UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
	For the Quarterly Period Ended ~~November 30, 2016~~May 31, 2017



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

SCHNITZER STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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

299 SW Clay Street, Suite 350 Portland, Oregon		97201
(Address of principal executive offices)		(Zip Code)

(503) 224-9900

(Registrant’s telephone number, including area code)

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

Yes x No o

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

Yes x No o

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



Large accelerated filer	o	Accelerated filer	x	Non-accelerated filer	o



Smaller ~~Reporting~~reporting company	o	Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Yes o No x

The Registrant had ~~26,803,375~~26,857,525 shares of Class A common stock, par value of $1.00 per share, and 200,000 shares of Class B common stock, par value of $1.00 per share, outstanding as of ~~January 3,~~June 22, 2017.

Table of Contents

SCHNITZER STEEL INDUSTRIES, INC.

INDEX



	PAGE
FORWARD LOOKING STATEMENTS	3

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Unaudited Condensed Consolidated Balance Sheets as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016	4

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended ~~November 30,~~May 31, 2017 and 2016 ~~and 2015~~	5

Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the Three and Nine Months Ended ~~November 30,~~May 31, 2017 and 2016 ~~and 2015~~	6

Unaudited Condensed Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~November 30,~~May 31, 2017 and 2016 ~~and 2015~~	7

Notes to the Unaudited Condensed Consolidated Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2025

Item 3. Quantitative and Qualitative Disclosures about Market Risk	3243

Item 4. Controls and Procedures	3244

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	3345

Item 1A. Risk Factors	3345

Item 6. Exhibits	3446

SIGNATURES	3547

Table of Contents

FORWARD-LOOKING STATEMENTS

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

Forward-looking statements in this Quarterly Report on Form 10-Q include statements regarding future events or our expectations, intentions, beliefs and strategies regarding the future, which may include statements regarding trends, cyclicality and changes in the markets we sell into; the Company's outlook, growth initiatives or expected results or objectives, including pricing, margins, sales volumes and profitability; strategic ~~direction;~~direction or goals; targets; 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; obligations under our retirement plans; benefits, savings or additional costs from business realignment, cost containment and productivity improvement programs; and the adequacy of accruals.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “outlook,” “target,” “aim,” “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “may,” “will,” “should,” “could,” “opinions,” “forecasts,” “projects,” “plans,” “future,” “forward,” “potential,” “probable,” and similar expressions. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

We may make other forward-looking statements from time to time, including in reports filed with the Securities and Exchange Commission, press releases, presentations and on 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” in Part I of our most recent Annual Report on Form ~~10-K.~~10-K, as supplemented in "Item 1A. Risk Factors" in Part II of subsequent Quarterly Reports on Form 10-Q. Examples of these risks include: potential environmental cleanup costs related to the Portland Harbor Superfund ~~site;~~site or other locations; the cyclicality and impact of general economic conditions; instability in international markets; volatile supply and demand conditions affecting prices and volumes in the markets for both our products and raw materials we purchase; imbalances in supply and demand conditions in the global steel industry; the impact of goodwill impairment charges; the impact of long-lived asset and joint venture investment impairment charges; the realization of expected benefits or cost reductions associated with productivity improvement and restructuring initiatives; difficulties associated with acquisitions and integration of acquired businesses; customer fulfillment of their contractual obligations; changes in the relative value of the U.S. dollar; 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 consolidation in the steel industry; inability to realize expected benefits from investments in technology; freight rates and the availability of transportation; the impact of equipment upgrades, equipment failures and facility damage on production; product liability claims; the impact of legal proceedings and legal compliance; the adverse impact of climate change; the impact of not realizing deferred tax assets; the impact of tax increases and changes in tax rules; the impact of aone or more cybersecurity ~~incident;~~incidents; costs associated with compliance with environmental regulations; 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.

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except per share amounts)


	November 30, 2016			August 31, 2016			May 31, 2017			August 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	8,100		$	26,819		$	15,209		$	26,819
Accounts receivable, net of allowance for doubtful accounts of $2,331 and $2,315	112,665			113,952
Accounts receivable, net of allowance for doubtful accounts of $2,267 and $2,315							127,457			113,952
Inventories	148,094			132,972			165,832			132,972
Refundable income taxes	1,452			1,254			2,189			1,254
Prepaid expenses and other current assets	23,967			24,809			23,582			24,809
Total current assets	294,278			299,806			334,269			299,806
Property, plant and equipment, net of accumulated depreciation of $726,287 and $714,965	385,750			392,820
Property, plant and equipment, net of accumulated depreciation of $743,202 and $714,965							382,825			392,820
Investments in joint ventures	13,766			13,616			13,385			13,616
Goodwill	166,432			166,847			166,273			166,847
Intangibles, net of accumulated amortization of $3,486 and $3,457	4,775			4,931
Intangibles, net of accumulated amortization of $3,775 and $3,457							4,599			4,931
Other assets	13,893			13,409			19,874			13,409
Total assets	$	878,894		$	891,429		$	921,225		$	891,429
Liabilities and Equity
Current liabilities:
Short-term borrowings	$	701		$	8,374		$	641		$	8,374
Accounts payable	68,867			58,439			69,411			58,439
Accrued payroll and related liabilities	19,017			29,116			34,876			29,116
Environmental liabilities	2,038			1,967			1,903			1,967
Other accrued liabilities	35,287			35,758			38,155			35,758
Total current liabilities	125,910			133,654			144,986			133,654
Deferred income taxes	16,856			16,682			18,565			16,682
Long-term debt, net of current maturities	186,944			184,144			183,802			184,144
Environmental liabilities, net of current portion	44,210			44,383			46,284			44,383
Other long-term liabilities	10,907			11,134			10,030			11,134
Total liabilities	384,827			389,997			403,667			389,997
Commitments and contingencies (Note 6)
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, 26,803 and 26,482 shares issued and outstanding	26,803			26,482
Class A common stock – 75,000 shares $1.00 par value authorized, 26,842 and 26,482 shares issued and outstanding							26,842			26,482
Class B common stock – 25,000 shares $1.00 par value authorized, 200 and 306 shares issued and outstanding	200			306			200			306
Additional paid-in capital	30,841			30,948			36,577			30,948
Retained earnings	473,630			480,100			490,760			480,100
Accumulated other comprehensive loss	(41,214		)	(40,115		)	(41,322		)	(40,115		)
Total SSI shareholders’ equity	490,260			497,721			513,057			497,721
Noncontrolling interests	3,807			3,711			4,501			3,711
Total equity	494,067			501,432			517,558			501,432
Total liabilities and equity	$	878,894		$	891,429		$	921,225		$	891,429

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Revenues	$	334,161		$	321,198		$	477,088		$	351,604		$	1,193,333		$	961,880
Operating expense:
Cost of goods sold	295,892			284,854			411,109			294,738			1,033,805			839,262
Selling, general and administrative	37,492			38,418			48,451			41,696			129,766			113,713
(Income) loss from joint ventures	(412		)	29			(668		)	(258		)	(3,300		)	61
Other asset impairment charges	401			—
Goodwill impairment charge							—			—			—			8,845
Other asset impairment charges (recoveries), net							(1,044		)	—			(643		)	18,458
Restructuring charges and other exit-related activities	201			1,925			93			542			(200		)	7,758
Operating income (loss)	587			(4,028		)	19,147			14,886			33,905			(26,217		)
Interest expense	(1,741		)	(1,859		)	(2,131		)	(2,905		)	(5,969		)	(6,779		)
Other income, net	437			407
Loss from continuing operations before income taxes	(717		)	(5,480		)
Income tax benefit	62			578
Loss from continuing operations	(655		)	(4,902		)
Other income (expense), net							524			(81		)	1,318			763
Income (loss) from continuing operations before income taxes							17,540			11,900			29,254			(32,233		)
Income tax expense							(161		)	(95		)	(736		)	(810		)
Income (loss) from continuing operations							17,379			11,805			28,518			(33,043		)
Loss from discontinued operations, net of tax	(53		)	(65		)	(127		)	(116		)	(275		)	(1,206		)
Net loss	(708		)	(4,967		)
Net income (loss)							17,252			11,689			28,243			(34,249		)
Net income attributable to noncontrolling interests	(618		)	(329		)	(687		)	(689		)	(1,967		)	(1,294		)
Net loss attributable to SSI	$	(1,326	)	$	(5,296	)
Net income (loss) attributable to SSI							$	16,565		$	11,000		$	26,276		$	(35,543	)

Net loss per share attributable to SSI:
Net income (loss) per share attributable to SSI:
Basic:
Loss per share from continuing operations attributable to SSI	$	(0.05	)	$	(0.19	)
Income (loss) per share from continuing operations attributable to SSI							$	0.60		$	0.41		$	0.97		$	(1.26	)
Loss per share from discontinued operations attributable to SSI	—			—			—			—			(0.01		)	(0.04		)
Net loss per share attributable to SSI⁽¹⁾	$	(0.05	)	$	(0.20	)
Net income (loss) per share attributable to SSI⁽¹⁾							$	0.60		$	0.40		$	0.96		$	(1.31	)
Diluted:
Loss per share from continuing operations attributable to SSI	$	(0.05	)	$	(0.19	)
Income (loss) per share from continuing operations attributable to SSI							$	0.60		$	0.41		$	0.96		$	(1.26	)
Loss per share from discontinued operations attributable to SSI	—			—			—			—			(0.01		)	(0.04		)
Net loss per share attributable to SSI⁽¹⁾	$	(0.05	)	$	(0.20	)
Net income (loss) per share attributable to SSI⁽¹⁾							$	0.60		$	0.40		$	0.95		$	(1.31	)
Weighted average number of common shares:
Basic	27,372			27,121			27,601			27,261			27,499			27,195
Diluted	27,372			27,121			27,703			27,327			27,692			27,195
Dividends declared per common share	$	0.1875		$	0.1875		$	0.1875		$	0.1875		$	0.5625		$	0.5625

____________________________


(1)	May not foot due to rounding.

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~LOSS~~INCOME (LOSS)

(Unaudited, in thousands)


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Net loss	$	(708	)	$	(4,967	)
Net income (loss)							$	17,252		$	11,689		$	28,243		$	(34,249	)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(1,034		)	(1,009		)	(694		)	1,485			(1,488		)	(416		)
Cash flow hedges, net	—			240			—			—			—			240
Pension obligations, net	(65		)	41			266			65			281			170
Total other comprehensive loss, net of tax	(1,099		)	(728		)
Comprehensive loss	(1,807		)	(5,695		)
Total other comprehensive income (loss), net of tax							(428		)	1,550			(1,207		)	(6		)
Comprehensive income (loss)							16,824			13,239			27,036			(34,255		)
Less comprehensive income attributable to noncontrolling interests	(618		)	(329		)	(687		)	(689		)	(1,967		)	(1,294		)
Comprehensive loss attributable to SSI	$	(2,425	)	$	(6,024	)
Comprehensive income (loss) attributable to SSI							$	16,137		$	12,550		$	25,069		$	(35,549	)

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)


	Three Months Ended November 30,						Nine Months Ended May 31,
	2016			2015			2017			2016
Cash flows from operating activities:
Net loss	$	(708	)	$	(4,967	)
Adjustments to reconcile net loss to cash provided by operating activities:
Net income (loss)							$	28,243		$	(34,249	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	12,543			14,828			37,459			41,943
Exit-related asset impairment charges	158			—
Other asset impairment charges	401			—
Exit-related (gains), asset impairments and accelerated depreciation, net							(407		)	3,127
Goodwill impairment charge							—			8,845
Other asset impairment charges (recoveries), net							(643		)	18,458
Write-off of debt issuance costs							—			768
Share-based compensation expense	3,408			2,937			9,182			6,636
Deferred income taxes	(60		)	(513		)	1,452			580
Inventory write-down	—			478			—			710
Undistributed equity in earnings of joint ventures	(412		)	29			(3,300		)	61
Loss on disposal of assets	45			21
Unrealized foreign exchange gain, net	(23		)	(57		)
(Gain) loss on disposal of assets							194			(529		)
Unrealized foreign exchange (gain) loss, net							89			(75		)
Bad debt expense, net	17			47			35			154
Changes in assets and liabilities, net of acquisitions:
Changes in assets and liabilities:
Accounts receivable	(1,546		)	38,369			(21,950		)	5,303
Inventories	(12,586		)	4,797			(25,033		)	3,812
Income taxes	(150		)	(219		)	(935		)	436
Prepaid expenses and other current assets	(614		)	1,578			(2,826		)	882
Other long-term assets	164			202			421			(465		)
Accounts payable	14,343			(5,026		)	13,365			3,527
Accrued payroll and related liabilities	(10,080		)	(8,311		)	5,795			(2,880		)
Other accrued liabilities	899			(3,534		)	5,866			(5,632		)
Environmental liabilities	(29		)	(514		)	1,936			(534		)
Other long-term liabilities	(193		)	381			(1,050		)	(88		)
Distributed equity in earnings of joint ventures	350			100			3,389			400
Net cash provided by operating activities	5,927			40,626			51,282			51,190
Cash flows from investing activities:
Capital expenditures	(10,603		)	(9,341		)	(31,508		)	(21,442		)
Joint venture payments, net	(55		)	(4		)
Purchase of cost method investment							(6,017		)	—
Joint venture receipts, net							266			7
Proceeds from sale of assets	73			730			2,753			2,649
Net cash used in investing activities	(10,585		)	(8,615		)	(34,506		)	(18,786		)
Cash flows from financing activities:
Borrowings from long-term debt	102,631			11,439			360,626			112,427
Repayment of long-term debt	(107,491		)	(35,976		)	(368,843		)	(137,869		)
Proceeds from line of credit	—			53,500			—			135,500
Repayment of line of credit	—			(53,500		)	—			(135,500		)
Payment of debt issuance costs	(53		)	—			(112		)	(879		)
Taxes paid related to net share settlement of share-based payment arrangements	(3,301		)	(1,887		)	(3,300		)	(1,938		)
Repurchase of Class A common stock	—			(3,479		)	—			(3,479		)
Distributions to noncontrolling interest	(522		)	(827		)	(1,177		)	(1,179		)
Dividends paid	(5,185		)	(5,100		)	(15,322		)	(15,275		)
Net cash used in financing activities	(13,921		)	(35,830		)	(28,128		)	(48,192		)
Effect of exchange rate changes on cash	(140		)	(11		)	(258		)	51
Net decrease in cash and cash equivalents	(18,719		)	(3,830		)	(11,610		)	(15,737		)
Cash and cash equivalents as of beginning of period	26,819			22,755			26,819			22,755
Cash and cash equivalents as of end of period	$	8,100		$	18,925		$	15,209		$	7,018

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements

are an integral part of these statements.

SCHNITZER STEEL INDUSTRIES, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Financial Statements of Schnitzer Steel Industries, Inc. (the “Company”) have been prepared pursuant to generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for Form 10-Q, including Article 10 of Regulation S-X. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. Certain information and note disclosures normally included in annual financial statements have been condensed or omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all normal, recurring adjustments considered necessary for a fair statement have been included. Management suggests that these Unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2016. The results for the three and nine months ended ~~November 30, 2016~~May 31, 2017 and ~~2015~~2016 are not necessarily indicative of the results of operations for the entire fiscal year.

Accounting Changes

In January 2017, an accounting standard update was issued that eliminates the second step of the two-step goodwill impairment test. Under the revised guidance, an entity applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. To reduce the complexity of the goodwill impairment test, the Company early-adopted the new requirement as of the beginning of the third quarter of fiscal 2017 with no impact to the Unaudited Condensed Consolidated Financial Statements. The Company will apply the amendments to future goodwill impairment tests. See the Goodwill section of this Note for further detail.

Discontinued Operations

The results of discontinued operations are presented separately, net of tax, from the results of ongoing operations for all periods presented. The expenses included in the results of discontinued operations are the direct operating expenses incurred by the disposed components that may be reasonably segregated from the costs of the ongoing operations of the Company. Asset impairments related to the disposed components are also included in the results of discontinued operations. See Note 10 - Discontinued Operations and the Asset Impairment Charges section of this Note 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 ~~$19~~$4 million and $3 million as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, respectively.

Assets Held for Sale

An asset is classified as held for sale upon meeting certain 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 with no further adjustments for depreciation. During the nine months ended May 31, 2016, the Company recorded an impairment charge for the initial and subsequent write-down of certain equipment assets held for sale of $2 million, which is reported within other asset impairment charges (recoveries), net in the Unaudited Condensed Consolidated Statements of Operations. The Company determined 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. Assets held for sale were less than $1 million as of August 31, 2016. The Company did not have any assets held for sale as of May 31, 2017.

During the third quarter of fiscal 2017, the Company sold equipment assets that had been classified as held for sale prior to being fully impaired in fiscal 2015. The Company recorded a gain on the sale of $1 million, which is reported within other asset impairment charges (recoveries), net in the Unaudited Condensed Consolidated Statements of Operations.



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

Long-Lived Assets

~~Changes~~The Company tests long-lived tangible and intangible assets for impairment at the asset group level, which is determined based on the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. For the Company's metals recycling operations, an asset group is generally comprised of the regional shredding and export operation along with surrounding feeder yards. For regions with no shredding and export operations, each metals recycling yard is an asset group. For the Company's auto parts operations, generally each auto parts store is an asset group. The Company's steel manufacturing business is a single asset group. The Company tests its asset groups for impairment when certain triggering events or changes in circumstances indicate that the carrying value of the asset group may be impaired. If the carrying value of the asset group is not recoverable because it exceeds the Company’s estimate of future undiscounted cash flows from the use and eventual disposition of the asset group, an impairment loss is recognized by the amount the carrying value exceeds its fair value, if any. The impairment loss is allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group shall not reduce the carrying amount of that asset below its fair value. Fair value is determined primarily using the cost and market approaches.

During the three and nine months ended May 31, 2016, the Company recorded impairment charges on long-lived tangible and intangible assets associated with certain regional metals recycling operations and used auto parts store locations.

With respect to individual long-lived assets, changes in circumstances may merit a change in the estimated useful lives or salvage values of ~~individual long-lived~~the assets, which are accounted for prospectively in the period of change. For such assets, the useful life is shortened based on the Company's current plans to dispose of or abandon the asset before the end of its original useful life and depreciation is accelerated beginning when that determination is made. During the ~~three~~nine months ended ~~November 30, 2016,~~May 31, 2017, the Company recognized accelerated depreciation ~~of less than $1 million~~primarily due to shortening the useful lives of decommissioned machinery and equipment ~~assets~~assets. During the nine months ended May 31, 2016, the Company recognized accelerated depreciation due to shortened useful lives in connection with site closures and idled equipment.

See the Asset Impairment Charges section of this Note for tabular presentation of long-lived asset impairment charges and accelerated depreciation. Long-lived asset impairment charges and accelerated depreciation are reported in the ~~Steel Manufacturing Business reportable segment,~~Unaudited Condensed Consolidated Statements of Operations within (1) other asset impairment charges (recoveries), net; (2) restructuring charges and other exit-related activities, if related to a site closure not qualifying for discontinued operations reporting; or (3) loss from discontinued operations, if related to a component of the Company qualifying for discontinued operations reporting.

Investments in Joint Ventures

A loss in value of an investment in a joint venture is recognized when the decline is other than temporary. 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 nine months ended May 31, 2016, the Company recorded an impairment charge of $2 million related to an investment in a joint venture, which is reported within other asset impairment charges (recoveries), net in the Unaudited Condensed Consolidated Statements of Operations.

During the nine months ended May 31, 2017, one of the Company's other joint venture interests sold real estate resulting in recognition of a $6 million gain by the joint venture, $3 million of which is attributable to the Company's investment. The Company's share of the gain is reported within (income) loss from joint ventures in the Unaudited Condensed Consolidated Statements of Operations for the nine months ended May 31, 2017.

Cost Method Investment

During the nine months ended May 31, 2017, the Company invested $6 million in a privately-held waste and recycling entity. The Company's influence over the operating and financial policies of the entity is not significant and, thus, the investment is accounted for under the cost method. Under the cost method, the investment is carried at cost and adjusted only for other-than-temporary impairments, certain distributions and additional investments. The investment is presented as part of the Auto and Metals Recycling ("AMR") reportable segment and reported within other assets in the Unaudited Condensed Consolidated Balance Sheets. The Company does not hold any other cost-method investments. As of May 31, 2017, the Company had not identified any events or changes in circumstances that may have a significant adverse effect on the fair value of the investment or indicators of other-than-temporary impairment.



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

Asset Impairment Charges

The following asset impairment charges, excluding goodwill impairment charges discussed below in this Note, were recorded in the Unaudited Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended May 31,				Nine Months Ended May 31,
	2017		2016		2017		2016
Reported within other asset impairment charges (recoveries), net⁽¹⁾⁽²⁾:
Long-lived assets	$	—	$	—	$	—	$	7,336
Accelerated depreciation⁽¹⁾	—		—		401		6,208
Investment in joint venture	—		—		—		1,968
Assets held for sale	—		—		—		1,659
Other assets⁽¹⁾	—		—		—		1,287
	—		—		401		18,458
Reported within restructuring charges and other exit-related activities:
Long-lived assets	—		119		—		448
Accelerated depreciation	—		—		96		630
Other assets	—		—		62		1,102
	—		119		158		2,180
Reported within discontinued operations:
Long-lived assets	—		—		—		673
Accelerated depreciation	—		—		—		274
	—		—		—		947
Total	$	—	$	119	$	559	$	21,585

_____________________________


(1)	Other asset impairment charges were incurred in AMR, except for $401 thousand of accelerated depreciation related to the Steel Manufacturing Business ("SMB") reportable segment for the nine months ended May 31, 2017, and $79 thousand of impairment charges on Other assets related to Corporate for the nine months ended May 31, 2016.


(2)	Excluded from the tabular presentation of asset impairment charges above, but included within other asset impairment charges (recoveries), net reported in the Unaudited Condensed Consolidated Statements of Operations, are recoveries on previously-impaired Assets held for sale at AMR of $1,044 thousand for the three and nine months ended May 31, 2017.

Goodwill

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 on July 1 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). A component of an operating segment is required to be identified as a reporting unit if the component is a business for which discrete financial information is available and segment management regularly reviews its operating results.

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 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 quantitative impairment test.

Under the accounting guidance in effect for the Company prior to the third quarter of fiscal 2017, in the first step of the two-step quantitative impairment test, the fair value of a reporting unit was compared to its carrying value. If the carrying value of a reporting unit exceeded its fair value, the second step of the impairment test was performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit was 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 exceeded the implied fair value of goodwill, an impairment loss was recognized in an amount equal to that excess.



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

As of the beginning of the third quarter of fiscal 2017, the Company adopted an accounting standard update that eliminates the second step of the two-step goodwill impairment test with no impact to the Unaudited Condensed Consolidated Financial Statements. Under the revised guidance, the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment.

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 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.

During the second quarter of fiscal 2016, management identified the combination of sustained weak market conditions at such time, including the adverse effects of lower commodity selling prices and the constraining impact of the lower price environment on the supply of raw materials which negatively impacted volumes, the Company’s financial performance and a decline in the Company’s market capitalization at such time as a triggering event requiring an interim impairment test of goodwill allocated to its reporting units. In connection with the interim impairment test performed in the second quarter of fiscal 2016, the Company used a measurement date of February 1, 2016. For a reporting unit within AMR with $9 million of goodwill as of February 1, 2016, the first step of the impairment test showed that the fair value of the 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 no implied fair value of goodwill remained for the reporting unit, resulting in an impairment of the entire carrying amount of the reporting unit's goodwill totaling $9 million. For the reporting unit within AMR carrying the remainder, or $166 million, of the Company's goodwill as of February 1, 2016, the estimated fair value of the reporting unit exceeded its carrying value by approximately 27% and, thus, the Company did not record a goodwill impairment charge.

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 from suppliers. The majority of cash and cash equivalents is maintained with ~~two~~ major financial institutions. Balances with these and certain other institutions exceeded the Federal Deposit Insurance Corporation insured amount of $250,000 as of ~~November 30, 2016~~May 31, 2017. 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, credit insurance, letters 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 ~~$46~~$47 million and $40 million of open letters of credit as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, respectively.

Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and debt. 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.



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

Fair Value Measurements

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

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

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

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

When developing the fair value measurements, the Company uses quoted market prices whenever available or seeks to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available.



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

Restructuring Charges

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. Restructuring charges that directly involve a discontinued operation are included in the results of discontinued operations in all periods presented. See Note 7 - Restructuring Charges and Other Exit-Related Activities for further detail.

Note 2 - Recent Accounting Pronouncements

In May 2014, an accounting standard update was issued that clarifies the principles for recognizing revenue from contracts with customers. The update will supersede the existing standard for recognizing revenue. Additional updates have been issued since May 2014 amending aspects of the initial update and providing implementation guidance. 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 2019, including interim periods within that fiscal year. Upon becoming effective, ~~the Company will apply the amendments in~~an entity may adopt the 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~~in the ~~impact~~process of ~~adopting~~examining its current revenue streams and significant contracts with customers under the requirements of the new standard and, based on the progress of this examination to date, does not believe the standard will have a material impact on its ~~consolidated~~ financial position, ~~results~~net income or cash flows. The Company is also analyzing the expanded disclosure requirements under the new standard, the method of ~~operations~~adoption, and ~~cash flows.~~potential changes to its accounting policies, processes, systems and internal controls that may be required to support the new standard.

In February 2016, an accounting standard was issued that will supersede the existing lease standard and requiring a lessee to recognize a lease liability and a lease asset on its balance sheet for all leases, including those classified as operating leases under the existing lease standard. The update also expands the required quantitative and qualitative disclosures surrounding leases. This standard is effective for the Company beginning in ~~the first quarter of~~ fiscal 2020, including interim periods within that fiscal year. This standard will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is in the process of identifying its population of leases within the scope of the new accounting standard and documenting salient lease terms to support the initial and subsequent measurement of lease liabilities and lease assets. The Company is evaluating the impact of adopting this standard on its ~~consolidated~~ financial position, results of operations, cash flows and ~~cash flows.~~disclosures.

In March 2016, an accounting standard update was issued that amends several aspects of the accounting for share-based payments, including accounting for income taxes, forfeitures and statutory tax withholding requirements, and classification within the statement of cash flows. The standard is effective for the Company beginning in ~~the first quarter of~~ fiscal 2018, including interim periods within that fiscal year. Early adoption is permitted in any interim or annual period; however, if the Company elects early adoption, it must adopt all of the amendments in the same period. The Company does not expect adoption to have an immediate material impact on its consolidated financial position, results of operations and cash flows.



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

In June 2016, an accounting standard update was issued that amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, which include trade and other receivables, loans and other financial instruments, the update amends the initial recognition threshold to require a company to estimate expected credit losses rather than delaying the recognition of the full amount of credit losses until the loss is probable of occurring. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP; however, the update requires that credit losses be presented as an allowance rather than as a write-down. This standard is effective for the Company beginning in the first quarter of fiscal 2021, including interim periods within that fiscal year. The standard will be applied using a modified retrospective transition approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Adoption of the standard is not expected to have a material impact on the Company's consolidated financial position.

In August 2016, an accounting standard update was issued that addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Among the cash flow matters addressed in the update are payments for costs related to debt prepayments or extinguishments, payments related to settlement of certain types of debt instruments, payments of contingent consideration made after a business combination, proceeds from insurance claims and corporate-owned life insurance policies, and distributions received from equity method investees, among others. The standard is effective for the Company beginning in ~~the first quarter of~~ fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period, and all of the amendments must be adopted together in the same period. The amendments will be applied using a retrospective transition method to each period presented, unless impracticable for specific cash flow matters, in which case the amendments would be applied prospectively as of the earliest date practicable. The Company is evaluating the impact of adopting this standard on its consolidated statement of cash flows.



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

In October 2016, an accounting standard update was issued that amends the existing guidance on the accounting for the income tax effects of intra-entity transfers of assets other than inventory. Current accounting standards prohibit the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. The amendments in the update require that entities recognize the income tax effects of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments do not change accounting standards for the pre-tax effects of an intra-entity asset transfer under accounting standards applicable to consolidation, or for an intra-entity transfer of inventory. The standard is effective for the Company beginning in ~~the first quarter of~~ fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted in the first interim period of a fiscal year. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company is evaluating the impact of adopting this standard on its consolidated financial position, results of operations and cash flows.

In March 2017, an accounting standard update was issued that modifies the presentation requirements for net periodic pension cost and net periodic postretirement benefit cost within an entity's income statement. The amendments in the update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amendments also require the other components of net periodic pension cost and net periodic postretirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. Additionally, only the service cost component is eligible for capitalization, when applicable. The standard is effective for the Company beginning in fiscal 2019, including interim periods within that fiscal year. Early adoption is permitted beginning with the first quarter of fiscal 2018. Aspects of the update affecting income statement presentation must be applied retrospectively, while aspects affecting the capitalization of the service cost component in assets must be applied prospectively on and after the effective date. The Company is evaluating the impact of adopting this standard on its consolidated financial position, results of operations and cash flows.

Note 3 - Inventories

Inventories consisted of the following (in thousands):


	November 30, 2016		August 31, 2016		May 31, 2017		August 31, 2016
Processed and unprocessed scrap metal	$	65,402	$	49,061	$	78,846	$	49,061
Semi-finished goods (billets)	9,785		8,320		7,875		8,320
Finished goods	39,482		40,646		44,887		40,646
Supplies	33,425		34,945		34,224		34,945
Inventories	$	148,094	$	132,972	$	165,832	$	132,972

Note 4 - Goodwill

The Company evaluates goodwill for impairment annually on July 1 and upon the occurrence of certain triggering events or substantive changes in circumstances that indicate that the fair value of goodwill may be impaired. There were no triggering events identified during the ~~first quarter of fiscal~~nine months ended May 31, 2017 requiring an interim goodwill impairment test.



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

The gross ~~changes~~change in the carrying amount of goodwill ~~by reportable segment~~ for the ~~three~~nine months ended ~~November 30, 2016 were~~May 31, 2017 was as follows (in thousands):


	Auto and Metals Recycling			AMR
August 31, 2016	$	166,847		$	166,847
Foreign currency translation adjustment	(415		)	(574		)
November 30, 2016	$	166,432
May 31, 2017				$	166,273

Accumulated goodwill impairment charges were $471 million as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016.

Note 5 - Debt

As of August 31, 2016, the Company had $8 million of tax-exempt economic development revenue bonds outstanding with the State of Oregon and scheduled to mature in January 2021. In August 2016, the Company exercised its option to redeem the bonds prior to maturity. The Company repaid the bonds in full in September 2016. The obligation is reported as a current liability within short-term borrowings as of August 31, 2016 on the Unaudited Condensed Consolidated Balance Sheet, and the $8 million repayment is reported as a cash outflow from financing activities for the ~~three~~nine months ended ~~November 30, 2016~~May 31, 2017 on the Unaudited Condensed Consolidated Statement of Cash Flows.



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

Note 6 - Commitments and Contingencies

Environmental Liabilities

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

Changes in the Company’s environmental liabilities for the ~~three~~nine months ended ~~November 30, 2016~~May 31, 2017 were as follows (in thousands):


Reportable Segment	Balance as of August 31, 2016		Liabilities Established (Released), Net		Payments and Other			Balance as of November 30, 2016		Short-Term		Long-Term		Balance as of August 31, 2016		Liabilities Established (Released), Net		Payments and Other			Balance as of May 31, 2017		Short-Term		Long-Term
Auto and Metals Recycling	$	46,122	$	100	$	(184	)	$	46,038	$	1,948	$	44,090	$	46,122	$	2,349	$	(404	)	$	48,067	$	1,903	$	46,164
Corporate	228		—		(18		)	210		90		120		228		58		(166		)	120		—		120
Total	$	46,350	$	100	$	(202	)	$	46,248	$	2,038	$	44,210	$	46,350	$	2,407	$	(570	)	$	48,187	$	1,903	$	46,284

~~Auto and Metals Recycling (“AMR”)~~AMR

As of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, AMR had environmental liabilities of $48 million and $46 million, respectively, for the potential remediation of locations where it has conducted business and has environmental liabilities from historical or recent activities.

Portland Harbor

In December 2000, the Company was notified by the United States Environmental Protection Agency (“EPA”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) that it is one of the potentially responsible parties (“PRPs”) that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (the “Site”). The precise nature and extent of any cleanup of the Site, the parties to be involved, the ~~process to be followed for~~timing of any ~~cleanup~~specific remedial action and the allocation of the costs for any cleanup among responsible parties have not yet been ~~determined, but the~~determined. The process of ~~identifying~~site investigation, remedy selection, identification of additional PRPs and ~~beginning~~ allocation of costs ~~is underway.~~has been underway for a number of years, but significant uncertainties remain. 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 iswas 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~~approximately 100 other PRPs, including the LWG members, 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.~~Site, including costs incurred by the LWG in the RI/FS process. The LWG ~~has~~members have also commenced federal court litigation, which has been stayed, seeking to bring additional parties into the allocation process.



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

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.

A former Trustee, the Confederated Tribes and Bands of the Yakama Nation, which withdrew from the council in 2009, filed a suit on January 30, 2017 against approximately 30 parties, including the Company, seeking reimbursement of certain past and future response costs in connection with remedial action at the Site and recovery of assessment costs related to natural resources damages from releases at and from the Site to the Multnomah Channel and the Lower Columbia River. The Company does not have sufficient information to determine the likelihood of a loss or to estimate the amount of damages being sought or the amount of such damages that could be allocated to the Company.



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

On March 30, 2012, the LWG submitted to the EPA and made available on its website a draft feasibility study (“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 submitted by the LWG identified ten possible remedial alternatives which ranged 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 alternative and estimated a range of two to 28 years to implement the remedial work, depending on the selected alternative. However, the EPA largely rejected this draft FS, and took over the drafting process. The EPA provided their revised draft FS ~~to the LWG and other key stakeholders in sections, with the final section being made available~~ in August ~~2015. The revised draft FS~~2015 that identified five possible remedial alternatives which ranged in estimated cost from approximately $550 million to $1.19 billion (net present value) for the least costly alternative to approximately $1.71 billion to $3.67 billion (net present value) for the most costly alternative and estimated a range of four to 18 years to implement the remedial ~~work, depending on the selected alternative.~~

In November 2015, EPA Region 10 presented its preferred alternative remedy to the National Remedy Review Board ("NRRB"), a peer review group that has been established to review proposed Superfund cleanup decisions for consistency with the Superfund statute, regulations, and guidance. EPA Region 10’s preferred alternative presented to the NRRB was a modified version of one of the alternatives (Alternative E) in the revised draft FS, and EPA Region 10 estimated that its preferred alternative would take seven years to implement, with an estimated cost of $1.4 billion (net present value).work.

In June 2016, the EPA issued its final FS and Proposed Plan for the cleanup of the in-river portion of the Site. In the Proposed Plan, the EPA identified its preferred alternative, which ~~includes~~included a combination of dredging, capping, and enhanced natural recovery and which the EPA ~~estimates will~~estimated would take approximately seven years to construct with additional time for monitored natural recovery to occur and cost an estimated $746 million (net present value). This is approximately half of the estimated $1.4 billion (net present value) cost of ~~the~~a very similar preferred alternative that EPA Region 10 presented to a peer review group in November 2015. The Proposed Plan also describes other alternatives that were considered and the criteria the EPA used to compare the alternatives, including estimated costs and construction timelines. In conjunction with the Proposed Plan, the EPA issued its final FS ~~in June 2016. The final FS identifies~~identified eight possible remedial alternatives (some of which contain two disposal alternatives, for a total of 13 possible alternative remedial scenarios) which ranged in estimated cost from approximately $316 million to $677 million (net present value) for the least costly alternative to approximately $1.21 billion to $2.67 billion (net present value) for the most costly alternative that the EPA did not screen out and ~~estimates~~estimated a range of four to 19 years to implement the remedial work, depending on the selected alternative. The final FS includes one alternative (Alternative H) which would involve capping/dredging the entire Site with an estimated cost range from approximately $6.61 billion to $14.29 billion and 62 years to implement. work.

The EPA screened out this Alternative H due to implementability and cost considerations. Each of the draft and final FS also contain a No Action alternative considered as a baseline for comparison with the other alternatives. The FS and thereceived input on its Proposed Plan ~~do not determine or allocate the responsibility for remediation costs.~~

~~Issuance of the Proposed Plan is part of the continuing process for evaluation and remediation of the Site. There was~~from over 5,300 commenters during a 90-day public comment period ~~on the Proposed Plan~~ that closed onin September 6, 2016. ~~Approximately 5,300 commenters submitted comments. Following its review and consideration of these~~In their comments, the EPA will prepare a summary responding to the submitted comments and select a remedy for the Site in a Record of Decision (“ROD”). The EPA has indicated that it plans to issue the ROD in early January 2017. In the ROD, the EPA may modify the preferred alternative or select a different alternative than that presented in the Proposed Plan based on new information or public comments. It is uncertain whether the preferred alternative identified by the EPA in the Proposed Plan will be the selected remedy in the ROD or whether the EPA will be able to maintain its proposed schedule for issuing the ROD. Even when the ROD is issued, it is likely that there will continue to be significant uncertainty regarding the costs of the selected remedy.

~~The~~ Company and certain other stakeholders ~~have~~ identified a number of serious concerns regarding the EPA's risk and remedial alternatives assessments and the EPA's cost estimates, scheduling assumptions and conclusions regarding the feasibility, effectiveness and assignment of remediation ~~technologies. The~~technologies, including that the EPA’s FS and Proposed Plan ~~are~~were based on data that are more than a decade old and may not accurately represent site or background conditions.

In ~~its~~January 2017, the EPA issued a Record of Decision (“ROD”) that identified the selected remedy for the Site. The selected remedy is a modified version of one of the alternative remedies in the EPA’s FS that expands the scope of the cleanup and has an estimated cost which is significantly more than their Proposed ~~Plan,~~Plan. The EPA has estimated the total cost of the selected remedy at $1.7 billion with a net present value cost of $1.05 billion (at a 7% discount rate) and an estimated construction period of 13 years following completion of the remedial designs. In the ROD, the EPA stated that the cost estimate is an order-of-magnitude engineering estimate that is expected to be within +50% to -30% of the actual project cost and that changes in the cost elements are likely to occur as a result of new information and data collected during the engineering design. The Company has identified a number of concerns regarding the EPA's estimated cost and time required for the selected remedy. Because of questions regarding cost-effectiveness and other concerns, such as technical feasibility, use of stale data and the need for new baseline data, it is uncertain whether the ROD will be implemented as issued. In addition, the ROD does not determine or allocate the responsibility for remediation costs.

In the ROD, the EPA acknowledged that the assumptions used to estimate costs for the ~~remedial alternatives~~selected remedy were developed based on the existing data and will be finalized during the remedial design, after design level data to refine the baseline conditions are obtained. ~~In addition,~~Moreover, the ~~FS and Proposed Plan provide~~ROD provides only ~~site-wide~~Site-wide cost estimates and dodoes not provide sufficient detail ~~regarding~~or ranges of certainty and finality to estimate costs for specific sediment management areas.



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

Accordingly, ~~it is anticipated~~the EPA has indicated and the Company anticipates that additional pre-remedial design investigative work, such as new baseline sampling and monitoring, will ~~need to occur after the ROD is issued~~be conducted in order to provide a re-baseline ~~for costs~~ and ~~determine~~delineate particular remedial actions for specific areas within the Site.

~~The~~ This re-baselining will need to occur prior to proceeding with the next phase in the process ~~following the ROD~~which is the remedial design. The remedial design phase is an engineering phase during which additional technical information and data will be collected, identified and incorporated into technical drawings and specifications developed for the subsequent remedial action. The EPA is ~~expected to seek~~seeking a new coalition of PRPs to perform the re-baselining and remedial design activities. Remediation activities are not expected to commence for a number of years and responsibility for implementing and funding the EPA’s selected remedy will be determined in a separate allocation process. While an allocation process is currently underway, the EPA's ~~FS and its approach to the proposed alternative remedies have~~ROD has raised questions and uncertainty as to when and how that allocation process will proceed.

Because there has not been a determination of the ~~total cost of the investigations, the~~specific remediation actions 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 to or which it is reasonably possible that it will 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 being developed 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.



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

The Company has insurance policies that it believes will provide reimbursement for costs it incurs for defense, remediation and mitigation for natural resource damages claims 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) have not yet been determined.

Other AMR Sites

As of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, the Company had environmental liabilities related to various AMR sites other than Portland Harbor of $47 million and $45 ~~million.~~million, respectively. The liabilities relate to the investigation and potential ~~future~~ remediation of soil contamination, groundwater contamination, ~~and~~ storm water runoff issues and other natural resource damages and were not individually material at any site.

Legacy Environmental Loss Contingencies

The Company’s environmental loss contingencies as of May 31, 2017 and August 31, 2016, other than Portland Harbor, include actual or possible investigation and cleanup costs from historical contamination at sites currently or formerly owned or operated by the Company or at other sites where the Company may have responsibility for such costs due to past disposal or other activities ("legacy environmental loss contingencies"). These legacy environmental loss contingencies relate to the potential remediation of waterways and soil and groundwater contamination and may also involve natural resource damages, governmental fines and penalties and claims by third parties for personal injury and property damage. The Company has been notified that it is or may be a potentially responsible party at certain of these sites, and investigation and cleanup activities are ongoing or may be required in the future. The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. Where investigation and cleanup activities are ongoing or where the Company has not yet been identified as having responsibility or the contamination has not yet been identified, it is reasonably possible that the Company may need to recognize additional liabilities in connection with such sites but the Company cannot currently reasonably estimate the possible loss or range of loss absent additional information or developments. Such additional liabilities, individually or in the aggregate, may have a material adverse effect on the Company's results of operations, financial condition or cash flows.

Steel Manufacturing Business (“SMB”)

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

SMB has an operating permit issued under Title V of the Clean Air Act Amendments of 1990, which governs certain air quality standards. The permit is based on an annual production capacity of 950 thousand tons. The permit was first issued in 1998 and has since been renewed through February 1, 2018.

SMB had no environmental liabilities as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016.

Other than the Portland Harbor Superfund site and legacy environmental loss contingencies, which isare discussed separately above, management currently believes that adequate provision has been made for the potential impact of these issues and that the ultimate outcomes will not have a material adverse effect on the ~~Unaudited Condensed Consolidated Financial Statements~~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~~Other Contingencies

The Company is a party to various legal proceedings arising in the normal course of business. ~~Management~~The Company recognizes a liability for such matters when the loss is probable and can be reasonably estimated. Legal proceedings include those arising from accidents involving Company-owned vehicles, including Company tractor trailers. In some instances, such accidents and the related litigation involve accidents that have resulted in third party fatalities. It is reasonably possible that the Company may recognize additional losses in connection with such lawsuits at the time such losses are probable and can be reasonably estimated. Such losses may be material to the Company's consolidated financial statements. The Company believes that ~~adequate provisions have been made for these contingencies.~~such losses, if incurred, will be substantially covered by existing insurance coverage. The Company does not anticipate that the resolution of legal proceedings arising in the normal course of business, after taking into consideration expected insurance recoveries, will have a material adverse effect on its results of operations, financial condition, or cash flows.



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

Note 7 - Restructuring Charges and Other Exit-Related Activities

The Company has implemented a number of restructuring initiatives designed to reduce operating expenses and improve profitability and to achieve further integration and synergistic cost efficiencies in its operating platform. The restructuring charges incurred by the Company during the periods presented primarily pertain to the plan announced in the second quarter of fiscal 2015 and expanded in subsequent periods (the "Q2'15 Plan").

At the end of the second quarter of fiscal 2015, the Company commenced additional restructuring and exit-related initiatives by undertaking strategic actions consisting of idling underutilized assets at AMR and initiating the closure of seven auto parts stores to align the Company's business to market conditions. The Company expanded these initiatives in April 2015 and also announced the integration of the former Metals Recycling Business and Auto Parts Business into the combined AMR platform in order to achieve operational synergies and reduce the Company's annual operating expenses, primarily selling, general and administrative expenses, through headcount reductions, reducing organizational layers, consolidating shared service functions and other non-headcount measures. Additional cost savings and productivity improvement initiatives, including reductions in personnel, savings from procurement activities, streamlining of administrative and supporting services functions, and adjustments to its operating capacity through facility closures, were identified and initiated in subsequent periods. Collectively, these initiatives are referred to as the Q2'15 Plan.

The Company incurred restructuring charges of less than $1 million during each of the three and $2nine months ended May 31, 2017, and less than $1 million and $6 million during the three and nine months ended ~~November 30,~~May 31, 2016, ~~and 2015,~~ respectively. The remaining charges relating to these initiatives of less than $1 million are expected to be substantially incurred by the end of fiscal ~~2017. The~~2017, and the significant majority of ~~the restructuring~~these remaining charges require the Company to make cash payments. However, the Company may incur additional restructuring charges after fiscal 2017 as a result of remeasuring lease contract termination liabilities to reflect changes in contractual lease rentals and sublease rentals that are not currently estimable.

In addition to the restructuring charges recorded related to these initiatives, the Company recognized a net gain from other exit-related activities of less than $1 million during each of the three and nine months ended May 31, 2017, primarily related to a gain recorded in the second quarter of fiscal 2017 in connection with the disposition of business assets related to the elimination of a metals recycling feeder yard operation. The Company incurred charges associated with other exit-related activities of less than $1 million and $3 million during the three and nine months ended ~~November 30,~~May 31, 2016, consisting of asset impairments and accelerated depreciation of assets in connection with site ~~closures and idled equipment. The Company did not incur charges associated with other exit-related activities during the three months ended November 30, 2015.~~closures.

Restructuring charges and other exit-related activities were comprised of the following (in thousands):


	Three Months Ended November 30, 2016								Three Months Ended November 30, 2015							Three Months Ended May 31, 2017								Three Months Ended May 31, 2016
	All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges			All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges
Restructuring charges:
Severance costs	$	—	$	(62	)	$	(62	)	$	—	$	1,161	$	1,161		$	—	$	36		$	36		$	—	$	340	$	340
Contract termination costs	88		(2		)	86			90		645		735			43		24			67			76		26		102
Other restructuring costs	—		—			—			—		—		—			—		—			—			—		—		—
Total restructuring charges	88		(64		)	24			90		1,806		1,896			43		60			103			76		366		442
Other exit-related activities:
Asset impairments and accelerated depreciation	—		158			158			—		—		—			—		—			—			—		119		119
Gain on exit-related disposal																—		(3		)	(3		)	—		—		—
Total other exit-related activities	—		158			158			—		—		—			—		(3		)	(3		)	—		119		119
Total restructuring charges and other exit-related activities	$	88	$	94		$	182		$	90	$	1,806	$	1,896		$	43	$	57		$	100		$	76	$	485	$	561

Restructuring charges and other exit-related activities included in continuing operations	Restructuring charges and other exit-related activities included in continuing operations					$	201						$	1,925		Restructuring charges and other exit-related activities included in continuing operations					$	93						$	542
Restructuring charges (recoveries) and other exit-related activities included in discontinued operations						$	(19	)					$	(29	)
Restructuring charges and other exit-related activities included in discontinued operations																Restructuring charges and other exit-related activities included in discontinued operations					$	7						$	19

Q2'15 Plan
Total restructuring charges to date $ 14,270
Total expected restructuring charges $ 14,400



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



	Nine Months Ended May 31, 2017								Nine Months Ended May 31, 2016
	All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges
Restructuring charges:
Severance costs	$	—	$	(23	)	$	(23	)	$	—	$	4,686	$	4,686
Contract termination costs	180		83			263			201		683		884
Other restructuring costs	—		—			—			—		—		—
Total restructuring charges	180		60			240			201		5,369		5,570
Other exit-related activities:
Asset impairments and accelerated depreciation	—		158			158			—		3,127		3,127
Gain on exit-related disposal	—		(565		)	(565		)	—		—		—
Total other exit-related activities	—		(407		)	(407		)	—		3,127		3,127
Total restructuring charges and other exit-related activities	$	180	$	(347	)	$	(167	)	$	201	$	8,496	$	8,697

Restructuring charges and other exit-related activities included in continuing operations						$	(200	)					$	7,758
Restructuring charges and other exit-related activities included in discontinued operations						$	33						$	939



	Q2'15 Plan
Total restructuring charges to date	$	14,394
Total expected restructuring charges	$	14,460

The following illustrates the reconciliation of the restructuring liability by major type of costs for the ~~three~~nine months ended ~~November 30, 2016~~May 31, 2017 (in thousands):


	Q2’15 Plan										Total Charges to Date⁽¹⁾				Total Expected Charges⁽¹⁾		Q2’15 Plan													Total Charges to Date⁽¹⁾			Total Expected Charges⁽¹⁾
	Balance 8/31/2016		Charges			Payments and Other			Balance 11/30/2016					Balance 8/31/2016				Charges			Payments and Other			Balance 5/31/2017						Total Charges to Date⁽¹⁾			Total Expected Charges⁽¹⁾
Severance costs	$	918	$	(62	)	$	(427	)	$	429	Total Charges to Date⁽¹⁾	$	10,213		Total Expected Charges⁽¹⁾		$	10,213	$	918		$	(23	)		$	(776	)	$	119		$	10,252		$	10,252
Contract termination costs	1,159		(2		)	(159		)	998		2,008				2,138		1,159			83			(337		)		905			2,093			2,159
Other restructuring costs	—		—			—			—		2,049				2,049		—			—			—				—			2,049			2,049
Total	$	2,077	$	(64	)	$	(586	)	$	1,427	$	14,270			$	14,400	$	2,077		$	60		$	(1,113	)		$	1,024		$	14,394		$	14,460

___________________________


(1)	Total charges to date and total expected charges by major type of cost reflect amounts related to the Q2'15 Plan only. Remaining charges related to prior plans are not expected to be material.



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

Restructuring charges and other exit-related activities by reportable segment and discontinued operations were as follows (in thousands):


	Three Months Ended November 30,						Total Charges to Date⁽¹⁾			Total Expected Charges⁽¹⁾		Three Months Ended May 31,					Nine Months Ended May 31,						Total Charges to Date⁽¹⁾		Total Expected Charges⁽¹⁾
	2016			2015					2017				2016			2017		2016
Restructuring charges:
Auto and Metals Recycling	$	45		$	1,922		$	9,450		$	9,525	$	60		$	423	$	173		$	4,766		$	9,486	$	9,535
Unallocated (Corporate)	(2		)	3			3,176			3,176		36			—		34			812			3,212		3,212
Discontinued operations	(19		)	(29		)	1,644			1,699		7			19		33			(8		)	1,696		1,713
Total restructuring charges	24			1,896			14,270			14,400		103			442		240			5,570			14,394		14,460
Other exit-related activities:
Auto and Metals Recycling	158			—			4,837					(3		)	119		(407		)	2,180			4,272
Discontinued operations	—			—			3,613					—			—		—			947			3,613
Total other exit-related activities	158			—			8,450					(3		)	119		(407		)	3,127			7,885
Total restructuring charges and other exit-related activities	$	182		$	1,896		$	22,720				$	100		$	561	$	(167	)	$	8,697		$	22,279

___________________________


(1)	Total charges to date and total expected charges by reportable segment and discontinued operations reflect amounts related to the Q2'15 Plan only. Remaining charges related to prior plans are not expected to be material.

The Company does not allocate restructuring charges and other exit-related activities to the segments’ operating results because management does not include this information in its measurement of the performance of the operating segments.



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

Note 8 - Changes in Equity

Changes in equity were comprised of the following (in thousands):


	Three Months Ended November 30, 2016									Three Months Ended November 30, 2015									Nine Months Ended May 31, 2017									Nine Months Ended May 31, 2016
	SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity			SSI Shareholders’ Equity			Noncontrolling Interests			Total Equity
Balance - September 1 (Beginning of period)	$	497,721		$	3,711		$	501,432		$	534,535		$	4,016		$	538,551		$	497,721		$	3,711		$	501,432		$	534,535		$	4,016		$	538,551
Net income (loss)	(1,326		)	618			(708		)	(5,296		)	329			(4,967		)	26,276			1,967			28,243			(35,543		)	1,294			(34,249		)
Other comprehensive loss, net of tax	(1,099		)	—			(1,099		)	(728		)	—			(728		)	(1,207		)	—			(1,207		)	(6		)	—			(6		)
Distributions to noncontrolling interests	—			(522		)	(522		)	—			(827		)	(827		)	—			(1,177		)	(1,177		)	—			(1,179		)	(1,179		)
Share repurchases	—			—			—			(3,479		)	—			(3,479		)	—			—			—			(3,479		)	—			(3,479		)
Restricted stock withheld for taxes	(3,301		)	—			(3,301		)	(1,887		)	—			(1,887		)	(3,300		)	—			(3,300		)	(1,938		)	—			(1,938		)
Share-based compensation	3,408			—			3,408			2,937			—			2,937			9,182			—			9,182			6,636			—			6,636
Dividends	(5,143		)	—			(5,143		)	(5,152		)	—			(5,152		)	(15,615		)	—			(15,615		)	(15,406		)	—			(15,406		)
Balance - November 30 (End of period)	$	490,260		$	3,807		$	494,067		$	520,930		$	3,518		$	524,448
Balance - May 31 (End of period)																			$	513,057		$	4,501		$	517,558		$	484,799		$	4,131		$	488,930



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

Note 9 - Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss, net of tax, were comprised of the following (in thousands):


	Three Months Ended November 30, 2016									Three Months Ended November 30, 2015												Three Months Ended May 31, 2017									Three Months Ended May 31, 2016
	Foreign Currency Translation Adjustments			Pension Obligations, net			Total			Foreign Currency Translation Adjustments			Pension Obligations, net			Net Unrealized Gain (Loss) on Cash Flow Hedges			Total			Foreign Currency Translation Adjustments			Pension Obligations, net			Total			Foreign Currency Translation Adjustments			Pension Obligations, net			Net Unrealized Gain (Loss) on Cash Flow Hedges		Total
Balances - September 1 (Beginning of period)	$	(34,539	)	$	(5,576	)	$	(40,115	)	$	(34,009	)	$	(4,273	)	$	(240	)	$	(38,522	)
Balances - March 1 (Beginning of period)																						$	(35,333	)	$	(5,561	)	$	(40,894	)	$	(35,910	)	$	(4,168	)	$	—	$	(40,078	)
Other comprehensive income (loss) before reclassifications	(1,034		)	49			(985		)	(1,009		)	—			—			(1,009		)	(694		)	—			(694		)	1,485			—			—		1,485
Income tax expense	—			(194		)	(194		)	—			—			—			—			—			—			—			—			—			—		—
Other comprehensive loss before reclassifications, net of tax	(1,034		)	(145		)	(1,179		)	(1,009		)	—			—			(1,009		)
Other comprehensive income (loss) before reclassifications, net of tax																						(694		)	—			(694		)	1,485			—			—		1,485
Amounts reclassified from accumulated other comprehensive loss	—			125			125			—			64			312			376			—			420			420			—			102			—		102
Income tax benefit	—			(45		)	(45		)	—			(23		)	(72		)	(95		)	—			(154		)	(154		)	—			(37		)	—		(37		)
Amounts reclassified from accumulated other comprehensive loss, net of tax	—			80			80			—			41			240			281			—			266			266			—			65			—		65
Net periodic other comprehensive income (loss)	(1,034		)	(65		)	(1,099		)	(1,009		)	41			240			(728		)	(694		)	266			(428		)	1,485			65			—		1,550
Balances - November 30 (End of period)	$	(35,573	)	$	(5,641	)	$	(41,214	)	$	(35,018	)	$	(4,232	)	$	—		$	(39,250	)
Balances - May 31 (End of period)																						$	(36,027	)	$	(5,295	)	$	(41,322	)	$	(34,425	)	$	(4,103	)	$	—	$	(38,528	)



	Nine Months Ended May 31, 2017									Nine Months Ended May 31, 2016
	Foreign Currency Translation Adjustments			Pension Obligations, net			Total			Foreign Currency Translation Adjustments			Pension Obligations, net			Net Unrealized Gain (Loss) on Cash Flow Hedges			Total
Balances - September 1 (Beginning of period)	$	(34,539	)	$	(5,576	)	$	(40,115	)	$	(34,009	)	$	(4,273	)	$	(240	)	$	(38,522	)
Other comprehensive income (loss) before reclassifications	(1,488		)	49			(1,439		)	(416		)	—			—			(416		)
Income tax expense	—			(194		)	(194		)	—			—			—			—
Other comprehensive loss before reclassifications, net of tax	(1,488		)	(145		)	(1,633		)	(416		)	—			—			(416		)
Amounts reclassified from accumulated other comprehensive loss	—			670			670			—			268			312			580
Income tax benefit	—			(244		)	(244		)	—			(98		)	(72		)	(170		)
Amounts reclassified from accumulated other comprehensive loss, net of tax	—			426			426			—			170			240			410
Net periodic other comprehensive income (loss)	(1,488		)	281			(1,207		)	(416		)	170			240			(6		)
Balances - May 31 (End of period)	$	(36,027	)	$	(5,295	)	$	(41,322	)	$	(34,425	)	$	(4,103	)	$	—		$	(38,528	)

Reclassifications from accumulated other comprehensive loss, both individually and in the aggregate, were immaterial to the impacted captions in the Unaudited Condensed Consolidated Statements of ~~Operations.~~Operations for all periods presented.



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

Note 10 - Discontinued Operations

In fiscal 2015, the Company ceased operations at seven auto parts stores, six of which qualified for discontinued operations reporting. The operations of the six qualifying stores had previously been reported within the AMR reportable segment. During the nine months ended May 31, 2016, the Company incurred charges totaling $1 million consisting of asset impairments and accelerated depreciation of assets related to discontinued auto parts stores. Impaired assets in the second quarter of fiscal 2016 consisted primarily of capital lease assets associated with the buildings on two leased properties.

Operating results of discontinued operations were comprised of the following (in thousands):



	Three Months Ended May 31,						Nine Months Ended May 31,
	2017			2016			2017			2016
Revenues	$	—		$	—		$	—		$	—

Loss from discontinued operations before income taxes	$	(120	)	$	(130	)	$	(278	)	$	(1,225	)
Income tax benefit (expense)	(7		)	14			3			19
Loss from discontinued operations, net of tax	$	(127	)	$	(116	)	$	(275	)	$	(1,206	)

Note 1011 - Share-Based Compensation

In the first quarter of fiscal 2017, as part of the annual awards under the Company's Long-Term Incentive Plan, the Compensation Committee of the Company's Board of Directors ("Compensation Committee") granted 142,635 restricted stock units ("RSUs") and 134,899 performance share awards to the Company's key employees and officers under the Company's 1993 Amended and Restated Stock Incentive Plan ("SIP"). The RSUs generally have a five-year term and vest 20% per year commencing October 31, 2017. The aggregate fair value of all of the RSUs granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $3 million. The compensation expense associated with the RSUs is recognized over the requisite service period of the awards, net of forfeitures.

The performance share awards are comprised of two separate and distinct awards with different vesting conditions.

The Compensation Committee granted 65,506 performance share awards based on a relative Total Shareholder Return ("TSR") metric over a performance period spanning November 1, 2016 to August 31, 2019. Award share payouts range from a threshold of 50% to a maximum of 200% based on the relative ranking of the Company's TSR among a designated peer group of 16 companies. The TSR award stipulates certain limitations to the payout in the event the payout reaches a defined ceiling level or the Company's TSR is negative. The TSR awards contain a market condition and, therefore, once the award recipients complete the requisite service period, the related compensation expense based on the grant-date fair value is not changed, regardless of whether the market condition has been satisfied. The estimated fair value of the TSR awards at the date of grant was $2 million. The Company estimated the fair value of the TSR awards using a Monte-Carlo simulation model utilizing several key assumptions including expected Company and peer company share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features.

The remaining 69,393 performance share awards have a three-year performance period consisting of the Company’s ~~fiscal~~ 2017, 2018 and ~~2019.~~2019 fiscal years. The performance targets are based on the Company's cash flow return on investment ("CFROI") over the three-year performance period, with award payouts ranging from a threshold of 50% to a maximum of 200%. The fair value of the awards granted was based on the market closing price of the underlying Class A common stock on the grant date and totaled $2 million.

The compensation expense associated with performance share awards is recognized over the requisite service period, net of forfeitures. Performance share awards will be paid in Class A common stock as soon as practicable after the end of the requisite service period and vesting date of October 31, 2019.

~~Note 11~~ ~~- Income Taxes~~In the second quarter of fiscal 2017, the Company granted deferred stock units ("DSUs") to each of its non-employee directors under the Company's SIP. Each DSU gives the director the right to receive one share of Class A common stock at a future date. The grant included an aggregate of 30,312 shares that will vest on the day before the Company's 2018 annual meeting, subject to continued Board service. The total value of these awards at the grant date was $1 million.

The effective tax rate for the Company’s continuing operations for the three months ended November 30, 2016 was a benefit of 8.6%, compared to a benefit of 10.5% for the three months ended November 30, 2015.

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

Three Months Ended November 30,
2016 2015
Federal statutory rate 35.0 % 35.0 %
State taxes, net of credits 2.1
0.8
Foreign income taxed at different rates (3.4 ) (9.1 )
Non-deductible officers’ compensation 2.7
1.5
Noncontrolling interests (4.4 ) (3.9 )
Research and development credits (1.4 ) (0.2 )
Valuation allowance on deferred tax assets (25.0 ) (16.4 )
Unrecognized tax benefits 1.9
1.2
Other non-deductible expenses 1.3
2.1
Other (0.2 ) (0.5 )
Effective tax rate 8.6 % 10.5 %



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

In the third quarter of fiscal 2017, the Compensation Committee granted the second half of the fiscal 2017 annual award comprised of 172,227 RSUs and 167,358 performance share awards, which performance share awards consisted of 81,262 TSR awards and 86,096 CFROI awards, to the Company's key employees and officers under its SIP. The awards granted in the third quarter of fiscal 2017 have terms substantially similar to the awards granted in the first quarter of fiscal 2017, as described above in this Note, except that the performance period for the TSR awards started on April 27, 2017, and the performance period for the CFROI awards started on March 1, 2017. The fair values of RSUs, TSR awards and CFROI awards granted in the third quarter of fiscal 2017 were $3 million, $2 million, and $2 million, respectively.

Note 12 - Income Taxes

The effective tax rate for the Company’s continuing operations for the three and nine months ended May 31, 2017 was an expense of 0.9% and 2.5%, respectively, compared to an expense of 0.8% and 2.5% for the three and nine months ended May 31, 2016, respectively.

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



	Three Months Ended May 31,				Nine Months Ended May 31,
	2017		2016		2017		2016
Federal statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
State taxes, net of credits	2.0		1.7		2.0		1.4
Foreign income taxed at different rates	(2.3	)	(2.4	)	(2.1	)	(6.1	)
Non-deductible officers’ compensation	2.2		0.7		1.9		(1.3	)
Noncontrolling interests	(1.6	)	(1.6	)	(2.5	)	3.0
Research and development credits	(0.9	)	(2.1	)	(0.8	)	1.6
Tax return to provision adjustment	(4.7	)	(1.1	)	(2.8	)	0.4
Valuation allowance on deferred tax assets	(31.2	)	(31.2	)	(30.3	)	(33.5	)
Non-deductible goodwill	—		0.3		—		(0.6	)
Unrecognized tax benefits	0.7		1.4		0.9		(1.4	)
Other non-deductible expenses	1.6		0.7		1.3		(1.8	)
Other	0.1		(0.6	)	(0.1	)	0.8
Effective tax rate⁽¹⁾	0.9	%	0.8	%	2.5	%	(2.5	)%

_____________________________


(1)	For periods with reported pre-tax losses, the effect of reconciling items with positive signs is a tax benefit in excess of applying the federal statutory rate to the pre-tax loss.

The effective tax rate from continuing operations for the third quarter and first ~~quarter~~nine months of fiscal 2017 and 2016 was lower than the federal statutory rate of 35% primarily due to the low projected annual effective tax rate applied to the quarterly results. The low projected annual effective tax rate is the result of the Company’s full valuation allowance positions partially offset by increases in deferred tax liabilities from indefinite-lived assets in all jurisdictions.

The Company files federal and state income tax returns in the U.S. and foreign tax returns in Puerto Rico and Canada. For U.S. federal income tax returns, fiscal years ~~2012~~2013 to 2016 remain subject to examination under the statute of limitations. The Company's U.S. federal income tax return for fiscal 2015 is currently under examination.



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

Note 1213 - Net ~~Loss~~Income (Loss) Per Share

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


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Loss from continuing operations	$	(655	)	$	(4,902	)
Income (loss) from continuing operations							$	17,379		$	11,805		$	28,518		$	(33,043	)
Net income attributable to noncontrolling interests	(618		)	(329		)	(687		)	(689		)	(1,967		)	(1,294		)
Loss from continuing operations attributable to SSI	(1,273		)	(5,231		)
Income (loss) from continuing operations attributable to SSI							16,692			11,116			26,551			(34,337		)
Loss from discontinued operations, net of tax	(53		)	(65		)	(127		)	(116		)	(275		)	(1,206		)
Net loss attributable to SSI	$	(1,326	)	$	(5,296	)
Net income (loss) attributable to SSI							$	16,565		$	11,000		$	26,276		$	(35,543	)
Computation of shares:
Weighted average common shares outstanding, basic	27,372			27,121			27,601			27,261			27,499			27,195
Incremental common shares attributable to dilutive stock options, performance share awards, DSUs, and RSUs	—			—			102			66			193			—
Weighted average common shares outstanding, diluted	27,372			27,121			27,703			27,327			27,692			27,195

Common stock equivalent shares of ~~1,086,335~~375,653 and 309,476 were considered antidilutive and were excluded from the calculation of diluted net ~~loss~~income (loss) per share for the three and nine months ended ~~November 30, 2016~~,May 31, 2017, respectively, compared to ~~794,579~~490,984 and 725,548 common stock equivalent shares for the three and nine months ended ~~November 30, 2015.~~May 31, 2016, respectively.

Note 1314 - Related Party Transactions

The Company purchases recycled metal from its joint venture operations at prices that approximate fair market value. These purchases totaled $5 million and $3 million for the three months ended ~~November 30,~~May 31, 2017 and 2016, respectively, and ~~2015.~~$11 million and $9 million for the nine months ended May 31, 2017 and 2016, respectively.

Note 1415 - 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~~Through the end of the third quarter of fiscal 2017, the Company ~~has~~had two reportable ~~segments as follows:~~segments: AMR and SMB.

AMR buys and processes ferrous and nonferrous metal for sale to foreign and other domestic steel producers or their representatives and to ~~SMB. AMR also~~SMB, purchases ferrous metal from other processors for shipment directly to ~~SMB. AMR also~~SMB, and procures salvaged vehicles and sells serviceable used auto parts from these vehicles through a network of self-service auto parts stores. Additionally, the Company ~~is a~~holds noncontrolling ~~partner~~ownership interests in joint ventures, which are either in the metals recycling business or are suppliers of unprocessed metal. The Company's allocable portion of the results of these joint ventures is reported within the AMR reportable segment.

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

Intersegment sales from AMR to SMB are made at rates that approximate market prices for shipments from the West Coast of the ~~U.S.~~United States. These intercompany sales tend to produce intercompany profits which are not recognized until the finished products are ultimately sold to third parties.



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

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 to measure segment performance. The Company does not allocate corporate interest income and expense, income taxes and other income and expense to its reportable segments. Expenses related to shared services that support operational activities and transactions is allocated from Corporate to the segments. Unallocated Corporate expense consists primarily of expense for management and certain administrative services that benefit both reportable segments. In addition, the Company does not allocate restructuring charges and other exit-related activities to the segment operating income because management does not include this information in its measurement of the performance of the operating segments.

The table below illustrates the Company’s revenues from continuing operations by reportable segment (in thousands):


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Revenues:
Auto and Metals Recycling:
Revenues	$	304,938		$	272,965		$	430,047		$	306,851		$	1,084,354		$	829,628
Less: Intersegment revenues	(23,373		)	(23,668		)	(34,923		)	(26,171		)	(83,872		)	(68,965		)
AMR external customer revenues	281,565			249,297			395,124			280,680			1,000,482			760,663
Steel Manufacturing Business:
Revenues	52,596			71,901			81,964			70,924			192,851			201,217
Total revenues	$	334,161		$	321,198		$	477,088		$	351,604		$	1,193,333		$	961,880

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


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Auto and Metals Recycling	$	12,419		$	2,036		$	29,801		$	26,870		$	68,579		$	2,555
Steel Manufacturing Business	(3,081		)	2,754			411			1,246			(4,416		)	2,799
Segment operating income	9,338			4,790			30,212			28,116			64,163			5,354
Restructuring charges and other exit-related activities	(201		)	(1,925		)	(93		)	(542		)	200			(7,758		)
Corporate and eliminations	(8,550		)	(6,893		)	(10,972		)	(12,688		)	(30,458		)	(23,813		)
Operating income (loss)	587			(4,028		)	19,147			14,886			33,905			(26,217		)
Interest expense	(1,741		)	(1,859		)	(2,131		)	(2,905		)	(5,969		)	(6,779		)
Other income, net	437			407
Loss from continuing operations before income taxes	$	(717	)	$	(5,480	)
Other income (expense), net							524			(81		)	1,318			763
Income (loss) from continuing operations before income taxes							$	17,540		$	11,900		$	29,254		$	(32,233	)

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


	November 30, 2016			August 31, 2016			May 31, 2017			August 31, 2016
Auto and Metals Recycling⁽¹⁾	$	1,520,912		$	1,510,688		$	1,597,410		$	1,510,688
Steel Manufacturing Business	359,112			373,130			360,195			373,130
Total segment assets	1,880,024			1,883,818			1,957,605			1,883,818
Corporate and eliminations⁽²⁾	(1,001,130		)	(992,389		)	(1,036,380		)	(992,389		)
Total assets	$	878,894		$	891,429		$	921,225		$	891,429

_____________________________


(1)	AMR total assets include ~~$14~~$13 million and $14 million as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, respectively, for investments in joint ventures.


(2)	The substantial majority of Corporate and eliminations total assets is comprised of Corporate intercompany payables to the Company's operating segments and intercompany eliminations.



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.


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

This section includes a discussion of our operations for the three and nine months ended ~~November 30, 2016~~May 31, 2017 and ~~November 30, 2015.~~2016. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended August 31, 2016 and the Unaudited Condensed Consolidated Financial Statements and the related Notes thereto included in Part I, Item 1 of this report.

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, including end-of-life vehicles, and a manufacturer of finished steel products.

Our internal organizational and reporting structure supports two operating and reportable segments: the Auto and Metals Recycling ("AMR") business and the Steel Manufacturing Business ("SMB").

AMR 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. AMR procures scrap supply from salvaged vehicles, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap. Our largest source of autobodies is our own network of auto parts stores, which operate under the commercial brand-name Pick-n-Pull. AMR procures salvaged vehicles and sells serviceable used auto parts from these vehicles through 5253 self-service auto parts stores. The remaining portions of the vehicles, primarily autobodies and major parts containing ferrous and nonferrous materials, are shipped to our metal recycling facilities, or sold to wholesalers where geographically more economical. AMR then processes mixed and large pieces of scrap metal into smaller pieces by crushing, torching, shearing, shredding and sorting, resulting in scrap metal pieces of a size, density and metal content required by customers to meet their production needs. Processed recycled metals are shipped to our own domestic steel mill and to other metal producers globally.

SMB operates a steel mini-mill that produces a wide range of finished steel products. SMB’s scrap metal raw material requirements are sourced almost entirely through AMR. SMB uses its mini-mill in McMinnville, Oregon to melt recycled metal and other raw materials to produce finished steel products. SMB also maintains a mill depot in Southern California.

In June 2017, we modified our internal organizational and reporting structure to combine our steel manufacturing business, which is currently reported as our SMB segment, with our Oregon metals recycling business, which is currently reported within our AMR segment, forming a new division named Cascade Steel and Scrap ("CSS"). The Oregon metals recycling business is centered around our shredding and export operation in Portland, Oregon, and also includes four feeder yard operations located in Oregon and Southern Washington and two joint venture ownership interests. The Oregon metals recycling business sources substantially all of the scrap raw material needs of our steel manufacturing business. This change in organizational structure is intended to enhance our flexibility, generate internal synergies, and enable us to more effectively adjust to market changes across our recycling and steel production operations. We expect to report CSS's results of operations as a single operating and reportable segment beginning in the fourth quarter of fiscal 2017.

The results of discontinued operations are excluded from segment operating results and are presented separately, net of tax, from the results of ongoing operations for all periods presented.

For further information regarding our reportable segments, see Note 1415 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.

Our results of operations depend in large part on the demand and prices for recycled metal in foreign and domestic markets and on the supply of raw materials, including end-of-life vehicles, available to be processed at our facilities. We respond to changes in selling prices for processed metal by seeking to adjust purchase prices for unprocessed scrap metal in order to manage the impact on our operating income. We believe AMR generally benefits from sustained periods of rising recycled scrap metal selling prices, which allow it to better maintain or increase both operating income and unprocessed scrap metal flow into its facilities. When recycled scrap metal selling prices decline, AMR's operating margins typically compress.



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

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 Europe, Africa, the Middle East, Asia, and North, Central and South 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.

Our quarterly operating results fluctuate based on a variety of factors including, but not limited to, changes in market conditions for ferrous and nonferrous recycled metal and finished steel products, the supply of scrap metal in our domestic markets, and varying demand for used auto parts from our self-service retail stores. These factors are influenced, to a degree, by the impact of seasonal changes including severe weather conditions in winter and summer months, which can impact the timing of shipments and inhibit construction activity utilizing our products, scrap metal collection at our facilities, and retail admissions at our auto parts stores.



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

Executive Overview of Financial Results for the ~~First~~Third Quarter of Fiscal 2017

We generated consolidated revenues of ~~$334~~$477 million in the ~~first~~third quarter of fiscal 2017, an increase of 4%36% from the ~~$321~~$352 million of consolidated revenues in the ~~first~~third quarter of fiscal 2016, primarily due to ~~stronger demand~~improved market conditions for recycled metals in ~~our~~the domestic and export markets resulting in higher average net selling prices ~~for ferrous scrap metal~~ and increased ~~export~~ sales volumes compared to the prior year period. The effects of these increases compared to the prior year period were partially offset by decreases in finished steel average net selling prices and sales volumes primarily due to competition from lower-priced imports. While overall demand for recycled metals in our end-markets improved compared to the prior year period, including an upward trend in ferrous prices near the end of the first quarter, low global economic growth and the relative strength of the U.S. dollar continued to adversely impact overall market conditions.

Consolidated operating income was $1$19 million in the ~~first~~third quarter of fiscal 2017, compared to ~~consolidated operating loss of $4~~$15 million in the ~~first~~third quarter of fiscal 2016. Adjusted consolidated operating income in the ~~first~~third quarter of fiscal 2017 was $1$18 million, compared to ~~adjusted consolidated operating loss of $2~~$15 million in the ~~first~~third quarter of fiscal 2016. Adjusted results in the first quarter of fiscal 2017 and 2016 exclude the impact of restructuring charges and other exit-related activities, and also exclude the impact of other asset impairment charges and benefits from contract settlements recognized in the first quarter of fiscal 2017. See the reconciliation of adjusted operating income (loss) in Non-GAAP Financial Measures at the end of this Item 2.

Operating results in the ~~first~~third quarter of fiscal 2017 benefited from ~~relatively stable ferrous average net selling prices on shipped~~improved market conditions, increased sales diversification, and improved supply volumes during the quarter compared to the lower and sharply declining price environment experienced during the first quarter of fiscal 2016 which had adversely impacted operating margins and overall results at AMR during the prior year period. While ferrous prices decreased leading into the first quarter of fiscal 2017 before increasing near the end of the period, the resulting adverse impact from average inventory accounting was significantly less than the adverse impact during the first quarter of fiscal 2016. The improved operating results at AMR were partially offset by a decrease in SMB's operating results compared to the prior year period. The ~~decrease~~higher price environment for scrap metal in ~~SMB's~~the third quarter of fiscal 2017 together with an improved trend in U.S. economic conditions led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processed volumes and improved operating results ~~was due~~at AMR compared to ~~a combination of a decline in finished steel~~the prior year quarter. The higher price environment also positively impacted the spread between direct purchase costs and selling prices ~~and~~of ferrous recycled metal, with the metal spread for the third quarter of fiscal 2017 expanding by approximately 6% compared to the prior year quarter, contributing to the improvement in AMR's operating results. Operating margins in the third quarter of fiscal 2016 benefited from a favorable impact from average inventory accounting, compared to an immaterial impact from average inventory accounting in the third quarter of fiscal 2017. SMB reported slightly above break-even operating results for the third quarter of fiscal 2017, compared to $1 million for the prior year period. The benefits to SMB from higher sales volumes ~~driven~~in the third quarter of fiscal 2017 were offset by ~~competition~~continued pressure from ~~lower-priced~~low-priced imports, ~~and lower rolling mill utilization caused by downtime associated with major equipment upgrades, commissioning and maintenance having~~which limited the extent to which selling prices could be increased in a ~~combined $2 million adverse impact on SMB's first quarter~~period of rising raw material costs, which compressed operating ~~results.~~ margins at SMB.

Consolidated selling, general and administrative ("SG&A") expense ~~decreased~~in the third quarter of fiscal 2017 increased by $1$7 million, or 2%16%, compared to the prior year period primarily due to higher employee-related expenses, including an increase in incentive compensation accruals resulting from improved financial performance, and other expenses related to higher volumes. This increase was partially offset by incremental benefits from cost saving and productivity improvement measures initiated in fiscal 2015 and further expanded in subsequent periods. These measures also reduced direct costs of production primarily at AMR contributing to its improved operating results in the first quarter of fiscal 2017 compared to the prior year period.measures.

In recent years, we implemented a number of cost reduction and productivity improvement measures to more closely align our business to market conditions. The combined benefit of the measures initiated since the beginning of fiscal 2015 represents a targeted annual improvement to operating performance of approximately $95 million, of which $78 million had been achieved in total by the end of fiscal 2016. In the ~~first~~third quarter of fiscal 2017, we achieved approximately ~~$22~~$24 million in combined benefits related to these measures, ~~reflecting~~including approximately $7$2 million in incremental benefits compared to the prior year quarter. We expect to achieve substantially all ~~of the remainder~~ of the annual improvement target of $95 million associated with these measures in fiscal 2017. Charges incurred in connection with the foregoing initiatives are discussed in Results of Operations, Restructuring Charges and Other Exit-Related Activities in this Item 2.

Net ~~loss~~income from continuing operations attributable to SSI in the ~~first~~third quarter of fiscal 2017 was $1$17 million, or ~~$(0.05)~~$0.60 per diluted share, compared to $5$11 million, or ~~$(0.19)~~$0.41 per diluted share, in the prior year period. Adjusted net ~~loss~~income from continuing operations attributable to SSI in the ~~first~~third quarter of fiscal 2017 was $1$16 million,, or ~~$(0.03)~~$0.56 per diluted share,, compared to $4$13 million, or ~~$(0.13)~~$0.46 per diluted share, in the prior year period. See the reconciliation of adjusted net ~~loss~~income (loss) from continuing operations attributable to SSI in Non-GAAP Financial Measures at the end of this Item 2.

The following items further highlight selected liquidity and capital structure ~~metrics for~~metrics:

For the first ~~quarter~~nine months of fiscal ~~2017:~~

~~Net cash provided by operating activities of $6 million, compared to~~2017 and 2016, net cash provided by operating activities of ~~$41 million in the prior year period;~~$51 million;

Debt of ~~$188~~$184 million as of ~~November 30, 2016,~~May 31, 2017, compared to $193 million as of August 31, 2016; and

Debt, net of cash, of ~~$180~~$169 million as of May 31, 2017, compared to $166 million as of August 31, 2016 (see the reconciliation of debt, net of cash, in Non-GAAP Financial Measures at the end of this Item 2).



Table of Contents	SCHNITZER STEEL INDUSTRIES, INC.

Results of Operations



	Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands)	2017			2016			% Change		2017			2016			% Change
Revenues:
Auto and Metals Recycling	$	430,047		$	306,851		40	%	$	1,084,354		$	829,628		31	%
Steel Manufacturing Business	81,964			70,924			16	%	192,851			201,217			(4	)%
Intercompany revenue eliminations⁽¹⁾	(34,923		)	(26,171		)	33	%	(83,872		)	(68,965		)	22	%
Total revenues	477,088			351,604			36	%	1,193,333			961,880			24	%
Cost of goods sold:
Auto and Metals Recycling	366,741			251,008			46	%	926,155			716,128			29	%
Steel Manufacturing Business	79,693			67,892			17	%	191,860			193,565			(1	)%
Intercompany cost of goods sold eliminations⁽¹⁾	(35,325		)	(24,162		)	46	%	(84,210		)	(70,431		)	20	%
Total cost of goods sold	411,109			294,738			39	%	1,033,805			839,262			23	%
Selling, general and administrative expense:
Auto and Metals Recycling	35,319			29,241			21	%	94,076			83,577			13	%
Steel Manufacturing Business	1,860			1,786			4	%	5,006			4,853			3	%
Corporate⁽²⁾	11,272			10,669			6	%	30,684			25,283			21	%
Total selling, general and administrative expense	48,451			41,696			16	%	129,766			113,713			14	%
(Income) loss from joint ventures:
Auto and Metals Recycling	(770		)	(268		)	187	%	(3,412		)	144			NM
Change in intercompany profit elimination⁽³⁾	102			10			920	%	112			(83		)	NM
Total (income) loss from joint ventures	(668		)	(258		)	159	%	(3,300		)	61			NM
Goodwill impairment charge:
Auto and Metals Recycling	—			—			NM		—			8,845			NM
Other asset impairment charges (recoveries), net:
Auto and Metals Recycling	(1,044		)	—			NM		(1,044		)	18,379			NM
Steel Manufacturing Business	—			—			NM		401			—			NM
Corporate	—			—			NM		—			79			NM
Total other asset impairment charges (recoveries), net	(1,044		)	—			NM		(643		)	18,458			NM
Operating income (loss):
Auto and Metals Recycling	29,801			26,870			11	%	68,579			2,555			2,584	%
Steel Manufacturing Business	411			1,246			(67	)%	(4,416		)	2,799			NM
Segment operating income	30,212			28,116			7	%	64,163			5,354			1,098	%
Restructuring charges and other exit-related activities⁽⁴⁾	(93		)	(542		)	(83	)%	200			(7,758		)	NM
Corporate expense⁽²⁾	(11,272		)	(10,669		)	6	%	(30,684		)	(25,362		)	21	%
Change in intercompany profit elimination⁽⁵⁾	300			(2,019		)	NM		226			1,549			(85	)%
Total operating income (loss)	$	19,147		$	14,886		29	%	$	33,905		$	(26,217	)	NM

Three Months Ended November 30,
($ in thousands) 2016 2015 % Change
Revenues:
Auto and Metals Recycling $ 304,938
$ 272,965
12 %
Steel Manufacturing Business 52,596
71,901
(27 )%
Intercompany revenue eliminations⁽¹⁾
(23,373 ) (23,668 ) (1 )%
Total revenues 334,161
321,198
4 %
Cost of goods sold:
Auto and Metals Recycling 266,011
242,393
10 %
Steel Manufacturing Business 53,709
67,478
(20 )%
Intercompany cost of goods sold eliminations⁽¹⁾
(23,828 ) (25,017 ) (5 )%
Total cost of goods sold 295,892
284,854
4 %
Selling, general and administrative expense:
Auto and Metals Recycling 26,943
28,450
(5 )%
Steel Manufacturing Business 1,567
1,669
(6 )%
Corporate⁽²⁾
8,982
8,299
8 %
Total selling, general and administrative expense 37,492
38,418
(2 )%
(Income) loss from joint ventures:
Auto and Metals Recycling (435 ) 86
NM
Change in intercompany profit elimination⁽³⁾
23
(57 ) NM
Total (income) loss from joint ventures (412 ) 29
NM
Other asset impairment charges:
Steel Manufacturing Business 401
—
NM
Total other asset impairment charges 401
—
NM
Operating income (loss):
Auto and Metals Recycling 12,419
2,036
510 %
Steel Manufacturing Business (3,081 ) 2,754
NM
Segment operating income 9,338
4,790
95 %
Restructuring charges and other exit-related activities⁽⁴⁾
(201 ) (1,925 ) (90 )%
Corporate expense⁽²⁾
(8,982 ) (8,299 ) 8 %
Change in intercompany profit elimination⁽⁵⁾
432
1,406
(69 )%
Total operating income (loss) $ 587
$ (4,028 ) NM

_____________________________

NM = Not Meaningful


(1)	AMR sells recycled ferrous metal to SMB at rates per ton that approximate West Coast U.S. market prices. These intercompany revenues and cost of goods sold are eliminated in consolidation.


(2)	Corporate expense consists primarily of unallocated expenses for management and certain administrative services that benefit both reportable segments.



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(3)	The joint ventures sell recycled metal to AMR and to SMB 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 reportable segments. Other exit-related activities consist of asset impairments and accelerated depreciation, net of gains on exit-related disposals, related to site ~~closures and idled equipment.~~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.

~~We operate~~Through the end of the third quarter of fiscal 2017, we operated our business across two reportable segments: AMR and SMB. Additional financial information relating to these reportable segments is contained in Note 1415 - Segment Information in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report.



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Auto and Metals Recycling


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
($ in thousands, except for prices)	2016		2015		% Change		2017		2016		% Change		2017		2016		% Change
Ferrous revenues	$	183,754	$	163,413	12	%	$	272,099	$	194,961	40	%	$	686,030	$	498,500	38	%
Nonferrous revenues⁽¹⁾	90,936		77,590		17	%	121,938		79,823		53	%	304,386		237,480		28	%
Retail and other revenues⁽¹⁾	30,248		31,962		(5	)%	36,010		32,067		12	%	93,938		93,648		—	%
Total segment revenues	$	304,938	$	272,965	12	%	430,047		306,851		40	%	$	1,084,354	829,628		31	%

Segment operating income	$	12,419	$	2,036	510	%	$	29,801	$	26,870	11	%	$	68,579	$	2,555	2,584	%

Average ferrous recycled metal sales prices ($/LT):⁽²⁾
Domestic	$	184	$	180	2	%	$	265	$	210	26	%	$	234	$	185	26	%
Foreign	$	202	$	179	13	%	$	254	$	218	17	%	$	236	$	191	24	%
Average	$	196	$	179	9	%	$	259	$	215	20	%	$	235	$	189	24	%
Ferrous sales volume (LT, in thousands):
Domestic	288		290		(1	)%	400		322		24	%	998		895		12	%
Foreign	546		515		6	%	551		510		8	%	1,639		1,480		11	%
Total ferrous sales volume (LT, in thousands)	834		805		4	%	951		832		14	%	2,637		2,375		11	%
Average nonferrous sales price ($/pound)⁽²⁾⁽³⁾	$	0.58	$	0.63	(8	)%	$	0.66	$	0.59	12	%	$	0.63	$	0.60	5	%
Nonferrous sales volumes (pounds, in thousands)⁽³⁾	136,057		111,077		22	%	161,832		122,244		32	%	420,443		356,996		18	%
Cars purchased (in thousands)⁽⁴⁾	94		77		22	%	108		79		37	%	298		226		32	%
Number of auto parts stores at period end	52		55		(5	)%	53		53		—	%	53		53		—	%
Outbound freight in cost of goods sold	$	24,336	$	22,156	10	%	$	30,795	$	19,523	58	%	$	77,632	$	60,876	28	%

_____________________________

NM = Not Meaningful

LT = Long Ton equivalent to 2,240 pounds


(1)	An adjustment of certain intrasegment items was made between nonferrous revenues and retail and other revenues for the three and nine months ended ~~November 30, 2015~~May 31, 2016 to conform to the presentation for the three and nine months ended ~~November 30, 2016.~~May 31, 2017. The adjustment had no impact on previously reported total revenues or earnings.


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


(3)	Average sales price and volume information excludes platinum group metals ("PGMs") in catalytic converters.


(4)	Cars purchased by auto parts stores only.

~~AMR Segment Revenues~~

Revenues in the first quarter of fiscal 2017 increased by 12% compared to the prior year period primarily due to stronger demand in our export markets resulting in higher average net selling prices for ferrous scrap metal and increased export sales volumes for both ferrous and nonferrous scrap metal compared to the prior year period. Average net selling prices for shipments of ferrous scrap metal in the first quarter increased by 9% compared to the prior year period reflecting stronger export demand and higher market prices for other steel-making raw materials generally than experienced during the first quarter of fiscal 2016. Ferrous export sales volumes in the first quarter increased by 6% compared to the prior year period. Nonferrous revenues in the first quarter increased by 17% compared to the prior year period primarily due to a 22% increase in nonferrous sales volumes partially offset by lower nonferrous average net selling prices. While overall demand for recycled metals in our end-markets improved compared to the prior year period, including an upward trend in ferrous prices near the end of the first quarter, low global economic growth and the relative strength of the U.S. dollar continued to adversely impact overall market conditions.

~~AMR Segment Operating Income~~

Operating income for the first quarter of fiscal 2017 was $12 million, compared to $2 million in the first quarter of fiscal 2016. Adjusted operating income for the first quarter of fiscal 2017 was also $12 million, compared to $2 million in the first quarter of fiscal 2016. See the reconciliation of AMR adjusted operating income in Non-GAAP Financial Measures at the end of this Item 2.



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AMR Segment Revenues

Revenues in the third quarter and first nine months of fiscal 2017 increased by 40% and 31%, respectively, compared to the same periods in the prior year primarily due to improved market conditions for recycled metals in the domestic and export markets resulting in higher average net selling prices and increased sales volumes compared to the prior year periods. Average net selling prices for shipments of ferrous scrap metal in the third quarter and first nine months of fiscal 2017 increased by 20% and 24%, respectively, compared to the same periods in the prior year. Ferrous sales volumes in the third quarter and first nine months of fiscal 2017 also increased by 14% and 11%, respectively, compared to the same periods in the prior year primarily due to higher domestic shipments in the third quarter of fiscal 2017. Additionally, nonferrous sales volumes in the third quarter and first nine months of fiscal 2017 were higher by 32% and 18%, respectively, compared to the prior year periods, and nonferrous average net selling prices were higher by 12% and 5%, respectively.

AMR Segment Operating Income (Loss)

Third quarter of fiscal 2017 compared with the third quarter of fiscal 2016

Operating income in the third quarter of fiscal 2017 was $30 million, compared to $27 million in the third quarter of fiscal 2016. Adjusted operating income in the third quarter of fiscal 2017 was $29 million, compared to $27 million in the third quarter of fiscal 2016. See the reconciliation of AMR adjusted operating income in Non-GAAP Financial Measures at the end of this Item 2.

Operating results in the ~~first~~third quarter of fiscal 2017 benefited from ~~relatively stable ferrous average net selling prices on shipped~~improved market conditions, increased sales diversification, and improved supply volumes ~~during the quarter~~ compared to the ~~lower and sharply declining~~prior year period. The higher price environment ~~experienced during~~for scrap metal in the ~~first~~third quarter of fiscal 2017 together with an improved trend in U.S. economic conditions led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processed volumes and improved operating results at AMR compared to the prior year quarter. The higher price environment also positively impacted the spread between direct purchase costs and selling prices of ferrous recycled metal, with the metal spread for the third quarter of fiscal 2017 expanding by approximately 6% compared to the prior year quarter, contributing to the improvement in AMR's operating results. Operating margins in the third quarter of fiscal 2016 which had adversely impacted operating margins and overall results at AMR during the prior year period. While ferrous prices decreased leading into the first quarter of fiscal 2017 before increasing near the end of the period, the resulting adversebenefited from a favorable impact from average inventory accounting, ~~was significantly less than~~compared to an immaterial impact from average inventory accounting in the ~~adverse impact during the first~~third quarter of fiscal 2017. AMR selling, general and administrative ("SG&A") expense in the third quarter of fiscal 2017 increased by $6 million, or 21%, compared to the prior year period primarily due to higher employee-related expenses and other expenses related to higher volumes.

First nine months of fiscal 2017 compared with the first nine months of fiscal 2016

Operating income in the first nine months of fiscal 2017 was $69 million, compared to $3 million in the first nine months of fiscal 2016. Adjusted operating income in the first nine months of fiscal 2017 was $67 million, compared to $30 million in the first nine months of fiscal 2016. See the reconciliation of AMR adjusted operating income in Non-GAAP Financial Measures at the end of this Item 2.

Operating results in the first ~~quarter~~nine months of fiscal 2017 benefited from significantly improved market conditions, increased sales diversification, and improved supply volumes compared to the prior year comparable period. Operating results in the first nine months of fiscal 2016 were adversely impacted by a lower price environment which included sharp declines in commodity selling prices during the first half of fiscal 2016 resulting in an unfavorable impact from average inventory accounting during the nine-month period, compared to a favorable impact from average inventory accounting in the first nine months of fiscal 2017 primarily during the second quarter. The higher price environment for scrap metal during the first nine months of fiscal 2017 together with an improved trend in U.S. economic conditions also led to an increase in the supply of scrap metal, including end-of-life vehicles, resulting in higher processed volumes and improved operating results at AMR compared to the prior year comparable period. The higher price environment also positively impacted the spread between direct purchase costs and selling prices of ferrous recycled metal, with the metal spread for the first nine months of fiscal 2017 expanding by $5approximately 8% compared to the prior year comparable period, contributing to the improvement in AMR's operating results.

Operating results in the first nine months of fiscal 2016 were adversely impacted by a non-cash goodwill impairment charge of $9 million in a reporting unit within AMR and non-cash impairment charges and accelerated depreciation of $18 million on certain long-lived and other assets at AMR. See Results of Operations, Asset Impairment Charges in this Item 2 for further details on asset impairment charges. The first nine months of fiscal 2017 also benefited from improved joint venture income compared to the prior year period driven primarily by a real estate sale at one joint venture during the second quarter resulting in recognition of a gain of $3 million at AMR.



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AMR SG&A expense in the first nine months of fiscal 2017 increased by $10 million, or 13%, compared to the prior year period primarily due to higher employee-related expenses, including an increase in incentive compensation accruals resulting from improved financial performance, other expenses related to higher volumes, and increased environmental liabilities. These increases were partially offset by incremental benefits from the cost saving and productivity improvement measures ~~initiated in fiscal 2015, and further expanded in subsequent periods,~~ to reduce direct costs of production and SG&A expense. ~~SG&A expense within~~ AMR ~~decreased $2 million, or 5%,~~operating results in the first ~~quarter~~nine months of fiscal 2017 ~~compared to the prior year quarter primarily resulting~~were positively impacted by $9 million of incremental benefits from ~~reduced employee-related expense.~~these measures.

Steel Manufacturing Business


	Three Months Ended November 30,								Three Months Ended May 31,								Nine Months Ended May 31,
($ in thousands, except for price)	2016			2015			% Change		2017			2016			% Change		2017			2016			% Change
Revenues⁽¹⁾	$	52,596		$	71,901		(27	)%	$	81,964		$	70,924		16	%	$	192,851		$	201,217		(4	)%

Segment operating income (loss)	$	(3,081	)	$	2,754		NM		$	411		$	1,246		(67	)%	$	(4,416	)	$	2,799		NM

Finished steel average sales price ($/ST)⁽²⁾	$	492		$	554		(11	)%	$	545		$	501		9	%	$	521		$	520		—	%
Finished steel products sold (tons, in thousands)	101			123			(18	)%	141			133			6	%	348			366			(5	)%
Rolling mill utilization⁽³⁾	65		%	68		%			85		%	53		%	60	%	80		%	61		%	31	%

_____________________________

ST = Short Ton, which is 2,000 pounds

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.

(3)

Rolling mill utilization for the third quarter and first ~~quarter~~nine months of fiscal 2017 is based on effective annual production capacity under current conditions of 580 thousand tons of finished steel products, reflecting a decrease in the effective finished steel production capacity resulting from the decommissioning of the older rolling mill during the ~~quarter.~~first quarter of fiscal 2017.

SMB Segment Revenues

~~Revenues for the first~~Third quarter of fiscal 2017 ~~decreased~~compared with the third quarter of fiscal 2016

Revenues in the third quarter of fiscal 2017 increased by ~~27%~~16% compared to the prior year period primarily due to ~~reduced~~higher average selling prices for our finished steel products, reflecting the impact of higher steel-making raw material costs, and higher sales volumes due to stronger demand in the West Coast markets.

First nine months of fiscal 2017 compared with the first nine months of fiscal 2016

Revenues in the first nine months of fiscal 2017 decreased by 4% compared to the prior year period primarily due to lower sales volumes during the first half of fiscal 2017 reflecting the adverse effects of competition from ~~lower-priced~~low-priced steel ~~imports and customer de-stocking.~~imports.

SMB Segment Operating Income (Loss)

~~Operating loss for the first~~Third quarter of fiscal 2017 compared with the third quarter of fiscal 2016

Operating results in the third quarter of fiscal 2017 were slightly above break-even, compared to operating income of $1 million in the prior year period. The benefits from higher sales volumes in the third quarter of fiscal 2017 were offset by continued pressure from low-priced imports, which limited the extent to which selling prices could be increased in a period of rising raw material costs, compressing operating margins at SMB.

First nine months of fiscal 2017 compared with the first nine months of fiscal 2016

Operating loss in the first nine months of fiscal 2017 was $3$4 million, compared to operating income of $3 million in the prior year period. Adjusted operating loss ~~for~~in the first ~~quarter~~nine months of fiscal 2017 was $3$4 million, compared to adjusted operating income of $3 million in the prior year period. See the reconciliation of SMB adjusted operating income (loss) in Non-GAAP Financial Measures at the end of this Item 2.

The decrease in operating results in the first nine months of fiscal 2017 was primarily due to the adverse impact of lower sales volumes and the downtime and costs associated with major equipment upgrades during the first quarter of fiscal 2017. Operating results for both periods were adversely impacted by selling prices for finished steel products falling faster than cost of goods sold, onprimarily during the first ~~quarter~~half of each year, resulting in compressed operating margins and lower overall operating results. ~~Additionally, downtime associated with major equipment upgrades, commissioning and maintenance led to lower rolling mill utilization that reduced overall profitability~~The benefits from higher sales volumes in the ~~first~~third quarter of fiscal 2017 were offset by ~~$2 million.~~continued pressure from low-priced imports, which limited the extent to which selling prices could be increased in a period of rising raw material costs, which compressed operating margins at SMB.



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Through the end of fiscal 2016, SMB operated two computerized rolling mills. In the first quarter of fiscal 2017, we implemented ~~the~~a plan ~~to which~~that we committed to in August 2016 to shut down and decommission the older ~~and less technologically advanced~~ rolling mill, which was entered into service over 40 years ago, and which in recent years ~~has~~had been producing a small proportion of SMB's finished steel products. This plan was implemented in conjunction with an initiative to enhance the operating efficiency of the newer and more technologically advanced rolling mill, improve product quality, and expand its overall effective annual production capacity. In the first quarter of fiscal 2017, we recognized accelerated depreciation of less than $1 million due to shortening the useful lives of decommissioned machinery and equipment assets, which is reported within other asset impairment charges (recoveries), net in the Unaudited Condensed Consolidated Statements of Operations.

Asset Impairment Charges

During the periods presented, we recorded non-cash impairment charges and accelerated depreciation on certain long-lived and other assets. Impairment charges and accelerated depreciation, excluding goodwill impairment charges, were as follows (in thousands):



	Three Months Ended May 31,				Nine Months Ended May 31,
	2017		2016		2017		2016
Reported within other asset impairment charges (recoveries), net⁽¹⁾⁽²⁾:
Long-lived assets	$	—	$	—	$	—	$	7,336
Accelerated depreciation⁽¹⁾	—		—		401		6,208
Investment in joint venture	—		—		—		1,968
Assets held for sale	—		—		—		1,659
Other assets⁽¹⁾	—		—		—		1,287
	—		—		401		18,458
Reported within restructuring charges and other exit-related activities:
Long-lived assets	—		119		—		448
Accelerated depreciation	—		—		96		630
Other assets	—		—		62		1,102
	—		119		158		2,180
Reported within discontinued operations:
Long-lived assets	—		—		—		673
Accelerated depreciation	—		—		—		274
	—		—		—		947
Total	$	—	$	119	$	559	$	21,585

_____________________________


(1)	Other asset impairment charges were incurred in AMR, except for $401 thousand of accelerated depreciation related to SMB for the nine months ended May 31, 2017, and $79 thousand of impairment charges on Other assets related to Corporate for the nine months ended May 31, 2016.


(2)	Excluded from the tabular presentation of asset impairment charges above, but included within other asset impairment charges (recoveries), net reported in the Unaudited Condensed Consolidated Statements of Operations, are recoveries on previously-impaired Assets held for sale at AMR of $1,044 thousand for the three and nine months ended May 31, 2017.

Corporate

Corporate expense is comprised almost entirely of unallocated SG&A expense for management and certain administrative services that benefit both reportable segments. Corporate SG&A expense for the third quarter and first nine months of fiscal 2017 was $11 million and $31 million, respectively, compared to $11 million and $25 million, respectively, for the comparable periods of fiscal 2016. The higher level of expense for the first nine months of fiscal 2017 is primarily due to an increase in incentive compensation accruals resulting from improved financial performance.



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Restructuring Charges and Other Exit-Related Activities

Consolidated operating results for each of the third quarter and first ~~quarter~~nine months of fiscal 2017 ~~and 2016 also~~ included restructuring charges and other exit-related activities of less than $1 million, compared to $1 million and $2$8 million, ~~respectively.~~respectively, in the same periods in the prior year. Restructuring charges consisted of severance, contract termination and other restructuring costs. Other exit-related activities in the first ~~quarter~~nine months of fiscal 2017 included a gain recorded in connection with the disposition of business assets related to the elimination of a metals recycling feeder yard operation, resulting in a net benefit from restructuring charges and other exit-related activities for the period. Other exit-related activities in the third quarter and first nine months of fiscal 2016 consisted of asset ~~impairment charges~~impairments and accelerated depreciation ~~in connection with~~related to site ~~closures and idled equipment.~~closures. The charges incurred during the periods presented primarily pertain to restructuring initiatives announced in the second quarter of fiscal 2015 and expanded in subsequent periods (the "Q2'15 Plan"). Consolidated operating results for the periods presented also reflect benefits from cost reduction and productivity improvement measures initiated prior to the second quarter of fiscal 2015 and an immaterial amount of associated costs.

Since the beginning of fiscal 2015, we have initiated and implemented a number of cost reduction and productivity improvement measures with a targeted annual benefit of $95 million. These initiatives included those announced in the first quarter of fiscal 2015 (the "Q1'15 Plan") followed by further cost-saving and exit-related measures as part of the Q2'15 Plan targeting a combined benefit to annual operating performance of approximately $60 million, subsequently increased by $5 million in the first quarter of fiscal 2016. In the second quarter of fiscal 2016, we expanded the Q2'15 Plan initiatives by an additional $30 million.

The cost reduction and productivity improvements associated with the Q1'15 Plan are driven by a combination of revenue drivers and production and SG&A cost reduction initiatives with a targeted aggregate annual improvement of $14 million, which was achieved in fiscal 2016. The improvements to performance associated with the Q2'15 Plan include two components. The first component reflects strategic actions initiated in the second quarter of fiscal 2015 consisting of idling shredding equipment and closing seven auto parts stores at AMR to align our business to market conditions, targeting a benefit to annual operating performance of approximately $18 million, of which approximately one-third is from reduced depreciation expense. As part of the second component of the Q2'15 Plan, in April 2015, we initiated measures, and also announced the integration of the former Metals Recycling Business and Auto Parts Business into the combined AMR platform, in order to achieve operational synergies and further reduce our annual operating expenses, primarily SG&A expense, by approximately $28 million through personnel reductions, eliminating organizational layers, consolidating shared service functions and reducing other administrative costs. We expanded the Q2'15 Plan and target by initiating measures primarily in the first and second quarters of fiscal 2016 with an additional $35 million in expected benefits primarily through further reductions in personnel, savings from procurement activities, streamlining of administrative and supporting services functions, and adjustments to our operating capacity through additional facility closures, with approximately two-thirds of the target coming from a reduction in SG&A expense and the rest from a reduction in production costs, primarily at AMR.

In the third quarter and first ~~quarter~~nine months of fiscal 2017, we achieved approximately ~~$22~~$24 million and $70 million, respectively, in combined benefits related to the Q1'15 and Q2'15 Plans, ~~reflecting~~including approximately $7$2 million and $16 million, respectively, in incremental benefits compared to the prior year ~~quarter.~~periods. We expect to achieve substantially all of the combined annual improvement target of $95 million associated with these measures in fiscal 2017.



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Restructuring charges and other exit-related activities incurred in connection with cost reduction and productivity improvement plans were comprised of the following (in thousands):



	Three Months Ended May 31, 2017								Three Months Ended May 31, 2016
	All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges
Restructuring charges:
Severance costs	$	—	$	36		$	36		$	—	$	340	$	340
Contract termination costs	43		24			67			76		26		102
Other restructuring costs	—		—			—			—		—		—
Total restructuring charges	43		60			103			76		366		442
Other exit-related activities:
Asset impairments and accelerated depreciation	—		—			—			—		119		119
Gain on exit-related disposal	—		(3		)	(3		)	—		—		—
Total other exit-related activities	—		(3		)	(3		)	—		119		119
Total restructuring charges and other exit-related activities	$	43	$	57		$	100		$	76	$	485	$	561

Restructuring charges and other exit-related activities included in continuing operations						$	93						$	542
Restructuring charges and other exit-related activities included in discontinued operations						$	7						$	19



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	Three Months Ended November 30, 2016								Three Months Ended November 30, 2015							Nine Months Ended May 31, 2017								Nine Months Ended May 31, 2016
	All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges			All Other Plans		Q2’15 Plan			Total Charges			All Other Plans		Q2’15 Plan		Total Charges
Restructuring charges:
Severance costs	$	—	$	(62	)	$	(62	)	$	—	$	1,161	$	1,161		$	—	$	(23	)	$	(23	)	$	—	$	4,686	$	4,686
Contract termination costs	88		(2		)	86			90		645		735			180		83			263			201		683		884
Other restructuring costs	—		—			—			—		—		—			—		—			—			—		—		—
Total restructuring charges	88		(64		)	24			90		1,806		1,896			180		60			240			201		5,369		5,570
Other exit-related activities:
Asset impairments and accelerated depreciation	—		158			158			—		—		—			—		158			158			—		3,127		3,127
Gain on exit-related disposal																—		(565		)	(565		)	—		—		—
Total other exit-related activities	—		158			158			—		—		—			—		(407		)	(407		)	—		3,127		3,127
Total restructuring charges and other exit-related activities	$	88	$	94		$	182		$	90	$	1,806	$	1,896		$	180	$	(347	)	$	(167	)	$	201	$	8,496	$	8,697

Restructuring charges and other exit-related activities included in continuing operations	Restructuring charges and other exit-related activities included in continuing operations					$	201						$	1,925		Restructuring charges and other exit-related activities included in continuing operations					$	(200	)					$	7,758
Restructuring charges (recoveries) and other exit-related activities included in discontinued operations						$	(19	)					$	(29	)
Restructuring charges and other exit-related activities included in discontinued operations																Restructuring charges and other exit-related activities included in discontinued operations					$	33						$	939

See Note 7 - Restructuring Charges and Other Exit-Related Activities in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for additional details on restructuring charges.

Income Tax

Our effective tax rate from continuing operations for the third quarter and first ~~quarter~~nine months of fiscal 2017 was ~~a benefit~~an expense of ~~8.6%~~0.9% and 2.5%, respectively, compared to ~~a benefit~~an expense of ~~10.5%~~0.8% and 2.5% for the comparable prior year ~~period.~~periods.

The effective tax rate from continuing operations for the third quarter and first ~~quarter~~nine months of fiscal 2017 and 2016 was lower than the federal statutory rate of 35% primarily due to the low projected annual effective tax rate applied to the quarterly results. The low projected annual effective tax rate was the result of our full valuation allowance positions partially offset by increases in deferred tax liabilities from indefinite-lived assets in all jurisdictions.

The valuation allowances on our deferred tax assets are the result of negative objective evidence, including the effects of historical losses in our tax jurisdictions, outweighing positive objective and subjective evidence, indicating that it is more likely than not that the associated tax benefit will not be realized. Realization of the deferred tax assets is dependent upon generating sufficient taxable income in the associated tax jurisdictions in future years to benefit from the reversal of net deductible temporary differences and from the utilization of net operating losses. 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.

The effective tax rate from continuing operations for fiscal 2017 is expected to be approximately 9%3%, subject to financial performance for the remainder of the year.

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 $8 million and $27 million as of~~ ~~November 30, 2016~~ ~~and~~ ~~August 31, 2016~~, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of November 30, 2016, debt was $188 million, compared to $193 million as of August 31, 2016, and debt, net of cash, was $180 million, compared to $166 million as of August 31, 2016 (refer to Non-GAAP Financial Measures below), an increase of $14 million primarily resulting from reduced cash on hand due to working capital spending. Our cash balances as of November 30, 2016 and August 31, 2016 include $6 million and $7 million, respectively, that are indefinitely reinvested in Puerto Rico and Canada.

~~Operating Activities~~

~~Net cash provided by operating activities in the first three months of fiscal 2017 was $6 million, compared to $41 million in the first three months of fiscal 2016.~~



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Sources and Uses of Cash

We had cash balances of $15 million and $27 million as of May 31, 2017 and August 31, 2016, respectively. Cash balances are intended to be used primarily for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. We use excess cash on hand to reduce amounts outstanding under our credit facilities. As of May 31, 2017, debt was $184 million, compared to $193 million as of August 31, 2016, and debt, net of cash, was $169 million, compared to $166 million as of August 31, 2016 (refer to Non-GAAP Financial Measures below). Debt, net of cash, increased by $4 million primarily due to higher working capital levels.

Operating Activities

Net cash provided by operating activities in the first nine months of fiscal 2017 and 2016 was $51 million.

Uses of cash in the first ~~three~~nine months of fiscal 2017 included a ~~$14 million increase in accounts payable due to the timing of payments. Uses of cash in the first three months of fiscal 2017 included a $13~~$25 million increase in inventory due to higher raw material purchase prices, higher volumes on hand and the impact of timing of purchases and sales, and a ~~$10~~$22 million ~~decrease~~increase in accounts receivable primarily due to increases in recycled metal selling prices and sales volumes and the timing of sales and collections. Sources of cash in the first nine months of fiscal 2017 included a $13 million increase in accounts payable primarily due to higher raw material purchase prices and the timing of payments, and a $6 million increase in accrued payroll and related liabilities ~~primarily~~ due to increases in incentive compensation ~~payments.~~accruals.

Sources of cash in the first ~~three~~nine months of fiscal 2016 included a ~~$38~~$5 million decrease in accounts receivable primarily due to reductions in recycled metal and finished steel selling prices and the timing of sales and collections, and a $5$4 million decrease in inventory due to the impacts of declining scrap metal purchase prices and timing of purchases and sales. Uses of cash in the first ~~three~~nine months of fiscal 2016 included a ~~$5 million decrease in accounts payable and an $8~~$3 million decrease in accrued payroll and related liabilities and a $6 million decrease in other accrued liabilities due to the timing of payments.

Investing Activities

Net cash used in investing activities was ~~$11~~$35 million in the first ~~three~~nine months of fiscal 2017, compared to $9$19 million in the first ~~three~~nine months of fiscal 2016.

Cash used in investing activities in the first ~~three~~nine months of fiscal 2017 included capital expenditures of ~~$11~~$32 million to upgrade our equipment and infrastructure and for additional investments in environmental and safety-related assets, compared to $9$21 million in the prior year period. Cash used in investing activities in the first nine months of fiscal 2017 also included the purchase of a cost-method investment for $6 million.

Financing Activities

Net cash used in financing activities in the first ~~three~~nine months of fiscal 2017 was ~~$14~~$28 million, compared to ~~$36~~$48 million in the first ~~three~~nine months of fiscal 2016.

Cash flows from financing activities in the first nine months of fiscal 2017 included $8 million in net repayments of debt, compared to $25 million in the prior year period (refer to Non-GAAP Financial Measures at the end of this Item 2). Uses of cash in the first nine months of fiscal 2017 and 2016 also included $15 million for dividends. Cash used in financing activities in the first three months of fiscal 2017 included $5 million in net repayments of debt (refer to Non-GAAP Financial Measures below) and $5 million for dividends, compared to $25 million and $5 million, respectively, in the prior year period. Cash used in financing activities in the first threenine months of fiscal 2016 also included $3 million for share repurchases.

Debt

Our senior secured revolving credit facilities, which provide for revolving loans of $335 million and C$15 million, mature in April 2021 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 ("LIBOR"), or the Canadian equivalent, plus a spread of between 1.75% and 2.75%, with the amount of the spread based on a pricing grid tied to the Company’s leverage ratio, ~~but no less than 2.50% for the fiscal quarters ended May 31, 2016, August 31, 2016 and November 30, 2016,~~ or the greater of (a) the prime rate, (b) the federal funds rate plus 0.50%, or (c) the daily rate equal to one-month LIBOR plus 1.75%, in each case plus a spread of between zero and 1.00% based on a pricing grid tied to the Company's leverage ratio. In addition, commitment fees are payable on the unused portion of the credit facilities at rates between 0.20% and 0.40% based on a pricing grid tied to our leverage ratio.

We had borrowings outstanding under the credit facilities of ~~$183~~$180 million as of ~~November 30, 2016~~May 31, 2017 and ~~$180 million as of~~ August 31, 2016. The weighted average interest rate on amounts outstanding was ~~3.07%~~3.25% and 3.01% as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, respectively.



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We use the credit facilities to fund working capital, capital expenditures, dividends, share repurchases, investments and acquisitions. The credit agreement contains various representations and warranties, events of default and financial and other customary covenants which limit (subject to certain exceptions) our ability to, among other things, incur or suffer to exist certain liens, make investments, incur or guaranty additional indebtedness, enter into consolidations, mergers, acquisitions, and sales of assets, make distributions and other restricted payments, change the nature of our business, engage in transactions with affiliates and enter into restrictive agreements, including agreements that restrict the ability of our subsidiaries to make distributions. The financial covenants under the credit agreement include (a) 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; (b) a consolidated leverage ratio, defined as consolidated funded indebtedness divided by the sum of consolidated net worth and consolidated funded indebtedness; and (c) a consolidated asset coverage ratio, defined as the consolidated asset value of eligible assets divided by the consolidated funded indebtedness. The financial covenants require maintenance of a minimum consolidated fixed charge coverage ratio of 1.25 to 1.00 for the fiscal quarter ended November 30, 2016, and 1.50 to 1.00 thereafter, a maximum leverage ratio of 0.55 to 1.00, and a minimum asset coverage ratio of 0.90 to 1.00 for fiscal quarter ended November 30, 2016, and 1.00 to 1.00 thereafter.



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As of ~~November 30, 2016,~~May 31, 2017, we were in compliance with the financial covenants under the credit agreement. The consolidated fixed charge coverage ratio was required to be no less than ~~1.25~~1.50 to 1.00 and was ~~2.42~~3.25 to 1.00 as of ~~November 30, 2016.~~May 31, 2017. The consolidated leverage ratio was required to be no more than 0.55 to 1.00 and was ~~0.28~~0.27 to 1.00 as of ~~November 30, 2016.~~May 31, 2017. The asset coverage ratio was required to be no less than ~~0.90~~1.00 to 1.00 and was ~~1.28~~1.39 to 1.00 as of ~~November 30, 2016.~~May 31, 2017.

The Company's obligations under the credit agreement are guaranteed by substantially all of our subsidiaries. The credit facilities and the related guarantees are secured by senior first priority liens on certain of our and our subsidiaries’ assets, including equipment, inventory and accounts receivable.

While we expect to remain in compliance with the financial covenants under the credit agreement, there can be no assurances that we will be able to do so in the event market conditions or other negative factors ~~which~~ adversely impact our results of operations and financial position ~~lead~~leading 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 a financial 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 facilities under our committed bank credit agreement and acceleration of the amounts owed under the agreement. In such case, we would be required to evaluate available alternatives and take appropriate steps to obtain alternative funds. There can be no assurances that any such alternative funds, if sought, could be obtained or, if obtained, would be adequate or on acceptable terms.

As of August 31, 2016, we had $8 million of tax-exempt economic development revenue bonds outstanding with the State of Oregon and scheduled to mature in January 2021. In August 2016, we exercised our option to redeem the bonds prior to maturity. We repaid the bonds in full in the first quarter of fiscal 2017. The obligation is reported as a current liability within short-term borrowings as of August 31, 2016 on the Unaudited Condensed Consolidated Balance Sheet, and the $8 million repayment is reported as a cash outflow from financing activities for the ~~three~~nine months ended ~~November 30, 2016~~May 31, 2017 on the Unaudited Condensed Consolidated Statement of Cash Flows.

Capital Expenditures

Capital expenditures totaled ~~$11~~$32 million for the first ~~three~~nine months of fiscal 2017, compared to $9$21 million for the prior year period. We currently plan to invest in the range of $45 million in capital expenditures on maintenance and environmental compliance and safety-related projects in fiscal 2017 using cash generated from operations and available credit facilities.

Dividends

On ~~October 27, 2016,~~April 28, 2017, our Board of Directors declared a dividend for the ~~first~~third quarter of fiscal 2017 of $0.1875 per common share, which equates to an annual cash dividend of $0.75 per common share. The dividend was paid on ~~November 21, 2016.~~May 22, 2017.

Environmental Compliance

~~Our~~Building on our commitment to recycling and operating our business in an environmentally responsible manner, ~~requires us to~~we 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 $3$12 million in capital expenditures for environmental projects in the first ~~three~~nine months of fiscal 2017, and plan to invest ~~in the range of~~up to $20 million for such projects in fiscal 2017. 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 that own or operate or formerly owned or operated sites which are part of or adjacent to the Portland Harbor Superfund site (“the Site”). See Note 6 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of this matter. We believe it is not possible to reasonably estimate the amount or range of costs which we are likely to or which it is reasonably possible that we will incur in connection with the Site, although such costs could be material to our financial position, results of operations, cash flows and liquidity. We have insurance policies that we believe will provide reimbursement for costs we incur for defense, remediation and mitigation for natural resource



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damages claims in connection with the Site, although there are no assurances that those policies will cover all of the costs which we may incur. Significant cash outflows in the future related to the Site could reduce the amounts available for borrowing that could otherwise be used for working capital, capital expenditures, dividends, share repurchases, investments and acquisitions and could result in our failure to maintain compliance with certain covenants in our debt agreements, and could adversely impact our liquidity.

Share Repurchase Program

Pursuant to our amended share repurchase program, we have existing authorization to repurchase up to approximately 1.8 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.



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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 working capital, capital expenditures, share repurchases, dividends, joint ventures, debt service requirements, environmental obligations and acquisitions. 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 assurances 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

There were no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016.

We maintain stand-by letters of credit to provide support for certain obligations, including workers’ compensation and performance bonds. AtAs of ~~November 30, 2016~~May 31, 2017, we had $8$9 million outstanding under these arrangements.

Critical Accounting Policies and Estimates

We reaffirm our critical accounting policies and estimates as described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended August 31, ~~2016.~~2016, except for the following:

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’).

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 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 quantitative impairment test.

As of the beginning of the third quarter of fiscal 2017, we early-adopted an accounting standard update that revises the quantitative goodwill impairment test with no impact to the Unaudited Condensed Consolidated Financial Statements. Under the revised guidance, we apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.

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



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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.

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.

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 and operating margin growth rates, 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, declines in market conditions from current levels, a trend of weaker than anticipated financial performance for the reporting unit with allocated goodwill, a decline 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.

Recently Issued Accounting Standards

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



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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 borrowings (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):


	November 30, 2016		August 31, 2016		May 31, 2017		August 31, 2016
Short-term borrowings	$	701	$	8,374	$	641	$	8,374
Long-term debt, net of current maturities	186,944		184,144		183,802		184,144
Total debt	187,645		192,518		184,443		192,518
Less: cash and cash equivalents	8,100		26,819		15,209		26,819
Total debt, net of cash	$	179,545	$	165,699	$	169,234	$	165,699

Net borrowings (repayments) of debt

Net borrowings (repayments) of debt is the sum of borrowings from long-term debt, repayments of long-term debt, proceeds from line of credit, and repayment of line of credit. We present this amount as the net change in borrowings (repayments) for the period because we believe it is useful to investors as a meaningful presentation of the change in debt.

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


	Three Months Ended November 30,						Nine Months Ended May 31,
	2016			2015			2017			2016
Borrowings from long-term debt	$	102,631		$	11,439		$	360,626		$	112,427
Repayment of long-term debt	(107,491		)	(35,976		)	(368,843		)	(137,869		)
Proceeds from line of credit	—			53,500			—			135,500
Repayment of line of credit	—			(53,500		)	—			(135,500		)
Net repayments of debt	$	(4,860	)	$	(24,537	)
Net borrowings (repayments) of debt							$	(8,217	)	$	(25,442	)

Adjusted consolidated operating income (loss), adjusted AMR operating income, adjusted SMB operating income (loss), adjusted net ~~loss~~income (loss) from continuing operations attributable to SSI, and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI

Management believes that providing these non-GAAP financial measures provides a meaningful presentation of our results from business operations excluding adjustments for a goodwill impairment charge, other asset impairment charges net of recoveries, restructuring charges and other exit-related activities, recoveries related to the resale or modification of previously contracted shipments, the non-cash write-off of debt issuance costs, and income tax expense (benefit) associated with these adjustments, items which are not related to underlying business operational performance, and improves the period-to-period comparability of our results from business operations. ~~These non-GAAP financial measures also exclude the impact on~~Adjusted operating results in fiscal 2015 excluded the impact from the resale or modification of the terms, each at significantly lower prices due to sharp declines in selling prices, of certain previously-contracted bulk shipments for delivery during fiscal 2015. Recoveries resulting from settlements with the original contract parties, which began in the third quarter of fiscal 2016, are reported within SG&A expense in the Unaudited Condensed Consolidated Statements of Operations and are also excluded from the measures.



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The following is a reconciliation of ~~the~~ adjusted consolidated operating income (loss), adjusted AMR operating income, adjusted SMB operating income (loss), adjusted ~~net loss~~income (loss) from continuing operations attributable to SSI, and adjusted diluted earnings (loss) per share from continuing operations attributable to SSI (in thousands, except per share data):


	Three Months Ended November 30,						Three Months Ended May 31,						Nine Months Ended May 31,
	2016			2015			2017			2016			2017			2016
Consolidated operating income (loss):							Consolidated operating income (loss):
As reported	$	587		$	(4,028	)	$	19,147		$	14,886		$	33,905		$	(26,217	)
Other asset impairment charges	401			—
Goodwill impairment charge							—			—			—			8,845
Other asset impairment charges (recoveries), net							(1,044		)	—			(643		)	18,458
Restructuring charges and other exit-related activities	201			1,925			93			542			(200		)	7,758
Recoveries related to the resale or modification of previously contracted shipments	(139		)	—			(171		)	(139		)	(727		)	(139		)
Adjusted	$	1,050		$	(2,103	)	$	18,025		$	15,289		$	32,335		$	8,705

AMR operating income:							AMR operating income:
As reported	$	12,419		$	2,036		$	29,801		$	26,870		$	68,579		$	2,555
Goodwill impairment charge							—			—			—			8,845
Other asset impairment charges (recoveries), net							(1,044		)	—			(1,044		)	18,379
Recoveries related to the resale or modification of previously contracted shipments	(139		)	—			(171		)	(139		)	(727		)	(139		)
Adjusted	$	12,280		$	2,036		$	28,586		$	26,731		$	66,808		$	29,640

SMB operating income (loss):							SMB operating income (loss):
As reported	$	(3,081	)	$	2,754		$	411		$	1,246		$	(4,416	)	$	2,799
Other asset impairment charges	401			—			—			—			401			—
Adjusted	$	(2,680	)	$	2,754		$	411		$	1,246		$	(4,015	)	$	2,799

Net loss from continuing operations attributable to SSI:
Income (loss) from continuing operations attributable to SSI:							Income (loss) from continuing operations attributable to SSI:
As reported	$	(1,273	)	$	(5,231	)	$	16,692		$	11,116		$	26,551		$	(34,337	)
Other asset impairment charges	401			—
Goodwill impairment charge							—			—			—			8,845
Other asset impairment charges (recoveries), net							(1,044		)	—			(643		)	18,458
Restructuring charges and other exit-related activities	201			1,925			93			542			(200		)	7,758
Recoveries related to the resale or modification of previously contracted shipments	(139		)	—			(171		)	(139		)	(727		)	(139		)
Non-cash write-off of debt issuance costs							—			768			—			768
Income tax expense (benefit) allocated to adjustments⁽¹⁾	(40		)	(311		)	3			273			9			829
Adjusted	$	(850	)	$	(3,617	)	$	15,573		$	12,560		$	24,990		$	2,182

Diluted earnings (loss) per share from continuing operations attributable to SSI:							Diluted earnings (loss) per share from continuing operations attributable to SSI:
As reported	$	(0.05	)	$	(0.19	)	$	0.60		$	0.41		$	0.96		$	(1.26	)
Other asset impairment charges, per share	0.01			—
Goodwill impairment charge, per share							—			—			—			0.33
Other asset impairment charges (recoveries), net, per share							(0.04		)	—			(0.02		)	0.68
Restructuring charges and other exit-related activities, per share	0.01			0.07			—			0.02			(0.01		)	0.29
Recoveries related to the resale or modification of previously contracted shipments, per share	(0.01		)	—			(0.01		)	(0.01		)	(0.03		)	(0.01		)
Non-cash write-off of debt issuance costs, per share							—			0.03			—			0.03
Income tax expense (benefit) allocated to adjustments, per share⁽¹⁾	—			(0.01		)	—			0.01			—			0.03
Adjusted⁽²⁾	$	(0.03	)	$	(0.13	)	$	0.56		$	0.46		$	0.90		$	0.08

____________________________



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(1)	Income tax allocated to the aggregate adjustments reconciling reported and adjusted ~~net loss~~income (loss) from continuing operations attributable to SSI and diluted earnings (loss) per share from continuing operations attributable to SSI is determined based on a tax provision calculated with and without the adjustments.


(2)	May not foot due to rounding.

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.



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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

We are exposed to commodity price risk, mainly associated with variations in the market price for finished steel products and ferrous and nonferrous metals including scrap metal, end-of-life vehicles 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 the shipment date. However, financial results may be negatively impacted when forward selling prices fall more quickly than we can adjust purchase prices or when customers fail to meet their contractual obligations. We assess the net realizable value of inventory (“NRV”) each quarter based upon contracted sales orders and estimated future selling prices. Based on contracted sales and estimates of future selling prices at ~~November 30, 2016,~~May 31, 2017, a 10% decrease in the selling price per ton of finished steel products would have caused an NRV inventory write-down of $5$4 million at SMB. A 10% decrease in the selling price of inventory would not have had a material NRV impact on AMR as of ~~November 30, 2016.~~May 31, 2017.

Interest Rate Risk

There have been no material changes to our disclosure regarding interest rate risk set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in our Annual Report on Form 10-K for the year ended August 31, 2016.

Credit Risk

As of ~~November 30, 2016~~May 31, 2017 and August 31, 2016, ~~39%~~36% and 34%, respectively, of our trade accounts receivable balance was covered by letters of credit. Of the remaining balance, ~~88%~~95% and 94%, respectively, was less than 60 days past due as of ~~November 30, 2016~~May 31, 2017 and August 31, 2016.

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 may 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 ~~November 30, 2016~~May 31, 2017 and August 31, 2016, we did not have any derivative contracts.



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ITEM 4.	CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain 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 we are required to disclose in the reports we file or submit 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. Our 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 our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of ~~November 30, 2016~~May 31, 2017, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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



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PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Information regarding reportable legal proceedings is contained in Part I, "Item 3. Legal Proceedings" in our Annual Report on Form 10-K for the fiscal year ended August 31, ~~2016.~~2016, and below in this Part II, "Item 1. Legal Proceedings" of this Quarterly Report on Form 10-Q. Also see Note 6 - Commitments and Contingencies in the Notes to the Unaudited Condensed Consolidated Financial Statements in Part I, Item I, incorporated by reference herein.

With respect to the previously reported matter in which the California Office of the Attorney General received a formal enforcement referral relating to a facility that we operate in the State, we are currently engaged in settlement discussions to resolve this matter. This matter grew out of an agency inspection of the facility in November 2013 and subsequent issuance of a Summary of Violations setting forth a number of alleged violations relating to hazardous waste management requirements. Based on the nature of the specific allegations and the fact that the activities in question were conducted several years ago and are not ongoing, as well as the settlement discussions to date and resolution of a similar enforcement proceeding that has recently been concluded in the State, we do not believe the resolution of this threatened enforcement proceeding will be material to our financial position, results of operations, cash flows or liquidity.


ITEM 1A.	RISK FACTORS

There have been no material changes to our risk factors reported or new factors identified since the filing of our Annual Report on Form 10-K for the year ended August 31, 2016,, which was filed with the Securities and Exchange Commission on October 25, ~~2016.~~2016, except for the change to the "Potential costs related to the environmental cleanup of Portland Harbor may be material to our financial position and liquidity" risk factor reported in our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2017, which was filed with the Securities and Exchange Commission on April 6, 2017.



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ITEM 6.	EXHIBITS



Exhibit Number		Exhibit Description

10.1*		Form of Long-Term Incentive Award Agreement under the 1993 Stock Incentive Plan used for awards granted in ~~the first quarter~~second half of fiscal 2017.

10.2*		~~Form of Restricted Stock Unit Award Agreement used for award to certain employees on November 1, 2016 under the 1993 Stock Incentive Plan.~~

10.3*		~~Fiscal 2017 Annual Performance Bonus Program for the Chief Executive Officer.~~

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

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

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

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

101		The following financial information from Schnitzer Steel Industries, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~November 30, 2016,~~May 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended ~~November 30,~~May 31, 2017 and 2016, ~~and 2015,~~ (ii) Unaudited Condensed Consolidated Balance Sheets as of ~~November 30, 2016,~~May 31, 2017 and August 31, 2016, (iii) Unaudited Condensed Consolidated Statements of Comprehensive ~~Loss~~Income (Loss) for the three and nine months ended ~~November 30,~~May 31, 2017 and 2016, ~~and 2015,~~ (iv) Unaudited Condensed Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~November 30,~~May 31, 2017 and 2016, ~~and 2015,~~ and (v) the Notes to Unaudited Condensed Consolidated Financial Statements.

* Management contract or compensatory plan or arrangement.



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SIGNATURES

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



		SCHNITZER STEEL INDUSTRIES, INC.
		(Registrant)

Date:	~~January 5,~~June 26, 2017	By:	/s/ Tamara L. Lundgren
			Tamara L. Lundgren
			President and Chief Executive Officer

Date:	~~January 5,~~June 26, 2017	By:	/s/ Richard D. Peach
			Richard D. Peach
			Senior Vice President, Chief Financial Officer and Chief of Corporate Operations

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