2014
August 31, 2013
Asset (Liability) Derivatives
Fair Value
73 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following tables summarizes the results of foreign currency exchange derivatives for the year ended August 31, 2014 (in
thousands):
Derivative Gain (Loss) Recognized in
Fiscal 2014
Other
Comprehen
sive Income
Revenues -
Effective
Portion
Other
Income
(Expense),
net
Foreign currency exchange forward contracts - designated as cash flow hedges
$
325
$
249
$
Foreign currency exchange forward contracts - not designated as cash flow hedges
—
—
112
(12)
The Company did not have any material derivatives activity for the years ended August 31, 2013 and 2012.
The Company entered into forward contracts to mitigate exposure to exchange rate fluctuations on Euro-denominated fixed asset
purchases, which were designated as qualifying cash flow hedges for accounting purposes. These foreign currency forward contracts
are measured using forward exchange rates based on observable exchange rates quoted in an active market and are classified as
Level 2 fair value measurements under the fair value hierarchy. In the first quarter of fiscal 2012, the Company determined that
certain forecasted transactions were no longer probable, de-designated these contracts as hedges and subsequently terminated the
contracts. The nominal amount and fair value of these contracts, the amounts reclassified from accumulated other comprehensive
loss and the realized losses recorded in other income, net were not material to the Consolidated Financial Statements.
Note 16 – Employee Benefits
The Company and certain of its subsidiaries have qualified and nonqualified retirement plans covering substantially all employees.
These plans include a defined benefit pension plan, a supplemental executive retirement benefit plan (“SERBP”), multiemployer
pension plans and defined contribution plans.
Defined Benefit Pension Plan and Supplemental Executive Retirement Benefit Plan
The Company maintains a qualified defined benefit pension plan for certain nonunion employees. Effective June 30, 2006, the
Company froze this plan and ceased accruing further benefits. The Company reflects the funded status of the defined benefit
pension plan as a net asset or liability in its Consolidated Balance Sheets. Changes in its funded status are recognized in
comprehensive income (loss). Net periodic pension benefit cost was not material for the years ended August 31, 2014, 2013 and
2012. The fair value of the plan assets was $18 million and $17 million as of August 31, 2014 and 2013, respectively, and the
projected benefit obligation was $14 million and $15 million as of August 31, 2014 and 2013, respectively. The plan was fully
funded with the plan assets exceeding the projected benefit obligation by $4 million and $3 million as of August 31, 2014 and
2013, respectively. Plan assets were comprised entirely of Level 1 investments as of August 31, 2014 and 2013. Level 1 investments
are valued based on quoted market prices of identical securities in the principal market. No contributions are expected to be made
to the defined benefit pension plan in the future; however, changes in the discount rate or actual investment returns that are lower
than the long-term expected return on plan assets could result in the need for the Company to make additional contributions. The
assumed discount rate used to calculate the projected benefit obligations was 4.05% and 4.73% as of August 31, 2014 and 2013,
respectively. The Company estimates future annual benefit payments to be between $1 million and $3 million per year.
The Company also has a nonqualified SERBP for certain executives. A restricted trust fund has been established with assets
invested in life insurance policies that can be used for plan benefits, although the fund is subject to claims of the Company’s
general creditors. The trust fund is included in other assets and the pension liability is included in other long-term liabilities in the
Company’s Consolidated Balance Sheets. The trust fund is valued at $3 million and $2 million as of August 31, 2014 and 2013,
respectively. The trust fund assets’ gains and losses are included in other income, net in the Company’s Consolidated Statements
of Operations. The benefit obligation and the unfunded amount were $4 million and $3 million as of August 31, 2014 and 2013,
respectively. Net periodic pension cost under the SERBP was not material for the years ended August 31, 2014, 2013 and 2012.
Because the defined benefit pension plan and the SERBP are not material to the Consolidated Financial Statements, other disclosures
required by U.S. GAAP have been omitted.
Multiemployer Pension Plans
The Company contributes to 13 multiemployer pension plans in accordance with its collective bargaining agreements.
Multiemployer pension plans are defined benefit plans sponsored by multiple employers in accordance with one or more collective
bargaining agreements. The plans are jointly managed by trustees that include representatives from both management and labor
74 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
unions. Contributions to the plans are made based upon a fixed rate per hour worked and are agreed to by contributing employers
and the unions in collective bargaining. Benefit levels are set by a joint board of trustees based on the advice of an independent
actuary regarding the level of benefits that agreed-upon contributions can be expected to support. To the extent that the pension
obligation of other participating employers is unfunded, the Company may be required to make additional contributions in the
future to fund these obligations.
One of the multiemployer plans that the Company contributes to is the Steelworkers Western Independent Shops Pension Plan
(“WISPP”, EIN 90-0169564, Plan No. 001) benefiting the union employees of SMB, which are covered by a collective bargaining
agreement that will expire on March 31, 2016. As of October 1, 2012, the WISPP had an accumulated funding deficiency (i.e., a
failure to satisfy the minimum funding requirements) and was certified in a Red Zone Status, as defined by the Pension Protection
Act of 2006. As of October 1, 2013, the WISPP was no longer in Red Zone Status, having been certified by the plan’s actuaries
as being in the Green Zone. The Company contributed $3 million to the WISPP for each of the years ended August 31, 2014 and
2013, and $2 million for the year ended August 31, 2012. These contributions represented more than 5% of total contributions to
the WISPP for each year.
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.
Company contributions to all of the multiemployer plans were $4 million for the years ended August 31, 2014, 2013 and 2012.
Defined Contribution Plans
The Company has several defined contribution plans covering certain employees. Company contributions to the defined
contribution plans totaled $2 million for each of the years ended August 31, 2014 and 2013 and $3 million for the year ended
August 31, 2012.
Note 17 – Share-Based Compensation
The Company’s 1993 Stock Incentive Plan, as amended, (“the Plan”) was established for its employees, consultants and directors.
There are 12.2 million shares of Class A common stock reserved for issuance under the Plan, of which 5.6 million are available
for future grants as of August 31, 2014. Share-based compensation expense was $15 million, $11 million and $9 million for the
years ended August 31, 2014, 2013 and 2012, respectively. Tax benefits used for option exercises and vesting of restricted stock
units were not material for all periods presented.
Restricted Stock Units
The Plan provides for the issuance of RSUs. The estimated fair value of the RSUs is based on the market closing price of the
underlying Class A common stock on the date of grant. The compensation expense associated with RSUs is recognized over the
respective requisite service period of the awards, net of estimated forfeitures.
During the years ended August 31, 2014, 2013 and 2012, the Compensation Committee granted 219,504 RSUs, 217,001 RSUs
and 146,481 RSUs, respectively, to its key employees, officers and employee directors under the Plan. The RSUs have a five-year
term and vest 20% per year commencing October 31 or June 1 of the year after grant, except for an immaterial number of awards
granted with different terms. The estimated fair value of the RSUs granted during the years ended August 31, 2014, 2013 and 2012
was $7 million, $7 million and $6 million, respectively.
75 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s restricted stock unit activity is as follows:
Outstanding as of August 31, 2011
Granted
Vested
Forfeited
Outstanding as of August 31, 2012
Granted
Vested
Forfeited
Outstanding as of August 31, 2013
Granted
Vested
Forfeited
Outstanding as of August 31, 2014
_____________________________
Weighted
Number of
Average Grant
Shares
Date Fair Value
(in thousands)
54.06
$
348
42.63
$
146
(148) $
52.93
(43) $
51.47
49.46
$
303
30.36
$
217
(174) $
46.04
(35) $
40.02
39.11
$
311
30.55
220
$
(93) $
42.13
(49) $
35.73
33.97
$
389
$
$
$
Fair Value(1)
28.43
24.69
25.01
(1) Amounts represent the value of the Company’s Class A common stock on the date that the restricted stock units vested.
The Company recognized compensation expense associated with RSUs of $6 million, $6 million and $7 million for the years
ended August 31, 2014, 2013 and 2012, respectively. As of August 31, 2014, total unrecognized compensation costs related to
unvested RSUs amounted to $7 million, which is expected to be recognized over a weighted average period of 2.3 years.
Performance Share Awards
The Plan authorizes performance-based awards to certain employees subject to certain conditions and restrictions. A participant
generally must be employed by the Company on October 31 following the end of the performance period to receive an award
payout, although adjusted awards will be paid if employment terminates earlier on account of death, disability, retirement,
termination without cause after the first year of the performance period or a sale of the Company or the reporting segments for
which the participant works. Awards will be paid in Class A common stock as soon as practicable after October 31 following the
end of the performance period.
The Company accrues compensation cost for performance share awards based on the probable outcome of specified performance
conditions, net of estimated forfeitures. The Company accrues compensation cost if it is probable that the performance conditions
will be achieved. The Company reassesses whether achievement of the performance conditions are probable at each reporting
date. If it is probable that the actual performance results will exceed the stated target performance conditions, the Company accrues
additional compensation cost for the additional performance shares to be awarded. If, upon reassessment, it is no longer probable
that the actual performance results will exceed the stated target performance conditions, or that it is no longer probable that the
target performance condition will be achieved, the Company reverses any recognized compensation cost for shares no longer
probable of being issued. If the performance conditions are not achieved at the end of the service period, all related compensation
cost previously recognized is reversed.
Fiscal 2013 – 2014 Performance Share Awards
The Compensation Committee approved performance-based awards under the Plan with a grant date of July 24, 2012. The
Compensation Committee established performance targets based on the Company’s EBITDA (weighted at 50%) and return on
equity (weighted at 50%) for the two years of the performance period, with award payouts ranging from a threshold of 50% to a
maximum of 200% for each portion of the awards.
Fiscal 2014 – 2015 (August) Performance Share Awards
The Compensation Committee approved performance-based awards under the Plan with a grant date of August 13, 2013. The
Compensation Committee established performance targets based on the Company’s EBITDA (weighted at 50%) and return on
equity (weighted at 50%) for the two years of the performance period, with award payouts ranging from a threshold of 50% to a
maximum of 200% for each portion of the awards.
76 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 2014 – 2015 (November) Performance Share Awards
The Compensation Committee approved performance-based awards under the Plan with a grant date of November 21, 2013. The
Compensation Committee established performance targets based on divisional volume metrics (weighted at 50%) and divisional
operating income metrics (weighted at 50%) for the two years of the performance period, with award payouts ranging from a
threshold of 50% to a maximum of 200% for each portion of the awards.
A summary of the Company’s performance-based awards activity is as follows:
Outstanding as of August 31, 2011
Granted
Vested
Forfeited
Outstanding as of August 31, 2012
Granted
Vested
Forfeited
Outstanding as of August 31, 2013
Granted
Vested
Forfeited
Outstanding as of August 31, 2014
_____________________________
Number of
Shares
(in thousands)
Weighted
Average Grant
Date Fair Value
Fair Value(1)
285
$
278
$
(54) $
(63) $
$
446
267
$
(98) $
(42) $
$
573
220
$
(62) $
(108) $
$
623
47.48
25.98
25.42
$
43.90
36.53
38.33
28.48
47.10
35.21
32.47
30.55
$
28.51
55.43
$
28.87
41.48
27.93
(1) Amounts represent the weighted average value of the Company’s Class A common stock on the date that the performance share awards vested.
Compensation expense associated with performance-based awards was calculated using management’s current estimate of the
expected level of achievement of the performance targets under the Plan. Compensation expense for anticipated awards based on
the Company’s financial performance was $6 million, $3 million and $1 million for the years ended August 31, 2014, 2013 and
2012, respectively. As of August 31, 2014, unrecognized compensation costs related to non-vested performance shares amounted
to $6 million, which is expected to be recognized over a weighted average period of 0.9 years.
Deferred Stock Units
The Deferred Compensation Plan for Non-Employee Directors (“DSU Plan”) provides for the issuance of DSUs to non-employee
directors to be granted under the Plan. One DSU gives the director the right to receive one share of Class A common stock at a
future date. Immediately following the annual meeting of shareholders, each non-employee director will receive DSUs which will
become fully vested on the day before the next annual meeting, subject to continued service on the Board. The compensation
expense associated with the DSUs granted is recognized over the respective requisite service period of the awards.
The Company will issue Class A common stock to a director pursuant to vested DSUs in a lump sum in January of the first year
after the director ceases to be a director of the Company, subject to the right of the director to elect an installment payment program
under the DSU Plan.
DSUs granted during the years ended August 31, 2014, 2013 and 2012 were for a total of 30,848 shares, 29,167 shares and 18,202
shares, respectively. The compensation expense associated with DSUs and the total value of shares vested during each of the years
ended August 31, 2014, 2013 and 2012, as well as the unrecognized compensation expense as of August 31, 2014, were not
material.
Stock Options
Under the Plan, stock options are granted to employees at exercise prices that are set at the sole discretion of the Board of Directors.
The fair value of each option grant under the Plan is estimated at the date of grant using the Black-Scholes Option Pricing Model,
which utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior.
Expected volatilities utilized in the model are based on the historical volatility of the Company’s stock price. The risk-free interest
77 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
rate is derived from the U.S. Treasury yield curve in effect at the time of grant. The expected term of the options is based on an
analysis of expected post-vesting exercise behavior including historical exercise patterns when available.
The stock options granted during the year ended August 31, 2012 vest on the two-year anniversary of the grant date and have a
contractual term of five years with an exercise price set at a 20% premium compared to the Company’s stock price on the date of
grant. The estimated fair value of the granted options was $3 million, which was determined using the Black-Scholes Option
Pricing Model with the following assumptions:
Risk-free interest rate
Expected dividend yield
Expected term (in years)
Expected volatility
Fair value of option
No options were granted in fiscal 2014 and 2013.
A summary of the Company’s stock option activity and related information is as follows:
2012
0.48%
2.59%
3.75
58.15%
9.29
$
Outstanding as of August 31, 2011
Granted
Exercised
Canceled
Outstanding as of August 31, 2012
Granted
Exercised
Canceled
Outstanding as of August 31, 2013
Granted
Exercised
Canceled
Outstanding as of August 31, 2014
_____________________________
Options
(in thousands)
Weighted
Average
Exercise
Price
319
$
323
$
(25) $
(5) $
$
612
— $
(15) $
(42) $
$
555
— $
(9) $
(20) $
$
526
28.50
34.75
24.03
34.59
31.94
—
20.48
34.39
32.07
—
25.56
30.55
32.25
Weighted
Average
Remaining
Contractual
Term (in years)
3.9
Aggregate
Intrinsic Value
(in thousands)
(1)
$
5,430
3.9
$
459
3.1
$
47
2.2
$
335
(1) Amounts represent the difference between the exercise price and the closing price of the Company’s stock on the last trading day of the corresponding fiscal
year, multiplied by the number of in-the-money options.
All outstanding stock options were vested as of August 31, 2014. The aggregate intrinsic value of stock options exercised, which
was immaterial for the year ended August 31, 2014 and less than $1 million for the years ended August 31, 2013 and 2012,
represents the difference between the exercise price and the value of the Company’s stock at the time of exercise. 307,855 stock
options vested in the year ended August 31, 2014, and no stock options vested in the years ended August 31, 2013 and 2012.
Compensation expense associated with stock options, the total proceeds received from option exercises and the tax benefits realized
from options exercised were not material during each of the years ended August 31, 2014, 2013 and 2012. As of August 31, 2014
there was no unrecognized compensation cost related to stock options.
78 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 18 – Income Taxes
Income (loss) from continuing operations before income taxes was as follows for the years ended August 31 (in thousands):
United States
Foreign
Total
2014
2013
2012
$
$
10,796
(61)
10,735
$
$
(196,289) $
(141,160)
(337,449) $
54,304
(11,348)
42,956
Income tax expense (benefit) from continuing operations consisted of the following for the years ended August 31 (in thousands):
Current:
Federal
State
Foreign
Total current tax expense (benefit)
Deferred:
Federal
State
Foreign
Total deferred tax expense (benefit)
Total income tax expense (benefit)
2014
2013
2012
$
$
$
$
5,927
$
229
177
$
556
356
764
6,333
$
1,676
$
(4,911) $
880
(301)
(4,332)
2,001
$
(58,194) $
(264)
(644)
(59,102)
(57,426) $
5,267
453
(2)
5,718
13,166
(2,748)
(2,097)
8,321
14,039
A reconciliation of the difference between the federal statutory rate and the Company’s effective tax rate for the years ended August
31 is as follows:
2014
2013
2012
Federal statutory rate
State taxes, net of credits
Foreign income taxed at different rates
Section 199 deduction
Non-deductible officers’ compensation
Noncontrolling interests
Research and development credits
Fixed asset tax basis adjustment
Valuation allowance on deferred tax assets
Unrecognized tax benefits
Non-deductible goodwill
Foreign interest income
Other
Effective tax rate
35.0%
(7.1)
(8.1)
(6.9)
2.7
(12.1)
(1.0)
(21.3)
21.8
18.0
—
—
(2.4)
18.6%
35.0%
1.2
(3.5)
0.5
(0.1)
0.2
0.2
—
(8.6)
—
(7.1)
—
(0.8)
17.0%
35.0%
(5.7)
4.2
(0.3)
1.5
(2.2)
(2.0)
—
—
—
—
0.7
1.5
32.7%
In fiscal 2014, the effective tax rate 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
79 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
jurisdictions, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax
benefit will not be realized.
In fiscal 2013, the effective tax rate differed from the U.S. federal statutory rate of 35% primarily due to the recognition of a
valuation allowance of $29 million 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 impairment charge of goodwill and by net operating
losses at the subsidiary. The valuation allowance was recognized as a result of negative evidence, including recent losses at the
subsidiary, outweighing the more subjective positive evidence, indicating that it is more likely than not that the associated tax
benefit will not be realized.
In fiscal 2012 the effective tax rate 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.
Realization of the foreign subsidiaries’ deferred tax assets is dependent upon the Company generating sufficient taxable income
in these tax jurisdictions in future years to benefit from the reversal of net deductible temporary differences and from the utilization
of net operating losses. Management believes that it is more likely than not that the Company will realize the benefits of its deferred
tax assets, net of valuation allowances, as of August 31, 2014.
Deferred tax assets and liabilities were comprised of the following as of August 31 (in thousands):
Deferred tax assets:
Environmental liabilities
Employee benefit accruals
State income tax and other
Net operating loss carryforwards
State credit carryforwards
Inventory valuation methods
Amortizable goodwill and other intangibles
Valuation allowances
Total deferred tax assets
Deferred tax liabilities:
Accelerated depreciation and other basis differences
Prepaid expense acceleration
Foreign currency translation adjustment
Total deferred tax liabilities
Net deferred tax liability
2014
2013
$
11,975
$
14,983
3,096
11,357
5,567
242
34,102
(32,086)
49,236
62,774
2,250
93
65,117
15,881
$
$
$
$
$
$
12,390
9,378
2,478
11,758
5,360
1,390
38,820
(29,696)
51,878
68,609
2,418
30
71,057
19,179
As of August 31, 2014, foreign operating loss carryforwards were $38 million, which expire if not used between 2015 and 2033.
State credit carryforwards will expire if not used between 2015 and 2025.
Accounting for Uncertainty in Income Taxes
The following table summarizes the activity related to the Company’s reserve for unrecognized tax benefits, excluding interest
and penalties, for the years ended August 31 (in thousands):
Unrecognized tax benefits, as of the beginning of the year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions for tax positions of the current year
Unrecognized tax benefits, as of the end of the year
2014
2013
2012
526
$
491
$
1
—
2,253
2,780
$
—
(31)
66
526
$
303
—
(143)
331
491
$
$
80 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company does not anticipate any material changes to the reserve in the next 12 months.
The recognized amounts of tax-related penalties and interest were not material for all periods presented.
The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. The federal
statute of limitations has expired for fiscal 2010 and prior years. The U.S., Canada and multiple state tax authorities are currently
examining the Company’s income tax returns for fiscal years 2009 to 2012.
Note 19 – Net Income (Loss) Per Share
The following table sets forth the information used to compute basic and diluted net income (loss) per share attributable to SSI
for the years ended August 31 (in thousands):
2014
2013
2012
Income (loss) from continuing operations
Net income attributable to noncontrolling interests
Income (loss) from continuing operations attributable to SSI
Income from discontinued operations, net of tax
Net income (loss) attributable to SSI
Computation of shares:
$
$
$
8,734
(3,667)
5,067
857
(280,023) $
(1,419)
(281,442)
—
5,924
$
(281,442) $
Weighted average common shares outstanding, basic
Incremental common shares attributable to dilutive stock options,
performance share awards, DSUs and RSUs
Weighted average common shares outstanding, diluted
26,834
166
27,000
26,656
—
26,656
28,917
(1,513)
27,404
—
27,404
27,317
236
27,553
Common stock equivalent shares of 618,348, 957,235 and 69,081 were considered antidilutive and were excluded from the
calculation of diluted net income (loss) per share for the years ended August 31, 2014, 2013 and 2012, respectively.
Note 20 – Related Party Transactions
The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These
purchases totaled $30 million, $26 million and $41 million for the years ended August 31, 2014, 2013 and 2012, respectively. Net
advances to these joint ventures were $3 million, $2 million and less than $1 million for the years ended August 31, 2014, 2013
and 2012, respectively. The Company had immaterial balances due from joint ventures as of August 31, 2014 and owed $3 million
to joint ventures as of August 31, 2013. Amounts receivable from joint venture partners were $1 million as of August 31, 2014
and 2013.
In connection with the acquisition of the metals recycling business assets of Amix Salvage and Sales Ltd. in March 2011, the
Company entered into a series of agreements to obtain barging and other services and lease property with entities owned by the
minority shareholder of the Company’s subsidiary that operates its MRB facilities in Vancouver, British Columbia and Alberta,
Canada. On March 8, 2013, the Company purchased the noncontrolling interest in that subsidiary and, as a result, those entities
under common ownership of the former minority shareholder ceased to be related parties of the Company. Prior to its purchase of
the noncontrolling interest, the Company paid $5 million and $9 million primarily for barging services under these agreements
for the years ended August 31, 2013 and 2012, respectively.
In connection with the acquisition of a metals recycling business in fiscal 2011, the Company entered into an agreement with the
selling parties, one of which was an employee of the Company, whereby the selling parties agreed to indemnify the Company for
property improvements in excess of a contractually defined threshold on property owned by the selling parties and leased to the
Company. The Company recognized an amount receivable of $1 million as of August 31, 2012 under the agreement, for which
payment was received in the first quarter of fiscal 2013.
Thomas D. Klauer, Jr., President of the Company’s Auto Parts Business, is the sole shareholder of a corporation that is the 25%
minority partner in a partnership in which the Company is the 75% partner and which operates five self-service stores in Northern
California. Mr. Klauer’s 25% share of the profits of this partnership totaled $2 million, $1 million and $2 million for the years
ended August 31, 2014, 2013 and 2012, respectively. The partnership leases properties from entities in which Mr. Klauer has
ownership interests under agreements that expire in March 2016 with options to renew the leases, upon expiration, for multiple
81 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
periods. The rent paid by the partnership to the entities in which Mr. Klauer has ownership interests was $1 million in each of the
years ended August 31, 2014, 2013 and 2012.
Certain members of the Schnitzer family own significant interests in, or are related to owners of, MMGL Corp (“MMGL”, formerly
known as Schnitzer Investment Corp.), which is engaged in the real estate business and was a subsidiary of the Company prior to
1989. MMGL is considered a related party for financial reporting purposes. The Company and MMGL are both potentially
responsible parties with respect to Portland Harbor, which has been designated as a Superfund site since December 2000. The
Company and MMGL have worked together in response to Portland Harbor matters, and the Company has paid all of the legal
and consulting fees for the joint defense, in part due to its environmental indemnity obligation to MMGL with respect to the
Portland scrap metal operations property. The Company and MMGL have agreed to an equitable cost sharing arrangement with
respect to defense costs under which MMGL will pay 50% of the legal and consulting costs, net of insurance recoveries. The
amounts receivable from (payable to) MMGL vary from period-to-period because of the timing of incurring legal and consulting
fees, payments for cost reimbursements and insurance recoveries. Amounts receivable from MMGL under this agreement were
$1 million and less than $1 million as of August 31, 2014 and 2013, respectively.
Note 21 – Segment Information
The accounting standards for reporting information about operating segments define an operating segment as a component of an
enterprise that engages in business activities from which it may earn revenues and incur expenses for which discrete financial
information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources
and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer. The Company is
organized by line of business. While the Chief Executive Officer evaluates results in a number of different ways, the line of business
management structure is the primary basis for which the allocation of resources and financial results are assessed. Under the
aforementioned criteria, the Company operates in three operating and reporting segments: metal purchasing, processing, recycling
and selling (MRB), used auto parts (APB) and mini-mill steel manufacturing (SMB). Additionally, the Company is a noncontrolling
partner in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal.
MRB buys and processes ferrous and nonferrous metal for sale to foreign and other domestic steel producers or their representatives
and to SMB. MRB also purchases ferrous metal from other processors for shipment directly to SMB.
APB purchases used and salvaged vehicles, sells parts from those vehicles through its retail facilities and wholesale operations,
and sells the remaining portion of the vehicles to metal recyclers, including MRB.
SMB operates a steel mini-mill that produces a wide range of finished steel products using recycled metal and other raw materials.
Intersegment sales from MRB to SMB are made at rates that approximate export market prices for shipments from the West Coast
of the U.S. In addition, the Company has intersegment sales of autobodies from APB to MRB at rates that approximate market
prices. These intercompany sales tend to produce intercompany profits which are not recognized until the finished products are
ultimately sold to third parties.
The information provided below is obtained from internal information that is provided to the Company’s chief operating decision
maker for the purpose of corporate management. The Company uses segment operating income (loss) to measure segment
performance. The Company does not allocate corporate interest income and expense, income taxes, other income and expenses
related to corporate activity or corporate expense for management and administrative services that benefit all three segments. In
addition, the Company does not allocate restructuring charges and other exit-related costs to the segment operating income (loss)
because management does not include this information in its measurement of the performance of the operating segments. Because
of this unallocated income and expense, the operating income (loss) of each reporting segment does not reflect the operating income
(loss) the reporting segment would report as a stand-alone business. All amounts presented exclude the results of operations of the
Company’s discontinued full-service used auto parts operation.
82 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the Company’s total assets as of August 31 (in thousands):
Total assets:
Metals Recycling Business(1)
Auto Parts Business
Steel Manufacturing Business
Total segment assets
Corporate and eliminations
Total assets
Property, plant and equipment, net (2)
_____________________________
2014
2013
$
1,343,771
$
1,316,202
361,411
350,344
2,055,526
(700,316)
1,355,210
523,433
$
$
359,977
330,282
2,006,461
(600,949)
1,405,512
564,426
$
$
(1) MRB total assets include $15 million as of August 31, 2014 and 2013, for investments in joint venture partnerships.
(2) Property, plant and equipment, net includes $75 million and $85 million as of August 31, 2014 and 2013, respectively, at our Canadian locations.
83 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table below illustrates the Company’s results by reporting segment for the years ended August 31 (in thousands):
$
$
$
$
$
$
$
Metals Recycling Business:
Revenues
Less: Intersegment revenues
MRB external customer revenues
Auto Parts Business:
Revenues
Less: Intersegment revenues
APB external customer revenues
Steel Manufacturing Business:
Revenues
Total revenues
Depreciation and amortization:
Metals Recycling Business
Auto Parts Business
Steel Manufacturing Business
Segment depreciation and amortization
Corporate
Total depreciation and amortization
Capital expenditures:
Metals Recycling Business
Auto Parts Business
Steel Manufacturing Business
Segment capital expenditures
Corporate
Total capital expenditures
Reconciliation of the Company’s segment operating income (loss) to
income (loss) from continuing operations before income taxes:
Metals Recycling Business(1)
Auto Parts Business
Steel Manufacturing Business
Segment operating income (loss)
Restructuring charges and other exit-related costs
Corporate and eliminations
Operating income (loss)
Interest expense
Other income, net
2014
2013
2012
$
2,102,935
(188,103)
1,914,832
$
2,210,484
(178,341)
2,032,143
2,948,707
(183,906)
2,764,801
327,569
(87,458)
240,111
388,640
2,543,583
56,368
11,861
8,256
76,485
2,724
79,209
16,881
12,400
5,379
34,660
4,487
$
$
$
$
313,306
(75,992)
237,314
352,454
2,621,911
58,964
11,793
9,072
79,829
3,241
83,070
61,930
12,769
7,582
82,281
8,100
$
$
$
$
39,147
$
90,381
$
30,083
$
21,434
18,538
70,055
(6,967)
(42,772)
20,316
(10,804)
1,223
(311,549) $
24,539
6,541
(280,469)
(7,906)
(39,414)
(327,789)
(9,743)
83
316,884
(73,974)
242,910
333,227
3,340,938
57,855
10,920
9,436
78,211
4,045
82,256
60,212
7,525
5,556
73,293
5,267
78,560
63,872
33,304
(2,081)
95,095
(5,012)
(36,415)
53,668
(11,880)
1,168
42,956
Income (loss) from continuing operations before income taxes $
10,735
$
(337,449) $
_____________________________
(1) MRB operating income (loss) includes $1 million, $1 million and $2 million in income from joint ventures accounted for by the equity method in fiscal 2014,
2013 and 2012, respectively. The MRB operating loss for fiscal 2013 also includes a goodwill impairment charge of $321 million and other asset impairment
charges of $13 million.
84 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
SCHNITZER STEEL INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following revenues from external customers are presented based on the sales destination and by major product for the years
ended August 31 (in thousands):
Revenues based on sales destination:
Foreign
Domestic
Total revenues from external customers
Major product information:
Ferrous scrap metal
Nonferrous scrap metal and other
Auto parts
Finished steel products
Semi-finished steel products
$
$
$
2014
2013
2012
1,473,069
1,070,514
2,543,583
$
$
1,657,736
964,175
2,621,911
$
$
2,284,152
1,056,786
3,340,938
1,394,046
$
1,500,115
$
2,117,055
520,786
240,111
377,678
10,962
532,028
237,314
346,982
5,472
647,746
242,910
332,719
508
Total revenues from external customers
$
2,543,583
$
2,621,911
$
3,340,938
In fiscal 2014, 2013 and 2012, there were no external customers that accounted for more than 10% of the Company’s consolidated
revenues. Sales to customers in foreign countries are a significant part of the Company’s business. The schedule below identifies
those foreign countries in which the Company’s sales exceeded 10% of consolidated revenues in any of the last three years ended
August 31 (in thousands):
China
Turkey
South Korea
_____________________________
2014
% of
Revenue
2013
% of
Revenue
2012
% of
Revenue
$
390,634
15.4% $
562,558
21.5% $
719,979
261,558
265,912
10.3%
10.5%
341,418
N/A
13.0%
N/A
435,558
397,525
22.0%
13.0%
12.0%
(1) N/A - sales were less than the 10% threshold and, as such, disclosure is not applicable.
85 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
In the opinion of management, this unaudited quarterly financial summary includes all adjustments necessary to present fairly the
results for the periods represented (in thousands, except per share amounts):
Quarterly Financial Data (Unaudited)
Fiscal 2014
First
Second
Third
Fourth
Revenues
Operating income (loss)
Income (loss) from discontinued operations, net of tax
Net income (loss) attributable to SSI
Basic net income (loss) per share attributable to SSI
Diluted net income (loss) per share attributable to SSI
Revenues
Operating income (loss)
Net income (loss) attributable to SSI
Basic net income (loss) per share attributable to SSI
Diluted net income (loss) per share attributable to SSI
$
$
$
$
$
$
$
$
$
$
$
587,745
$
(3,625) $
— $
(6,228) $
(0.23) $
(0.23) $
626,147
6,584
$
$
637,787
1,629
$
$
691,904
15,728
— $
1,789
0.07
$
$
$
0.07
Fiscal 2013
— $
3,110
0.12
0.12
First
Second
Third
592,820
$
662,210
1,213
$
(1,671) $
(0.06) $
(0.06) $
11,390
8,643
0.32
0.32
$
$
$
$
$
710,295
7,187
820
0.03
0.03
857
7,253
0.27
0.27
Fourth
656,586
(347,579)
(289,234)
(10.82)
(10.82)
$
$
$
$
$
$
$
$
In the fourth quarter of fiscal 2013, the Company recorded a goodwill impairment charge of $321 million, other asset impairment
charges of $13 million, restructuring charges of $3 million and a valuation allowance on deferred tax assets of $29 million. See
Note 2 - Summary of Significant Accounting Policies, Note 7 - Goodwill and Other Intangible Assets, net and Note 18 – Income
Taxes for further detail.
86 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
Schedule II – Valuation and Qualifying Accounts
For the Years Ended August 31, 2014, 2013 and 2012
(In thousands)
Column A
Description
Column B
Balance at
beginning
of period
Column C
Column D
Charges to cost
and expenses
Deductions
Column E
Balance at
end of
period
Fiscal 2014
Allowance for doubtful accounts
Allowance for notes and other contractual receivables
Deferred tax valuation allowance
Fiscal 2013
Allowance for doubtful accounts
Allowance for notes and other contractual receivables
Deferred tax valuation allowance
Fiscal 2012
Allowance for doubtful accounts
Deferred tax valuation allowance
$
$
$
$
$
$
$
$
2,990
7,803
29,696
4,459
$
$
$
$
— $
794
6,148
589
$
$
$
650
$
(201) $
$
4,648
(920) $
— $
(2,258) $
2,720
7,602
32,086
584
7,803
28,902
688
218
$
$
$
$
$
(2,053) $
— $
2,990
7,803
— $
29,696
(2,377) $
(13) $
4,459
794
87 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and
Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commission’s rules and forms and that such information is
accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated,
can only provide reasonable assurance of achieving the desired control objectives. The Company’s management, with the
participation of the Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer have concluded that, as of August 31, 2014, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s Annual Report on Internal Control Over Financial Reporting is presented within Part II, Item 8 of this report and
is incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during its most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
88 / Schnitzer Steel Industries, Inc. Form 10-K 2014
Table of Contents
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by Item 401 of Regulation S-K regarding directors, and information required by Items 405, 407(c)(3), 407
(d)(4) and 407(d)(5) of Regulation S-K, will be included under “Election of Directors,” “Corporate Governance” and “Section 16
(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders
and is incorporated herein by reference.
Executive Officers of the Registrant
Name
Tamara L. Lundgren
Richard D. Peach
Michael Henderson
Thomas D. Klauer, Jr.
Jeffrey Dyck
Richard C. Josephson
Belinda Gaye Hyde
Stefano Gaggini
Age
Office
57
51
55
60
51
66
43
43
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
Senior Vice President and President, Metals Recycling Business
Senior Vice President and President, Auto Parts Business
Senior Vice President and President, Steel Manufacturing Business
Senior Vice President, General Counsel and Secretary
Senior Vice President and Chief Human Resources Officer
Vice President, Corporate Controller and Principal Accounting Officer
Tamara L. Lundgren has been our President and Chief Executive Officer since December 2008. She joined the Company in
September 2005 as Vice President and Chief Strategy Officer and held roles of increasing responsibility, including Executive Vice
President and Chief Operating Officer. Prior to joining us, Ms. Lundgren was a Managing Director in the Investment Banking
Division of JPMorgan Chase, which she joined in 2001, and Deutsche Bank, which she joined in 1996. Ms. Lundgren began her
career as an attorney and was a partner at Hogan & Hartson LLP in Washington, D.C.
Richard D. Peach joined us in March 2007 and was appointed Chief Financial Officer in December 2007. Mr. Peach was the Chief
Financial Officer and Senior Vice President with the Western U.S. energy utility, PacifiCorp, from 2003 to 2006. From 1995 to
2002, he served in a variety of senior management positions with ScottishPower, the international energy company, including
Group Controller, Managing Director of United Kingdom Customer Services and Director of Energy Supply Finance. Prior to
joining ScottishPower, Mr. Peach was a senior manager with Coopers & Lybrand. Mr. Peach is a member of the Institute of
Chartered Accountants of Scotland.
Michael Henderson joined us in April 2012 as Chief Operating Officer of the Metals Recycling Business and became President
of the Metals Recycling Business in August 2013. Prior to joining Schnitzer, he was Eastern Region President for Sims Metal
Management where he was responsible for 26 facilities, including four shredders and five port locations. He began his career with
Naparano Iron & Metal and has more than 30 years in the scrap industry, including expertise in both the ferrous and nonferrous
sides of the business.
Thomas D. Klauer, Jr. has been the President of the Auto Parts Business since our acquisition of Pick-N-Pull Auto Dismantling,
Inc. in 2003. Before that Mr. Klauer was employed by Pick-N-Pull, having joined that Company in 1989.
Jeffrey Dyck joined the Steel Manufacturing Business in February 1994 and served in a variety of positions, including Manager
of the Rolling Mills and Director of Operations of the Steel Manufacturing Business, before his promotion to President of SMB
in June 2005.
Richard C. Josephson joined us in January 2006 as Vice President, General Counsel and Secretary. Before that Mr. Josephson was
a Member of the law firm Stoel Rives LLP, where he had practiced law since 1973.
Belinda Gaye Hyde joined us in October 2011 as Chief Human Resources Officer. Prior to joining us, Ms. Hyde was Vice President
of Human Resources with Celanese, a global specialty materials company, from 2008 to 2011. Previously, she led the talent
management, development, and communications functions for Life Technologies, a biotechnology company, from 2005 to 2008.
Ms. Hyde also worked at Dell Computer from 2000 to 2005 in a variety of Human Resources leadership positions.
Stefano Gaggini joined us in July 2011 as Senior Manager of SEC Reporting and Technical Accounting and became Director of
SEC Reporting and Technical Accounting in March 2012. He became Vice President, Corporate Controller and Principal
Accounting Officer in December 2013. Prior to joining Schnitzer, Mr. Gaggini was a senior manager at KPMG LLP, where he
89 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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served in various auditing roles since 1998 in the Portland, Oregon and Zurich, Switzerland offices. He is licensed as a Certified
Public Accountant in the State of Oregon.
Code of Ethics
On April 28, 2010, the Board of Directors approved a revised Company’s Code of Conduct that is applicable to all of its directors
and employees. It includes additional provisions that apply to the Company’s principal executive officer, principal financial officer,
principal accounting officer or controller, and persons performing similar functions (the “Senior Financial Officers”). This
document is posted on the Corporate Governance page of the Company’s internet website (www.schnitzersteel.com) and is available
free of charge by calling the Company or submitting a request to ir@schn.com. The Company intends to satisfy its disclosure
obligations with respect to any amendments to or waivers of the Code for directors, executive officers or Senior Financial Officers
by posting such information on its internet website set forth above rather than by filing a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Items 402, 407(e)(4) and 407(e)(5) of Regulation S-K will be included under “Compensation of
Executive Officers,” “Compensation Discussion and Analysis”, “Director Compensation”, “Corporate Governance – Assessment
of Compensation Risk” and “Compensation Committee Report” in the Company’s Proxy Statement to be filed for its 2015 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management, as required by Item 403 of Regulation
S-K, will be included under “Voting Securities and Principal Shareholders” in the Company’s Proxy Statement for its 2015 Annual
Meeting of Shareholders and is incorporated herein by reference. Information with respect to securities authorized for issuance
under equity compensation plans, as required by Item 201(d) of Regulation S-K, will be included under “Compensation Plan
Information” in the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Items 404 and 407(a) of Regulation S-K will be included under “Certain Transactions” and “Corporate
Governance – Director Independence” in the Company’s Proxy Statement for its 2015 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding the Company’s principal accountant fees and services required by Item 9(e) of Schedule 14A will be included
under “Independent Registered Public Accounting Firm” in the Company’s Proxy Statement for its 2015 Annual Meeting of
Shareholders and is incorporated herein by reference.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1 The following financial statements are filed as part of this report:
PART IV
The Report of Independent Registered Public Accounting Firm, the Company’s Consolidated Financial Statements,
the Notes thereto and the quarterly financial data (unaudited) are on pages 47 through 87 of this report.
2 The following financial statement schedule is filed as part of this report:
Schedule II Valuation and Qualifying Accounts is on page 88 of this report.
All other schedules are omitted as the information is either not applicable or is not required.
3 The following exhibits are filed as part of this report:
3.1
2006 Restated Articles of Incorporation (as corrected December 2, 2011) of the Registrant. Filed as Exhibit 3.1
to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2011, and incorporated
herein by reference.
3.2 Restated Bylaws of the Registrant. Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on
December 13, 2013, and incorporated herein by reference.
4.4 Rights Agreement, dated March 21, 2006, between the Registrant and Wells Fargo Bank, N.A. Filed as Exhibit
4.1 to the Registrant’s Current Report on Form 8-K filed on March 22, 2006, and incorporated herein by reference.
4.5 Second Amended and Restated Credit Agreement, dated February 9, 2011, between the Registrant, Bank of
America, NA, and the Other Lenders Party Thereto. Filed as Exhibit 4.1 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended May 31, 2011, and incorporated herein by reference.
4.6 Amendment, dated as of April 11, 2012, to Second Amended and Restated Credit Agreement, dated as of February
9, 2011, among Schnitzer Steel Industries, Inc., as US Borrower, and Schnitzer Steel BC, Inc., Schnitzer Steel
Pacific, Inc., as Canadian Borrowers, Bank of America, N.A., as Administrative Agent, and the other Lenders
party thereto. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 16, 2012, and
incorporated herein by reference.
4.7 Second Amendment, dated as of October 28, 2013, to Second Amended and Restated Credit Agreement, dated as
of February 9, 2011, among Schnitzer Steel Industries, Inc., as US Borrower, and Schnitzer Steel Canada Ltd., as
Canadian Borrower, Bank of America, N.A., as Administrative Agent, and the other Lenders party thereto. Filed
as an Exhibit to the Registrant's Annual Report on Form 10-K filed on October 29, 2013, and incorporated herein
by reference.
9.1 Schnitzer Steel Industries, Inc. 2001 Restated Voting Trust and Buy-Sell Agreement, dated March 26, 2001. Filed
as Exhibit 9.1 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001, and
incorporated herein by reference.
10.1 Lease Agreement, dated September 1, 1988, between Schnitzer Investment Corp. and the Registrant, as amended,
relating to the Portland Metals Recycling operation and which has terminated except for surviving indemnity
obligations. Filed as Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1 filed on September 24,
1993 (Commission File No. 33-69352), and incorporated herein by reference.
10.2 Purchase and Sale Agreement, dated May 4, 2005, between Schnitzer Investment Corp. and the Registrant, relating
to purchase by the Registrant of the Portland Metals Recycling operations real estate. Filed as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K filed on May 10, 2005, and incorporated herein by reference.
10.3 Third Amended Shared Services Agreement, dated July 26, 2006, between the Registrant, Schnitzer Investment
Corp. and Island Equipment Company, Inc. Filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-
K filed on July 28, 2006, and incorporated herein by reference.
10.4 Lease Agreement, dated January 1, 2010, between Commercial One Properties, LLC and Pick-N-Pull San Jose
Auto Dismantlers relating to the San Jose North Location. Filed as Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended February 28, 2010, and incorporated herein by reference.
10.5 Lease Agreement, dated January 1, 2010, between Commercial Court Properties, LLC, Pick-N-Pull Auto
Dismantlers and Pick-N-Pull San Jose Auto Dismantlers relating to the San Jose North Location. Filed as Exhibit
10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2010, and incorporated
herein by reference.
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*10.6 Executive Annual Bonus Plan. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
February 1, 2010, and incorporated herein by reference.
*10.7 Fiscal 2010 Annual Performance Bonus Program for John D. Carter and Tamara L. Lundgren. Filed as Exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2009, and incorporated
herein by reference.
*10.8 Annual Incentive Compensation Plan, effective September 1, 2006. Filed as Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended February 28, 2007, and incorporated herein by reference.
*10.9
1993 Stock Incentive Plan of the Registrant as Amended and Restated on November 7, 2013. Filed as Appendix
A to the Registrant’s Definitive Proxy Statement filed on December 18, 2013, and incorporated herein by reference.
*10.10 Form of Stock Option Agreement used for option grants to employees under the 1993 Stock Incentive Plan. Filed
as Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 31, 2007, and
incorporated herein by reference.
*10.11 Form of Stock Option Agreement used for option grants to non-employee directors under the 1993 Stock Incentive
Plan. Filed as Exhibit 10.15 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended August 31,
2004, and incorporated herein by reference.
*10.12 Form of Deferred Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for non-employee
directors. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 28, 2006, and
incorporated herein by reference.
*10.13 Deferred Compensation Plan for Non-Employee Directors. Filed as Exhibit 10.2 to the Registrant’s Current Report
on Form 8-K filed on July 28, 2006, and incorporated herein by reference.
*10.14 Amended and Restated Supplemental Executive Retirement Bonus Plan of the Registrant effective January 1,
2009. Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 31,
2009, and incorporated herein by reference.
*10.15 Form of Change in Control Severance Agreement between the Registrant and executive officers other than Tamara
L. Lundgren and used for agreements entered into prior to 2011. Filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on May 5, 2008, and incorporated herein by reference.
*10.16 Form of Change in Control Severance Agreement between the Registrant and executive officers and used for
agreements entered into after 2010.
*10.17 Form of Change in Control Severance Agreement between the Registrant and each executive officer other than
John D. Carter and Tamara L. Lundgren. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K
filed on May 5, 2008, and incorporated herein by reference.
*10.18 Amended and Restated Employment Agreement by and between the Registrant and Tamara L. Lundgren dated
October 29, 2008. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 4,
2008, and incorporated herein by reference.
*10.19 Amended and Restated Change in Control Severance Agreement by and between the Registrant and Tamara L.
Lundgren dated October 29, 2008. Filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on
November 4, 2008, and incorporated herein by reference.
*10.20 Amended and Restated Change in Control Severance Agreement by and between the Registrant and John D. Carter
dated October 29, 2008. Filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on November
4, 2008, and incorporated herein by reference.
*10.21 Form of Indemnity Agreement for Directors and Executive Officers. Filed as Exhibit 10.3 to the Registrant’s
Current Report on Form 8-K filed on July 28, 2006, and incorporated herein by reference.
*10.22 Fiscal 2011 Annual Performance Bonus Program for John D. Carter and Tamara L. Lundgren. Filed as Exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2010 and
incorporated herein by reference.
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*10.23 Amendment No. 1 dated June 29, 2011 to Amended and Restated Employment Agreement by and between the
Registrant and Tamara L. Lundgren dated October 29, 2008. Filed as Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended May 31, 2011 and incorporated herein by reference.
*10.24 Amended and Restated Employment Agreement by and between the Registrant and John D. Carter dated June
29, 2011. Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 31,
2011 and incorporated herein by reference.
*10.25 Form of Waiver of Annual Incentive dated as of August 28, 2012 executed by executive officers as a condition
of receipt of stock options. Filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on
August 31, 2012, and incorporated herein by reference.
*10.26 Form of Non-Statutory Stock Option Agreement used for premium-priced option grants to executive officers on
August 28, 2012 under the 1993 Stock Incentive Plan. Filed as Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K filed on August 31, 2012, and incorporated herein by reference.
*10.27 Form of Restricted Stock Unit Award Agreement used for award to chief executive officer on August 30, 2012
under the 1993 Stock Incentive Plan. Filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K
filed on August 31, 2012, and incorporated herein by reference.
*10.28 Form of Restricted Stock Unit Award Agreement under the 1993 Stock Incentive Plan used for awards granted in
fiscal 2013. Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
November 30, 2012 and incorporated herein by reference.
*10.29 Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in
fiscal 2012. Filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
November 30, 2012 and incorporated herein by reference.
*10.30 Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in
fiscal 2013. Filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K filed on October 29, 2013
and incorporated herein by reference.
*10.31 Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in
fiscal 2014. Filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
November 30, 2013 and incorporated herein by reference.
*10.32 Fiscal 2014 Annual Performance Bonus Program for Tamara L. Lundgren. Filed as Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2013 and incorporated herein by
reference.
18.1 Preferability letter provided by PricewaterhouseCoopers LLP, the Company’s registered public accounting firm,
to change the measurement date in connection with the Company’s annual goodwill impairment test. Filed as
Exhibit 18.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended November 30,
2013 and incorporated herein by reference.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
24.1 Powers of Attorney.
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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101 The following financial information from Schnitzer Steel Industries, Inc.’s Annual Report on Form 10-K for the
years ended August 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Statements of Operations for the years ended August 31, 2014, 2013 and 2012, (ii) Consolidated Balance Sheets
as of August 31, 2014, and August 31, 2013, (iii) Consolidated Statements of Other Comprehensive Loss (iv)
Consolidated Statements of Cash Flows for the years ended August 31, 2014, 2013 and 2012, and (v) the Notes
to Consolidated Financial Statements.
*Management contract or compensatory plan or arrangement.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other
disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them
for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made
solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the
date they were made or at any other time.
94 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: October 28, 2014
SCHNITZER STEEL INDUSTRIES, INC.
/s/ RICHARD D. PEACH
By:
Richard D. Peach
Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant on October 28, 2014 in the capacities indicated.
Signature
Title
Principal Executive Officer:
/s/ TAMARA L. LUNDGREN
Tamara L. Lundgren
Principal Financial Officer:
/s/ RICHARD D. PEACH
Richard D. Peach
Principal Accounting Officer:
/s/ STEFANO GAGGINI
Stefano Gaggini
Directors:
*DAVID J. ANDERSON
David J. Anderson
*JOHN D. CARTER
John D. Carter
*WILLIAM A. FURMAN
William A. Furman
*WAYLAND R. HICKS
Wayland R. Hicks
*DAVID L. JAHNKE
David L. Jahnke
President and Chief Executive Officer
Senior Vice President and Chief Financial Officer
Vice President, Corporate Controller and Principal Accounting
Officer
Director
Director
Director
Director
Director
95 / Schnitzer Steel Industries, Inc. Form 10-K 2014
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Signature
*JUDITH A. JOHANSEN
Judith A. Johansen
*WILLIAM D. LARSSON
William D. Larsson
*KENNETH M. NOVACK
Kenneth M. Novack
*By:
/s/ RICHARD D. PEACH
Attorney-in-fact, Richard D. Peach
Title
Director
Director
Director
96 / Schnitzer Steel Industries, Inc. Form 10-K 2014