item 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index financial statements schedules page 29 report 2 following financial statement schedule filed part report see index financial statements schedules page 29 report schedules listed index financial statements schedules omitted information either applicable required 3 exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust bysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 107 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 109 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1011 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1012 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1013 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1014 uniform time charter dated may 27 1993 registrant transpacific shipping co incorporated reference exhibit 106 form s1 1015 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1016 addendum 3 mv jade pacific uniform time charter agreement dated august 28 1996 registrant transpacific shipping co 1017 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1018 addendum 3 mv jade orient uniform time charter agreement dated august 28 1996 registrant transpacific shipping co 1019 1993 stock incentive plan registrant incorporated reference exhibit 107 form s1 1020 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1021 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1022 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 27 financial data schedule submitted electronically securities exchange commission information filed management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 1996 schnitzer steel industries inc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 22 1996 sbarry rosen barry rosen vice president finance treasurer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 22 1996 capacities indicated signature title principal executive officer leonard schnitzer chairman board leonard schnitzer chief executive officer director principal financial officer barry rosen vice president barry rosen finance treasurer principal accounting officer james w cruckshank controller assistant james w cruckshank treasurer schnitzer steel industries inc signatures directors carol lewis director carol lewis kenneth novack director kenneth novack robert w philip director robert w philip jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer manuel schnitzer director manuel schnitzer robert ball director robert ball william furman director william furman ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen report independent accountants financial statement schedules board directors schnitzer steel industries inc audits consolidated financial statements referred report dated september 27 1996 annual report shareholders schnitzer steel industries inc report consolidated financial statements included annual report form 10k also included audit financial statement schedule listed item 14a form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements sprice waterhouse llp price waterhouse llp portland oregon september 27 1996 schnitzer steel industries inc schedule ii valuation qualifying accounts reserves years ended august 31 1996 1995 1994 thousands schnitzer steel industries inc index exhibits page 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust bysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 page 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 107 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 109 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1011 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1012 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1013 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1014 uniform time charter dated may 27 1993 registrant transpacific shipping co incorporated reference exhibit 106 form s1 page 1015 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1016 addendum 3 mv jade pacific uniform time charter 61 78 agreement 57 75 dated august 28 1996 registrant transpacific shipping co 1017 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1018 addendum 3 mv jade orient uniform time charter 62 78 agreement 59 75 dated august 28 1996 registrant transpacific shipping co 1019 1993 stock incentive plan registrant incorporated reference exhibit 107 form s1 1020 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1021 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1022 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 211 subsidiaries registrant 63 78 231 consent independent accountants 64 78 241 powers attorney 65 78 27 financial data schedule submitted electronically securities exchange commission information filed 78 78item 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 27 report 2 following financial statement schedule filed part report see index consolidated financial statements schedule page 27 report schedules listed index consolidated financial statements schedule omitted information either applicable required 3 exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buy sell agreement dated november 30 1996 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated may 27 1993 registrant transpacific shipping co incorporated reference exhibit 106 form s1 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 3 mv jade pacific uniform time charter agreement dated august 28 1996 registrant transpacific shipping co filed exhibit 1016 registrants form 10k fiscal year ended august 31 1996 incorporated reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 3 mv jade orient uniform time charter agreement dated august 28 1996 registrant transpacific shipping co filed exhibit 1018 registrants form 10k fiscal year ended august 31 1996 incorporated reference 1022 1993 stock incentive plan registrant 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 27 financial data schedule management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 1997 schnitzer steel industries inc signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 18 1997 barry rosen barry rosen vice president finance treasurer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 18 1997 capacities indicated signature title principal executive officer leonard schnitzer chairman board chief executive officer director leonard schnitzer principal financial officer barry rosen vice president finance treasurer barry rosen principal accounting officer james w cruckshank controller assistant treasurer james w cruckshank directors carol lewis director carol lewis kenneth novack director kenneth novack robert w philip director robert w philip jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer manuel schnitzer director manuel schnitzer robert ball director robert ball william furman director william furman ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen report independent accountants financial statement schedule board directors schnitzer steel industries inc audits consolidated financial statements referred report dated september 26 1997 appearing page 28 1997 annual report shareholders schnitzer steel industries inc report consolidated financial statements located annual report form 10k also included audit financial statement schedule listed item 14a form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse llp portland oregon september 26 1997 schnitzer steel industries inc schedule ii valuation qualifying accounts reserves years ended august 31 1997 1996 1995 thousands schnitzer steel industries inc index exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buysell agreement dated november 30 1996 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated may 27 1993 registrant transpacific shipping co incorporated reference exhibit 106 form s1 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 3 mv jade pacific uniform time charter agreement dated august 28 1996 registrant transpacific shipping co filed exhibit 1016 registrants form 10k fiscal year ended august 31 1996 incorporated herein reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 3 mv jade orient uniform time charter agreement dated august 28 1996 registrant transpacific shipping co filed exhibit 1018 registrants form 10k fiscal year ended august 31 1996 incorporated herein reference 1022 1993 stock incentive plan registrant 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 27 financial data scheduleitem 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 28 report 2 schedules omitted information either applicable required 3 exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buysell agreement dated november 30 1996 filed exhibit 93 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated june 22 1998 registrant transpacific shipping co 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrants form 10q quarter ended november 30 1997 incorporated reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrants form 10q quarter ended november 30 1997 incorporated reference 1022 1993 stock incentive plan registrant filed exhibit 1022 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1026 vessel purchase sale agreement dated june 22 1998 registrant transpacific shipping co 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 1998 pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 24 1998 barry rosen barry rosen vice president finance treasurer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 24 1998 capacities indicated signature title principal executive officer leonard schnitzer chairman board chief executive officer director leonard schnitzer principal financial officer barry rosen vice president finance treasurer barry rosen principal accounting officer james w cruckshank controller assistant treasurer james w cruckshank directors carol lewis director carol lewis scott lewis director scott lewis kenneth novack director kenneth novack robert w philip director robert w philip jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer robert ball director robert ball william furman director william furman ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen schnitzer steel industries inc index exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buysell agreement dated november 30 1996 filed exhibit 93 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland scrap operations incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland scrap operations filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento scrap operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento scrap operations filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated june 22 1998 registrant transpacific shipping co 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrants form 10q quarter ended november 30 1997 incorporated herein reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrants form 10q quarter ended november 30 1997 incorporated herein reference 1022 1993 stock incentive plan registrant filed exhibit 1022 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1026 vessel purchase sale agreement dated june 22 1998 registrant transpacific shipping co 211 subsidiaries registrant 231 consent independent accountants 241 powers attorneyitem 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 28 report 2 schedules omitted information either applicable required 3 exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buysell agreement dated november 30 1996 filed exhibit 93 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated june 22 1998 registrant transpacific shipping co filed exhibit 1017 registrants form 10k fiscal year ended august 31 1998 incorporated herein reference 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrants form 10q quarter ended november 30 1997 incorporated reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrants form 10q quarter ended november 30 1997 incorporated reference 1022 1993 stock incentive plan registrant filed exhibit 1022 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1026 vessel purchase sale agreement dated june 22 1998 registrant transpacific shipping co filed exhibit 1026 registrants form 10k fiscal year ended august 31 1998 incorporated herein reference 181 letter regarding change accounting principle 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 1999 pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 29 1999 barry rosen barry rosen vice president finance treasurer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 29 1999 capacities indicated signature title principal executive officer leonard schnitzer chairman board chief executive officer director leonard schnitzer principal financial accounting officer barry rosen vice president finance treasurer chief financial officer barry rosen directors carol lewis director carol lewis scott lewis director scott lewis kenneth novack director kenneth novack robert w philip director robert w philip jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer robert ball director robert ball william furman director william furman ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen schnitzer steel industries inc index exhibits 21 agreement plan merger dated september 15 1996 registrant proler international corp incorporated reference exhibit c 1 registrants schedule 14d1 filed september 20 1996 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc voting trust buysell agreement dated march 31 1991 incorporated reference exhibit 91 form s1 92 first amendment voting trust buysell agreement dated july 15 1991 incorporated reference exhibit 92 form s1 93 second amendment voting trust buysell agreement dated november 30 1996 filed exhibit 93 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1014 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1015 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1016 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1017 uniform time charter dated june 22 1998 registrant transpacific shipping co filed exhibit 1017 registrants form 10k fiscal year ended august 31 1998 incorporated herein reference 1018 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrants form 10q quarter ended november 30 1997 incorporated herein reference 1020 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1021 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrants form 10q quarter ended november 30 1997 incorporated herein reference 1022 1993 stock incentive plan registrant filed exhibit 1022 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1023 supplemental executive retirement bonus plan registrant incorporated reference exhibit 108 form s1 1024 assistant secretarys certificate dated november 25 1995 amending supplemental executive retirement bonus plan registrant filed exhibit 106 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1025 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1026 vessel purchase sale agreement dated june 22 1998 registrant transpacific shipping co filed exhibit 1026 registrants form 10k fiscal year ended august 31 1998 incorporated herein reference 181 letter regarding change accounting principle 211 subsidiaries registrant 231 consent independent accountants 241 powers attorneyitem 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 30 report 2 following schedule report independent accountants filed part report schedules omitted information either applicable required 3 exhibits management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 2000 pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 29 2000 barry rosen barry rosen vice president finance treasurer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 29 2000 capacities indicated schnitzer steel industries inc index exhibitsitem 14 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 32 report 2 following schedule report independent accountants filed part report schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules omitted information either applicable required 3 exhibits 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrant’s form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 third amendment lease dated february 1998 schniter investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrant’s form 10k fiscal year ended august 31 2000 incorporated herein reference 1014 fourth amendment lease dated july 1 1998 schniter investment corp registrant relating portland recycled metals recycling operation filed exhibit 1026 registrant’s form 10k fiscal year ended august 31 2000 incorporated herein reference 1015 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1016 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1017 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1018 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1020 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrant’s form 10q quarter ended november 30 1997 incorporated reference 1021 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1022 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrant’s form 10q quarter ended november 30 1997 incorporated reference 1023 1993 stock incentive plan registrant filed exhibit 1022 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 1024 supplemental executive retirement bonus plan registrant 1025 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 1026 deferred bonus agreement company executive officer filed exhibit 103 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 1027 schnitzer steel industries inc economic value added bonus plan 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 2001 pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 29 2001 capacities indicated signature title principal executive officer leonard schnitzer chairman board leonard schnitzer chief executive officer director principal financial accounting officer barry rosen vice president finance treasurer barry rosen chief financial officer directors carol lewis director carol lewis scott lewis director scott lewis kenneth novack director kenneth novack robert w philip director robert w philip jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer robert ball director robert ball william furman director william furman ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen index exhibits 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrant’s form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrant’s form 10k fiscal year ended august 31 2000 incorporated herein reference 1014 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1026 registrant’s form 10k fiscal year ended august 31 2000 incorporated herein reference 1015 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1016 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrant’s form 10q quarterly period ended november 30 1995 incorporated herein reference 1017 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1018 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1019 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1010 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1020 addendum 4 mv jade pacific uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 102 registrant’s form 10q quarter ended november 30 1997 incorporated herein reference 1021 uniform time charter dated may 9 1995 registrant transpacific shipping co filed exhibit 1011 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 1022 addendum 4 mv jade orient uniform time charter agreement dated october 31 1997 registrant transpacific shipping co filed exhibit 101 registrant’s form 10q quarter ended november 30 1997 incorporated herein reference 1023 1993 stock incentive plan registrant filed exhibit 1022 registrant’s form 10k fiscal year ended august 31 1997 incorporated herein reference 1024 supplemental executive retirement bonus plan registrant 1025 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 1026 deferred bonus agreement company executive officer filed exhibit 103 registrant’s form 10q quarterly period ended may 31 1996 incorporated herein reference 1027 schnitzer steel industries inc economic value added bonus plan 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney management contract compensatory plan arrangementitem 14 controls procedures schnitzer steel industries inc management including chief executive officer chief financial officer conducted evaluation effectiveness disclosure controls procedures pursuant exchange act rule 13a15 within 90 days filing report based evaluation chief executive officer chief financial officer concluded disclosure controls procedures effective ensuring material information required filed annual report made known timely fashion significant changes internal controls factors could significantly affect internal controls subsequent date chief executive officer chief financial officer completed evaluation part iv item 15item 14 principal accountant fees services information regarding companys principal accountant fees services included independent auditors companys proxy statement 2004 annual meeting shareholders incorporated herein reference schnitzer steel industries inc form 10k part iv item 15item 14 principal accountant fees services information regarding companys principal accountant fees services included independent auditors companys proxy statement 2005 annual meeting shareholders incorporated herein reference schnitzer steel industries inc form 10k part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services included independent registered public accounting firm” company’s proxy statement 2006 annual meeting shareholders incorporated herein reference schnitzer steel industries inc form 10k part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services included “independent registered public accounting firm” company’s proxy statement 2007 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding company’s principal accountant fees services included “independent registered public accounting firm” company’s proxy statement 2008 annual meeting shareholders incorporated herein reference part iv item 15item 14 principal accounting fees services information regarding company’s principal accountant fees services included “independent registered public accounting firm” company’s proxy statement 2009 annual meeting shareholders incorporated herein reference 88 schnitzer steel industries inc form 10k 2008 part iv item 15item 14 principal accounting fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2010 annual meeting shareholders incorporated herein reference 96 schnitzer steel industries inc form 10k 2009 part iv item 15item 14 principal accounting fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2011 annual meeting shareholders incorporated herein reference 86 schnitzer steel industries inc form 10k 2010 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2012 annual meeting shareholders incorporated herein reference 76 schnitzer steel industries inc form 10k 2011 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2013 annual meeting shareholders incorporated herein reference 81 schnitzer steel industries inc form 10k 2012 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2014 annual meeting shareholders incorporated herein reference 86 schnitzer steel industries inc form 10k 2013 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2015 annual meeting shareholders incorporated herein reference 89 schnitzer steel industries inc form 10k 2014 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2016 annual meeting shareholders incorporated herein reference 93 schnitzer steel industries inc form 10k 2015 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2017 annual meeting shareholders incorporated herein reference 100 schnitzer steel industries inc form 10k 2016 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “independent registered public accounting firm” company’s proxy statement 2018 annual meeting shareholders incorporated herein reference 97 schnitzer steel industries inc form 10k 2017 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included company’s proxy statement 2019 annual meeting shareholders incorporated herein reference 99 schnitzer steel industries inc form 10k 2018 part iv item 15item 14 principal accountant fees services information regarding company’s principal accountant fees services required item 9e schedule 14a included “ratification selection independent registered public accounting firm” “fees paid independent registered public accounting firm” company’s proxy statement 2020 annual meeting shareholders incorporated herein reference 90 schnitzer steel industries inc form 10k 2019 part iv item 15item 14 principal accountant fees services information required item 14 incorporated herein reference definitive proxy statement 2021 annual meeting shareholders filed pursuant regulation 14a exchange act 100 schnitzer steel industries inc form 10k 2020 part iv item 15 item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices scrap metals world markets steel products west coast companys operating income declined fiscal 1992 slowdown world economic activity resulted declining demand prices scrap metals steel products increasing steel demand prices led improved profitability since fiscal 1993 although company experienced softening markets fiscal 1996 march 1995 company acquired outstanding stock mmi mmis results operations included companys financial statements since march 17 1995 therefore significant impact companys scrap related revenue income year ended august 31 1995 december 1993 company acquired four smaller scrap yards central southern oregon following tables set forth information regarding breakdown revenues companys scrap operations steel operations breakdown income operations scrap operations steel operations joint ventures additional financial information relating business segments contained note 10 notes consolidated financial statements schnitzer steel industries inc form 10k part ii continued 1 includes results operations mmi march 17 1995 date acquisition august 31 1995 2 july 1995 company sold certain portland nonferrous operations including nonferrous business acquired mmi transaction resulted decline nonferrous revenues fiscal 1996 3 ferrous scrap sales scrap operations steel operations made negotiated market rate per ton 4 corporate expense eliminations consist primarily unallocated corporate expense services benefit scrap operations steel operations unallocated expense income operations segment reflect income operations segment would standalone business schnitzer steel industries inc form 10k part ii continued fiscal 1996 compared fiscal 1995 revenues fiscal 1996 increased 86 million 3 compared fiscal 1995 increase steel revenues offset decrease scrap revenues scrap operations intercompany eliminations decreased 107 million 4 reflecting increased shipments ferrous scrap offset lower average selling prices decreased nonferrous scrap sales ferrous scrap revenues increased 101 million 5 shipments increased 225700 tons 18 ferrous scrap sales unaffiliated customers increased 109 million 7 reflecting 203500 ton 25 increase shipments ferrous scrap sales unaffiliated customers included 177900 ton increase export shipments 25600 ton increase shipments domestic steel mills result acquisition mmi march 1995 average selling prices ferrous scrap decreased 8 per ton 5 146 per ton result company believes short term market conditions see forward looking statements nonferrous scrap revenues decreased 215 million 67 resulting 55 decrease nonferrous shipments due sale companys portland oregon nonferrous operations july 1995 combined 27 decrease average selling prices steel operations revenues increased 185 million 13 fiscal 1996 compared fiscal 1995 resulting increased shipments finished steel products offset lower average selling prices decreased billet sales finished steel revenues increased 238 million 17 shipments increased 78000 tons 20 primarily due new rolling mill began production february billet sales fiscal 1996 compared 23500 tons billet shipments 52 million billet revenues fiscal 1995 companys intent produce billets resale average finished steel selling prices excluding billets decreased 6 per ton 2 336 per ton finished steel selling prices remained relatively soft throughout fourth quarter cost goods sold overall cost goods sold increased 63 million 2 fiscal 1996 percentage revenues remained unchanged 86 gross profit increased 23 million 5 485 million fiscal 1996 result 49 million increase scrap operations gross profit offset 28 million decrease steel operations gross profit cost goods sold scrap operations decreased 155 million 7 1939 million decreased percentage scrap revenues 86 83 average cost goods sold per ton ferrous scrap decreased 131 123 scrap operations gross profit increased 347 million 396 million primarily result 45 million increase ferrous scrap gross profit compared fiscal 1995 ferrous gross profit increased result 225700 ton increase shipments average gross profit per ton relatively unchanged despite falling prices fiscal 1996 nonferrous gross profit decreased 13 million primarily result 31000 ton decrease shipments schnitzer steel industries inc form 10k part ii continued cost goods sold steel operations fiscal 1996 increased 213 million 17 increased percentage revenues 92 94 increase resulted predominately increased finished steel shipments combined 5 per ton increase average finished steel cost goods sold 5 per ton increase reflects increased rolling mill costs primarily due start new rolling mill offset decrease depreciation expense result change estimated remaining life melt shop steel operations gross profit decreased 28 million 91 million result lower average selling prices combined increase cost goods sold partially offset increase finished steel shipments selling administrative expenses selling administrative expenses increased 27 million 17 189 million fiscal 1996 compared fiscal 1995 primarily due companys acquisition mmi march 1995 income joint ventures income joint ventures fiscal 1996 increased 8 million compared prior year largely due improved results industrial plant reclamation asbestos removal used auto parts joint ventures interest expense interest expense fiscal year 1996 increased 14 million compared fiscal 1995 result higher average borrowings part current fiscal year due part acquisition mmi capital expenditures steel operations addition new wire rod bar mill average borrowings lower recent quarter however company used proceeds received february 1996 stock offering cash generated operations pay debt average borrowings fiscal 1996 722 million compared 375 million fiscal 1995 average interest rate fiscal 1996 59 fiscal 1995 63 income decreased 22 million 17 million fiscal 1996 significant portion decrease resulted decrease gain sale assets 17 million fiscal 1995 primarily due sale certain companys nonferrous assets july 1995 income fiscal 1995 also included 7 million property tax refunds fiscal 1995 compared fiscal 1994 revenues fiscal 1995 increased 690 million 26 compared fiscal 1994 increase scrap revenues offset decline steel revenues scrap operations intercompany eliminations increased 823 million 51 ferrous scrap revenues increased 592 41 shipments increased 263000 tons 27 ferrous scrap sales unaffiliated customers increased 594 million 65 shipments unaffiliated customers increased 277200 tons 51 sales nonferrous scrap increased 208 million 182 increases resulted largely purchase mmi higher average selling prices ferrous nonferrous scrap average selling prices ferrous nonferrous scrap increased 16 per ton 11 20 per pound 56 respectively july 1995 company sold certain portland nonferrous operations including nonferrous business acquired mmi transaction permit company focus ferrous scrap activities accordingly nonferrous revenues decline future periods schnitzer steel industries inc form 10k part ii continued steel operations revenues decreased 131 million 9 fiscal 1995 compared fiscal 1994 reflecting lower volumes offset partially higher prices sales rebar merchant bar decreased approximately 54000 tons 25000 tons respectively sales fence posts special sections increased 8400 tons overall reduction shipments resulted roughly corresponding decreases rebar merchant bar production offset increase special section production decreases production due shift production mix slowerrolling products fence posts flat merchant bar extra 11day shutdown rolling mill fiscal 1995 rebrick reheat furnace slower rolling rate certain merchant bar products due startup issues new inline straightener stacker however increased average selling prices partially offset effects reduced shipments average selling price finished steel products fiscal 1995 342 representing increase 10 prior year shipments billets declined 42 approximately 41000 tons 23000 tons billet sales vary period based customer demand cost goods sold overall cost goods sold increased fiscal 1995 compared fiscal 1994 decreased percentage revenues 90 86 gross profit increased 188 million 68 462 million fiscal 1995 result 169 million increase scrap operations gross profit 28 million increase steel operations gross profit cost goods sold scrap operations increased 654 million 46 2089 million cost goods sold percent scrap revenues decreased 89 86 scrap gross profit increased 182 million 352 million ferrous scrap cost goods sold increased 450 million 1766 million primarily result increased shipments average cost sales per ton ferrous scrap increased 6 gross profit ferrous scrap increased 97 292 million largely due increase tons shipped generally improved margins change mix sales fiscal 1995 higher margin export sales accounted 54 total ferrous scrap shipments compared 47 fiscal 1994 gross profit nonferrous scrap increased 15 million 26 million may decline future periods result sale certain portland nonferrous operations cost goods sold steel operations fiscal 1995 1296 million 92 revenues compared 1455 million 94 revenues prior year decrease amount mostly attributable reduced shipments increases average manufacturing costs per ton resulted increase fixed costs per ton due lower production fact greater percentage tons sold highercost merchant bar special sections even though shipments declined average revenues per ton increased costs per ton resulting 28 million rise total gross profits 119 million selling administrative expenses selling administrative expenses increased 29 million 22 162 million fiscal 1995 compared fiscal 1994 primarily due purchase mmi march 1995 income joint ventures income joint ventures fiscal 1995 increased 1 million compared prior year largely result higher earnings companys used auto parts joint venture 3 million offset lower earnings asbestos removal joint venture 2 million schnitzer steel industries inc form 10k part ii continued interest expense interest expense fiscal 1995 increased 15 million compared fiscal 1994 principally result financing purchase mmi march 1995 higher average borrowing rates partially offset effect paydowns debt company also capitalized 5 million interest costs fiscal 1995 compared 2 million fiscal 1994 average borrowings fiscal 1995 375 million compared 170 million fiscal 1994 average interest rate fiscal 1995 63 fiscal 1994 40 income increased 30 million 39 million fiscal 1995 significant portion increase resulted sale certain companys nonferrous assets july 1995 total gains sale assets fiscal 1995 19 million interest income increased 6 million prior year steel operations also received 7 million property tax refunds liquidity capital resources february 16 1996 company raised 70 million sale 2500000 shares class common stock proceeds sale used repay outstanding bank borrowings cash used operations 58 million fiscal year 1996 compared cash provided operations 337 million 154 million fiscal years 1995 1994 respectively fiscal 1996 decrease cash flow operations primarily result increased inventories 189 million reflecting 91 million increase inventories scrap operations 98 million increase inventories steel operations increase inventories scrap operations primarily due timing export shipments steel operations finished goods inventories increased 92 million work process inventories decreased 49 million predominately due startup bar mill portion new rolling mill february 1996 supplies inventories steel operations increased 55 million anticipation new wire rod bar mill capital expenditures acquisitions totalled 446 million 959 million 227 million fiscal years 1996 1995 1994 respectively capital expenditures fiscal 1996 include 341 million progress payments related construction new wire rod bar mill steel operations august 31 1996 company outstanding purchase commitments related wire rod mill aggregating 64 million fiscal year 1995 capital expenditures acquisition expenditures included purchase mmi progress payments related construction new wire rod bar mill final payments inline straightner steel operations company expects spend 251 million capital improvements including wire rod mill fiscal 1997 march 1995 company purchased outstanding stock mmi 66 million cash prior acquisition mmi established reserve 244 million reflect cost cure environmental liabilities august 31 1996 environmental liability aggregated 229 million company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities schnitzer steel industries inc form 10k part ii continued august 31 1996 company 1000 million five year expires march 2000 unsecured revolving credit facility additional lines credit available 55 million 35 million uncommitted aggregate company borrowings outstanding lines credit august 31 1996 415 million company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital debt service requirements next twelve months company presently anticipate additional funding sources required completion steel operations wire rod mill currently scheduled fiscal 1997 longer term company may seek finance business expansion including potential acquisitions additional borrowing arrangements additional equity financing forward looking statements managements discussion analysis financial condition results operations contains forward looking statements involve number risks uncertainties particular company stated belief decreases scrap market prices result least part short term market conditions future market conditions subject supply demand conditions decisions market participants company control inherently difficult predict accordingly assurance scrap prices rise short term addition factors discussed among factors could cause actual results differ materially following business conditions growth scrap steel industries competitive factors including pricing pressures national steel companies availability scrap supply fluctuations scrap prices seasonality results uncertainty company able complete future acquisitions risk successful startup wire rod mill steel operations 1997 schnitzer steel industries inc form 10k item 8item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices scrap metals world markets steel products us west coast increasing steel demand prices led improved profitability since fiscal 1993 although company experienced softening markets fiscal 1996 1997 companys income joint ventures year ended august 31 1997 significantly higher prior years due acquisition proler effective november 29 1996 march 1995 company acquired outstanding stock mmi mmis results operations included companys financial statements since march 17 1995 significant impact companys scrap related revenue income since december 1993 company acquired four smaller scrap yards central southern oregon following tables set forth information regarding breakdown revenues companys scrap operations steel operations breakdown income operations scrap operations steel operations joint ventures additional financial information relating business segments contained note 10 notes consolidated financial statements schnitzer steel industries inc form 10k part ii continued schnitzer steel industries inc form 10k part ii continued fiscal 1997 compared fiscal 1996 revenues scrap steel increased resulting overall increase companys revenues 224 million 3617 million fiscal 1997 compared fiscal 1996 company achieved record shipments scrap finished steel products fiscal 1997 scrap operations generated revenues 2364 million intercompany eliminations fiscal 1997 compared 2334 million fiscal 1996 representing increase 30 million 1 ferrous revenues declined however despite 39000 ton 3 increase shipments due softer selling prices scrap sales companys steel operations increased 43000 tons 10 494000 tons although total number scrap export shipments last year foreign scrap tonnage declined slightly domestic third party sales tonnage remained relatively last year average ferrous scrap revenues per ton first three quarters fiscal 1997 lower period last year resulting lower average selling price year 138 per ton compared 146 fiscal 1996 company believes due temporary buildup scrap inventories scrap processors steel mills caused slackening demand average prices ferrous scrap world market declined period average selling price fourth quarter fiscal 1997 higher period last year based contracts signed date company expects see improvements prices first quarter fiscal 1998 prices realized fiscal 1997 see forward looking statements increase sales reflects acquisition proler november 1996 steel operations revenues increased 237 million 15 1837 million higher volumes sold offset lower average selling prices contributed increase company experienced increased tonnage sales product categories due part addition new rolling mill february 1996 average finished steel selling prices excluding billets declined 336 334 per ton reflecting lower prices categories companys primary finished steel products expansion steelmaking capacity companys competitors influx finished steel shipments mexico southern california third quarter fiscal 1997 predominantly responsible decline average selling prices market us west coast mix products sold also changed fiscal 1997 impacting average selling prices addition new rod block companys newest rolling mill february 1997 steel operations began producing wire rod coiled reinforcing bar rebar products sales products fiscal 1997 aggregated 20400 tons fiscal 1997 company also sold 5600 tons billets sold fiscal 1996 cost goods sold overall cost goods sold increased 239 million 8 3148 million increased percentage revenues 86 fiscal 1996 87 fiscal 1997 gross profit declined 15 million 3 470 million scrap operations cost goods sold increased 40 2 million 1979 million due increased tonnage sold average cost goods sold per ton ferrous scrap declined company managed purchase prices scale selling prices declining however average selling price ferrous scrap declined quickly cost goods sold per ton resulting overall decline scrap operations gross profit 11 million despite increase tons sold cost goods sold steel operations increased 244 million 16 1754 million due predominantly higher tonnage sales cost goods sold percentage revenues increased 94 95 due decline average selling price company recognized higher depreciation expense fiscal 1997 compared fiscal 1996 due addition new rod mill february 1996 rod block february 1997 increasing cost goods sold per ton however production efficiencies cases lower production costs positively impacted cost goods sold result average cost sales per ton finished steel products remained schnitzer steel industries inc form 10k part ii continued virtually unchanged steel operations gross profit declined 7 million lower average selling prices partially offset increase finished steel shipments selling administrative expenses selling administrative expenses increased 24 million 13 fiscal 1997 compared fiscal 1996 predominantly result increases accommodate corporate growth proler acquisition income joint ventures income joint ventures fiscal 1997 increased 36 million due proler acquisition november 1996 aggregate income companys joint ventures declined slightly large projects process fiscal 1996 completed year interest expense interest expense fiscal 1997 increased 12 million 32 additional debt incurred finance acquisition proler average borrowings fiscal 1997 961 million compared 722 million fiscal 1996 average interest rate fiscal 1997 57 fiscal 1996 59 income increased 29 million year ended august 31 1997 compared prior fiscal year fiscal 1997 company recognized gain approximately 3 million upon settlement interest rate agreement company initially entered agreement sole purpose locking interest rate planned private placement debt company subsequently decided pursuing company past intend future enter speculative hedge arrangements fiscal 1996 compared fiscal 1995 revenues fiscal 1996 increased 86 million 3 compared fiscal 1995 increase steel revenues offset decrease scrap revenues scrap operations intercompany eliminations decreased 107 million 4 reflecting increased shipments ferrous scrap offset lower average selling prices decreased nonferrous scrap sales ferrous scrap revenues increased 101 million 5 shipments increased 225700 tons 18 ferrous scrap sales unaffiliated customers increased 109 million 7 reflecting 203500 ton 25 increase shipments ferrous scrap sales unaffiliated customers included 177900 ton increase export shipments 25600 ton increase shipments domestic steel mills result acquisition mmi march 1995 average selling prices ferrous scrap decreased 8 per ton 5 146 per ton see forward looking statements nonferrous scrap revenues decreased 215 million 67 resulting 55 decrease nonferrous shipments due sale companys portland oregon nonferrous operations july 1995 combined 27 decrease average selling prices steel operations revenues increased 185 million 13 fiscal 1996 compared fiscal 1995 resulting increased shipments finished steel products offset lower average selling prices decreased billet sales finished steel revenues increased 238 million 17 shipments increased 78000 tons 20 primarily due new rolling mill began production february billet sales fiscal 1996 compared 23500 tons billet shipments 52 million billet revenues fiscal 1995 companys intent produce billets resale average finished steel selling prices excluding billets decreased 6 per ton 2 336 per ton finished steel selling prices remained relatively soft throughout fourth quarter cost goods sold overall cost goods sold increased 63 million 2 fiscal 1996 percentage revenues remained unchanged 86 gross profit increased 23 million 5 485 million fiscal 1996 result 49 million increase scrap operations gross profit offset 28 million decrease steel operations gross profit cost goods sold scrap operations decreased 155 million 7 1939 million decreased percentage scrap revenues 86 83 average cost goods sold per ton ferrous scrap decreased schnitzer steel industries inc form 10k part ii continued 131 123 scrap operations gross profit increased 347 million 396 million primarily result 45 million increase ferrous scrap gross profit compared fiscal 1995 ferrous gross profit increased result 225700 ton increase shipments average gross profit per ton relatively unchanged despite falling prices fiscal 1996 nonferrous gross profit decreased 13 million primarily result 31000 ton decrease shipments cost goods sold steel operations fiscal 1996 increased 213 million 17 increased percentage revenues 92 94 increase resulted predominately increased finished steel shipments combined 5 per ton increase average finished steel cost goods sold 5 per ton increase reflects increased rolling mill costs primarily due start new rolling mill offset decrease depreciation expense result change estimated remaining life melt shop steel operations gross profit decreased 28 million 91 million result lower average selling prices combined increase cost goods sold partially offset increase finished steel shipments selling administrative expenses selling administrative expenses increased 27 million 17 189 million fiscal 1996 compared fiscal 1995 primarily due companys acquisition mmi march 1995 income joint ventures income joint ventures fiscal 1996 increased 8 million compared prior year largely due improved results industrial plant reclamation asbestos removal used auto parts joint ventures interest expense interest expense fiscal year 1996 increased 14 million compared fiscal 1995 result higher average borrowings part 1996 due part acquisition mmi capital expenditures steel operations addition new wire rod bar mill average borrowings lower fourth quarter fiscal 1996 however company used proceeds received february 1996 stock offering cash generated operations pay debt average borrowings fiscal 1996 722 million compared 375 million fiscal 1995 average interest rate fiscal 1996 59 fiscal 1995 63 income decreased 22 million 17 million fiscal 1996 significant portion decrease resulted decrease gain sale assets 17 million fiscal 1995 primarily due sale certain companys nonferrous assets july 1995 income fiscal 1995 also included 7 million property tax refunds liquidity capital resources year ended august 31 1997 cash generated operations 231 million compared cash used operations 58 million period last year increase cash generated year predominantly due fact inventories increase significantly year fiscal 1996 scrap operations inventories rose due timing export shipments steel operations experienced increases finished goods supplies inventories related addition new rod bar mill capital expenditures acquisitions totaled 579 million 446 million 959 million fiscal years 1997 1996 1995 respectively expenditures fiscal 1997 included acquisition proler 425 million remaining payments new wire rod block completed february 1997 fiscal 1996 fiscal 1995 company incurred significant capital outlays related construction new rod bar mill placed service february 1996 expenditures fiscal 1995 also reflect acquisition mmi march 1995 final payments inline straightener steel operations company expects spend approximately 15 million capital improvements fiscal 1998 schnitzer steel industries inc form 10k part ii continued part acquisitions proler mmi company assumed environmental liabilities aggregating 303 million august 31 1997 company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities june 1997 company completed renegotiation unsecured revolving credit agreement whereby increased facility 200 million extended maturity facility june 2002 august 31 1997 company also additional lines credit available 55 million 35 million uncommitted aggregate company borrowings outstanding lines 826 million increase borrowings outstanding lines since august 31 1996 predominantly due acquisition proler november 1996 offset additional financing approximately 77 million related companys steel operations company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital debt service requirements next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing forward looking statements managements discussion analysis financial condition results operations contains forward looking statements involve number risks uncertainties future market conditions subject supply demand conditions decisions market participants company control inherently difficult predict addition factors discussed among factors could cause actual results differ materially following business conditions growth scrap steel industries competitive factors including pricing pressures national steel companies availability scrap supply fluctuations scrap prices seasonality results schnitzer steel industries inc form 10k part ii continued item 8item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices scrap metals world markets steel products us west coast increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 primarily due asian financial crisis fiscal 1998 results scrap operations negatively impacted companys income joint ventures year ended august 31 1997 significantly higher prior years due acquisition proler effective november 29 1996 march 1995 company acquired outstanding stock mmi mmis results operations included companys financial statements since march 17 1995 significant impact companys scrap related revenue income since following tables set forth information regarding breakdown revenues companys scrap operations steel operations breakdown income operations scrap operations steel operations joint ventures additional financial information relating business segments contained note 10 notes consolidated financial statements schnitzer steel industries inc form 10k part ii continued fiscal 1998 compared fiscal 1997 revenues scrap operations decreased revenues steel operations increased resulting net decrease companys revenues 86 million 3531 million fiscal 1998 compared 3617 million fiscal 1997 company achieved record shipments finished steel products produced record tons billets fiscal 1998 scrap operations generated revenues 2179 million intercompany eliminations compared 2364 million fiscal 1997 representing decrease 185 million 8 ferrous revenues decreased 170 million 9 result 5 decrease ferrous tons shipped lower average selling prices sales companys steel operations slightly scrap operations made 25 ferrous scrap export shipments totaling 720000 tons fiscal 1998 compared 30 shipments totaling 853000 tons fiscal 1997 domestic thirdparty tonnage increased 37 235000 tons average selling price ferrous scrap declined 5 per ton 122 largest decline occurring export prices second half 1998 steel operations revenues increased 77 million 4 1914 million higher volumes sold coupled increase selling prices contributed increase average steel selling prices increased 5 per ton 339 finished steel tons shipped increased 6600 tons 553000 tons fiscal 1998 company also sold 16900 tons billets compared 5600 tons 1997 cost goods sold overall cost goods sold decreased 36 million 1 3112 million increased percentage revenue 87 fiscal 1997 88 fiscal 1998 gross profit decreased 51 million 11 419 million schnitzer steel industries inc form 10k part ii continued scrap operations cost goods sold decreased 88 million 4 1891 million result 5 decrease ferrous tonnage shipped cost sales per ferrous ton shipped remained unchanged 1997 1998 average selling price ferrous scrap also declined resulting decrease scrap operations gross profit 96 million cost goods sold steel operations increased 27 million 2 1781 million result increased tonnage shipped cost sales per ton decreased 4 result lower scrap prices increased plant efficiencies decrease coupled 5 per ton increase average selling price finished steel 1 increase tonnage shipped resulted 48 million 58 increase overall gross profit 53 increase gross profit per ton finished steel selling administrative expenses selling administrative expenses increased 13 million 6 fiscal 1998 compared fiscal 1997 primarily result overhead added due proler acquisition november 1996 income joint ventures companys joint ventures generated 4086 million revenues fiscal 1998 compared 3525 million fiscal 1997 joint ventures scrap processing business shipped 22 million tons 25 million tons periods respectively decrease primarily result asian financial crisis income joint ventures fiscal 1998 decreased 28 million 41 million compared fiscal 1997 decrease resulted operating losses due asian financial crisis well 4 million charge income closure redundant plant facilities 31 million charge state inventory lower cost market offset 20 million favorable inventory adjustment recorded result physical inventories tons shipped fiscal 1997 discussion include activity occurred prior companys acquisition proler interest expense interest expense fiscal 1998 increased 18 million additional debt required support joint venture operations capital expenditures average borrowings fiscal 1998 976 million compared 961 million 1997 average interest rate fiscal 1998 58 compared 57 fiscal 1997 gain loss sale fixed assets results fiscal 1998 include 22 million charge reflect estimated loss company expects realize upon sale tacoma shredders replaced stateoftheart automobile shredder income decreased 36 million year ended august 31 1998 compared prior year fiscal 1997 included 3 million gain settlement interest rate agreement entered sole purpose locking interest rate planned private placement debt company subsequently decided pursuing income tax provision effective tax rate fiscal 1998 increased 38 34 fiscal 1997 result lower benefits companys foreign sales corporation reduced benefit state tax credits fiscal 1997 compared fiscal 1996 revenues scrap steel increased resulting overall increase companys revenues 224 million 3617 million fiscal 1997 compared fiscal 1996 company achieved record shipments scrap finished steel products fiscal 1997 compared previous years schnitzer steel industries inc form 10k part ii continued scrap operations generated revenues 2364 million intercompany eliminations fiscal 1997 compared 2334 million fiscal 1996 representing increase 30 million 1 ferrous revenues declined however despite 39000 ton 3 increase shipments due softer selling prices scrap sales companys steel operations increased 43000 tons 10 494000 tons although total number scrap export shipments prior year foreign scrap tonnage declined slightly domestic third party sales tonnage remained relatively prior year average ferrous scrap revenues per ton first three quarters fiscal 1997 lower period prior year resulting lower average selling price year 127 per ton compared 146 fiscal 1996 company believes due temporary buildup scrap inventories scrap processors steel mills caused slackening demand average prices ferrous scrap world market declined period average selling price fourth quarter fiscal 1997 higher period prior year increase sales reflects acquisition proler november 1996 steel operations revenues increased 237 million 15 1837 million higher volumes sold offset lower average selling prices contributed increase company experienced increased tonnage sales product categories due part addition new rolling mill february 1996 average finished steel selling prices excluding billets declined 336 334 per ton reflecting lower prices categories companys primary finished steel products expansion steelmaking capacity companys competitors influx finished steel shipments mexico southern california third quarter fiscal 1997 predominantly responsible decline average selling prices market us west coast mix products sold also changed fiscal 1997 impacting average selling prices addition new rod block companys newest rolling mill february 1997 steel operations began producing wire rod coiled reinforcing bar rebar products sales products fiscal 1997 aggregated 20400 tons fiscal 1997 company also sold 5600 tons billets sold fiscal 1996 cost goods sold overall cost goods sold increased 240 million 8 3148 million increased percentage revenues 86 fiscal 1996 87 fiscal 1997 gross profit declined 17 million 3 469 million scrap operations cost goods sold increased 40 2 million 1979 million due increased tonnage sold average cost goods sold per ton ferrous scrap declined company managed purchase prices scale selling prices declining however average selling price ferrous scrap declined quickly cost goods sold per ton resulting overall decline scrap operations gross profit 11 million despite increase tons sold cost goods sold steel operations increased 244 million 16 1754 million due predominantly higher tonnage sales cost goods sold percentage revenues increased 94 95 due decline average selling price company recognized higher depreciation expense fiscal 1997 compared fiscal 1996 due addition new rod mill february 1996 rod block february 1997 increasing cost goods sold per ton however production efficiencies cases lower production costs positively impacted cost goods sold result average cost sales per ton finished steel products remained virtually unchanged steel operations gross profit declined 7 million lower average selling prices partially offset increase finished steel shipments selling administrative expenses selling administrative expenses increased 23 million 12 fiscal 1997 compared fiscal 1996 predominantly result increases accommodate corporate growth proler acquisition income joint ventures income joint ventures fiscal 1997 increased 36 million due proler acquisition november 1996 aggregate income companys joint ventures declined slightly large projects process fiscal 1996 completed year schnitzer steel industries inc form 10k part ii continued interest expense interest expense fiscal 1997 increased 12 million 32 additional debt incurred finance acquisition proler average borrowings fiscal 1997 961 million compared 722 million fiscal 1996 average interest rate fiscal 1997 57 fiscal 1996 59 income increased 29 million year ended august 31 1997 compared prior fiscal year fiscal 1997 company recognized gain approximately 3 million upon settlement interest rate agreement company initially entered agreement sole purpose locking interest rate planned private placement debt company subsequently decided pursuing company intend enter speculative hedge arrangements year 2000 following discussion provided response securities exchange commissions interpretation disclosure year 2000 issues consequences public companies investment advisors investment companies municipal securities issuers response year 2000 compliance issues company developed systematic approach consists following three phases 1 identification assessment identify potential year 2000 issues 2 modification replacement equipment software 3 final testing ensure systems year 2000 compliant modifications installed company divided year 2000 issues following categories physical hardware related operating systems corporate data processing facility b business financial reporting systems locations c personal computers peripheral equipment locations facility support systems including communication devices safety systems locations e manufacturing systems cascade steel rolling mills company completed identification assessment phase corporate data processing facility business financial reporting systems locations personal computers peripheral equipment locations facility support systems majority locations company currently expects phase 1 activities complete march 1 1999 company completed modification equipment corporate data processing facility business financial reporting systems locations personal computers locations expects remainder phase 2 activities complete later may 31 1999 except steel operations expected complete later november 30 1999 company expects complete phase 3 activities later may 31 1999 except steel operations expected complete later november 30 1999 management estimates costs correction year 2000 issues including software hardware upgrades excluding replacements would occurred even without year 2000 issue cost personnel allocated project exceed 1000000 500000 expected capital expenditures approximately 100000 spent date year 2000 upgrades funded normal operating funds expected account less 5 companys information technology maintenance manufacturing capital budgets assurance costs timeframes change company continues assessments year 2000 project priority project companys engineering departments significant engineering projects deferred result companys year 2000 efforts schnitzer steel industries inc form 10k part ii continued company also process assessing year 2000 readiness key vendors using questionnaires letters event critical vendor found noncompliant company develop contingency plans address issue company dependent significant customer given nature scrap business year 2000 assessment customers anticipated present time company expended resources develop contingency plan respect year 2000 compliance company believes year 2000 ready liquidity capital resources year ended august 31 1998 cash generated operations 133 million compared 231 million period last year decrease cash generated year predominantly due decrease net income increase inventories offset decrease accounts receivable capital expenditures payments purchase interest joint ventures totaled 313 million 585 million 446 million fiscal years 1998 1997 1996 respectively expenditures fiscal 1997 included acquisition proler 425 million remaining payments new wire rod block completed february 1997 fiscal 1996 company incurred significant capital outlays related construction new rod bar mill placed service february 1996 company expects spend approximately 18 million capital improvements fiscal 1999 part acquisitions proler mmi company assumed environmental liabilities aggregating 283 million august 31 1998 company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities june 1997 company completed renegotiation unsecured revolving credit agreement whereby increased facility 200 million extended maturity facility june 2002 fiscal 1998 maturity facility extended june 2003 august 31 1998 company also additional lines credit available 75 million 55 million uncommitted aggregate company borrowings outstanding lines 1301 million increase borrowings outstanding lines since august 31 1997 predominantly due additional borrowings support joint venture operations capital expenditures pursuant stock repurchase program announced company may 1994 amended april 1998 company authorized repurchase 16 million shares stock market price companys stock reflective managements opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value august 31 1998 total 448300 shares purchased program fiscal 1998 company repurchased 196000 shares stock total 51 million company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing schnitzer steel industries inc form 10k part ii continued forward looking statements managements discussion analysis financial condition results operations contains forward looking statements within meaning section 27a securities act 1933 section 21e securities act 1934 subject risks uncertainties one identify forward looking statements use words expect believe words convey similar meaning one also identify statements relate strictly historical current facts likely address companys business strategy financial projections results global factors affecting companys financial prospects example current financial crisis facing certain asian countries year 2000 compliance matters factors could cause actual results differ materially following supply demand conditions companys ability mitigate effects asian situation foreign fiscal policies profitability railroad service difficulties competitive factors pricing pressures national steel companies imports foreign steel availability scrap supply fluctuations scrap prices seasonality results one understand possible predict identify factors could cause actual results differ companys forward looking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forward looking statement schnitzer steel industries inc form 10k part ii continued item 8item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices recycled metals world markets steel products us west coast increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 primarily due asian financial crisis severly curtailed demand decreased prices fiscal 1998 1999 results metals recycling business negatively impacted company acquired proler effective november 29 1996 following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business breakdown income operations metals recycling business steel manufacturing business joint ventures additional financial information relating business segments contained note 10 notes consolidated financial statements schnitzer steel industries inc form 10k part ii continued fiscal 1999 compared fiscal 1998 revenues metals recycling business steel manufacturing business decreased resulting overall decline consolidated revenues 881 2650 million fiscal 1999 compared 3531 million fiscal 1998 asian financial crisis began fiscal 1998 continued impact results operations fiscal 1999 metals recycling business generated revenues 1371 million intercompany eliminations decrease 808 million 37 ferrous revenues declined 736 million 42 1017 million result lower volumes lower average selling prices primarily caused financial crisis asia ferrous volumes declined 211000 tons 15 average selling price ferrous recycled metal declined 39 per ton 32 83 per ton metals recycling business made export shipments aggregating 491000 tons fiscal 1999 compared export shipments totaling 720000 tons prior year domestic thirdparty tonnage declined 17 194000 tons sales companys steel business increased 12 539000 tons steel manufacturing business recognized revenues fiscal 1999 1727 million decrease 10 revenues recognized prior year although volume finished steel products sold increased average selling price per ton declined sales finished steel products increased 3 571000 tons however average selling price declined 36 per ton 11 303 per ton company feels decline average selling prices attributable dumping lower priced steel products asian companies west coast decline average selling price also partially due change product mix fiscal 1999 steel manufacturing business shipped proportionately lowerpriced products prior year fiscal 1998 company also sold 16900 tons billets whereas fiscal 1999 sales billets aggregated 500 tons schnitzer steel industries inc form 10k part ii continued cost goods sold consolidated cost goods sold declined 734 million 24 2363 million increased percentage revenues 88 fiscal 1998 89 fiscal 1999 gross profit declined 147 million 34 288 million metals recycling business cost goods sold decreased 684 million 1192 million intercompany eliminations cost sales per ferrous ton declined company lowered purchase price recycled metals scale response declining selling prices sales volumes declined however average selling prices declined higher rate price unprepared metal gross profit metals recycling business declined 125 million metals recycling business generate income operations fiscal 1999 46 million despite adverse international financial climate operated year metals recycling business cost goods sold year ended august 31 1999 lowered 19 million reversal environmental reserves independent consultant engaged review companys environmental issues determine potential liabilities based upon completion certain projects less anticipated costs certain previously established reserves eliminated cost goods sold steel manufacturing business declined 153 million 9 despite higher volumes sold fiscal 1999 cost sales per ton excluding billets declined 30 per ton primarily due lower recycled metals prices impact lower average selling prices offset decline operating costs per ton however resulting gross profit 100 million 33 million lower fiscal 1998 selling administrative expenses selling administrative expenses declined 03 million 237 company endeavored contain overhead costs income joint ventures companys joint ventures revenues results operations follows joint ventures metals recycling business predominantly sell recycled ferrous metal decrease revenues recognized joint ventures attributable lower ferrous selling prices impact partially offset increase tonnage shipped shipments ferrous metal processed joint ventures increased 25 million tons year ended august 31 1999 23 million tons prior year increase ferrous recycled metal partially due fact one joint ventures organized fiscal 1998 thus fiscal 1998s results reflect portion years sales average selling price ferrous recycled metal declined period 87 per ton 117 per ton predominantly due asian financial crisis weaker domestic market reduced demand countries traditionally purchase large share worldwide supply schnitzer steel industries inc form 10k part ii continued companys equity income joint ventures metals recycling business fiscal 1999 included companys 14 million share gain recognized one joint ventures sale property additionally results fiscal 1999 also benefited 33 million lifo inventory adjustments compared 22 million prior year revenues income joint venture suppliers metal declined fiscal 1998 fiscal 1999 primarily due severe weather conditions california first part fiscal 1999 impacted demand thus results companys joint venture operates selfservice used auto parts yards additionally prices received auto bodies joint venture lower prior year due weakness recycled metals markets interest expense interest expense increased 02 million due increased average borrowings effect partially offset lower average interest rates average borrowings 1043 million fiscal 1999 exceeded average borrowings fiscal 1998 976 million average interest rate fiscal 1999 54 compared 58 fiscal 1998 gain loss sale assets fiscal 1999 steel manufacturing business sold union city california mill depot resulting gain 12 million fiscal 1998 results included 22 million charge reflected estimated loss company expected realize upon sale older tacoma shredders income increased 23 million fiscal 1999 company received 1 million settlement result antitrust litigation related graphite electrodes pricing also company recognized additional interest income fiscal 1999 6 million income tax provision companys effective tax rate increased 43 fiscal 1999 38 fiscal 1998 increase predominantly due lower taxable income relative amount nondeductible goodwill amortization fiscal 1998 compared fiscal 1997 revenues metals recycling business decreased revenues steel manufacturing business increased resulting net decrease companys revenues 86 million 3531 million fiscal 1998 compared 3617 million fiscal 1997 steel manufacturing business achieved record shipments finished steel products produced record tons billets fiscal 1998 metals recycling business generated revenues 2179 million intercompany eliminations compared 2364 million fiscal 1997 representing decrease 185 million 8 ferrous revenues decreased 170 million 9 result 5 decrease ferrous tons shipped lower average selling prices sales companys steel manufacturing business slightly metals recycling business made 25 ferrous recycled metals export shipments totaling 720000 tons fiscal 1998 compared 30 shipments totaling 853000 tons fiscal 1997 domestic thirdparty tonnage increased 37 235000 tons average selling price ferrous recycled metals declined 5 per ton 122 largest decline occurring export prices second half 1998 steel manufacturing business revenues increased 77 million 4 1914 million higher volumes sold coupled increase selling prices contributed increase average steel selling prices increased 5 per ton 339 finished steel tons shipped increased 6600 tons 553000 tons fiscal 1998 steel manufacturing business also sold 16900 tons billets compared 5600 tons 1997 schnitzer steel industries inc form 10k part ii continued cost goods sold overall cost goods sold decreased 36 million 1 3096 million increased percentage revenue 87 fiscal 1997 88 fiscal 1998 gross profit decreased 50 million 10 435 million metals recycling business cost goods sold decreased 89 million 5 1876 million result 5 decrease ferrous tonnage shipped cost sales per ferrous ton shipped remained unchanged 1997 1998 average selling price ferrous recycled metals also declined resulting decrease metals recycling business gross profit 95 million cost goods sold steel manufacturing business increased 27 million 2 1780 million result increased tonnage shipped cost sales per ton decreased 4 result lower recycled metals prices increased plant efficiencies decrease coupled 5 per ton increase average selling price finished steel 1 increase tonnage shipped resulted 48 million 56 increase overall gross profit 53 increase gross profit per ton finished steel selling administrative expenses selling administrative expenses increased 13 million 6 fiscal 1998 compared fiscal 1997 primarily result overhead added due proler acquisition november 1996 income joint ventures companys joint ventures revenues results operations follows increase revenues generated joint ventures metals recycling business fiscal 1997 fiscal 1998 due fact company acquired interest majority joint ventures acquisition proler effective november 29 1996 thus results fiscal 1997 include operations joint ventures since date fiscal 1998 joint ventures shipped 23 million tons ferrous recycled metals facilities compared 20 million tons november 1996 end fiscal 1997 annualized basis tons declined year primarily result asian financial crisis average selling price ferrous recycled metals processed sold joint ventures facilities declined 121 per ton 117 per ton also due financial crisis asia decrease companys share income joint ventures metals recycling business fiscal 1997 fiscal 1998 resulted operating losses due asian financial crisis also companys share 4 million charge income closure redundant plant facilities 31 million charge state inventory lower cost market included results fiscal 1998 partially offset 22 million favorable inventory adjustments primarily related lifo schnitzer steel industries inc form 10k part ii continued revenues joint venture suppliers metal increased 10 contributing increase companys equity earnings joint ventures 2 million joint ventures revenues vary year depending upon projects joint ventures engaged interest expense interest expense fiscal 1998 increased 18 million additional debt required support joint venture operations capital expenditures lower cash flow operations average borrowings fiscal 1998 976 million compared 961 million 1997 average interest rate fiscal 1998 58 compared 57 fiscal 1997 gain loss sale fixed assets results fiscal 1998 include 22 million charge reflect estimated loss company expected realize upon sale tacoma shredders since replaced stateoftheart automobile shredder income decreased 36 million year ended august 31 1998 compared prior year fiscal 1997 included 3 million gain settlement interest rate agreement entered sole purpose locking interest rate planned private placement debt company subsequently decided pursuing income tax provision effective tax rate fiscal 1998 increased 38 34 fiscal 1997 result lower benefits companys foreign sales corporation reduced benefit state tax credits year 2000 following discussion provided response securities exchange commissions interpretation disclosure year 2000 issues consequences public companies investment advisors investment companies municipal securities issuers response year 2000 compliance issues company developed systematic approach consists following three phases 1 identification assessment potential year 2000 issues 2 modification replacement equipment software 3 final testing ensure systems year 2000 compliant modifications installed company divided year 2000 issues following categories physical hardware related operating systems corporate data processing facility b business financial reporting systems locations c personal computers peripheral equipment locations facility support systems including communication devices safety systems locations e manufacturing systems steel manufacturing business f business systems picknpull companys selfservice auto dismantling joint venture company completed identification assessment phase company completed modification equipment corporate data processing facility business financial reporting systems locations personal computers locations remainder phase 2 activities except picknpull expected complete december 31 1999 company completed phase 3 activities october 1999 except picknpull expected complete december 31 1999 management estimates costs correction year 2000 issues including software hardware upgrades excluding replacements would occurred even without year 2000 issue cost personnel allocated project exceed 1300000 1000000 expected capital schnitzer steel industries inc form 10k part ii continued expenditures approximately 879500 spent date year 2000 upgrades funded normal operating funds expected account less 5 companys information technology maintenance manufacturing capital budgets assurance costs timeframes change company continues assessments year 2000 project priority project companys engineering departments significant engineering projects deferred result companys year 2000 efforts company also assessed year 2000 readiness key vendors using questionnaires letters critical vendors found noncompliant company dependent significant customer given nature metals recycling business year 2000 assessment customers anticipated present time company expended resources develop contingency plan respect year 2000 compliance company believes year 2000 ready liquidity capital resources year ended august 31 1999 cash generated operations 368 million compared 133 million period last year increase cash generated year predominantly due decreases inventories accounts receivable prepaid expenses capital expenditures payments purchase interest joint ventures totaled 121 million 313 million 585 million fiscal years 1999 1998 1997 respectively expenditures fiscal 1997 included acquisition proler 425 million remaining payments new wire rod block steel mill completed february 1997 part acquisitions proler mmi company assumed environmental liabilities aggregating 248 million august 31 1999 company expects significant future cash outlays incurs actual costs relating remediation environmental liabilities june 1997 company completed renegotiation unsecured revolving credit agreement whereby increased facility 200 million extended maturity facility june 2002 fiscal 1998 maturity facility extended june 2003 august 31 1999 company also additional lines credit available 85 million 65 million uncommitted aggregate company borrowings outstanding lines 1099 million companys debt agreements certain restrictive covenants august 31 1999 company compliance covenants pursuant stock repurchase program company authorized repurchase 16 million shares stock market price companys stock reflective managements opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value august 31 1999 total 708600 shares purchased program fiscal 1999 company repurchased 260300 shares stock total 32 million company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing schnitzer steel industries inc form 10k part ii continued forward looking statements managements discussion analysis financial condition results operations contains forward looking statements within meaning section 27a securities act 1933 section 21e securities act 1934 subject risks uncertainties one identify forward looking statements use words expect believe words convey similar meaning one also identify statements relate strictly historical current facts likely address companys business strategy financial projections results global factors affecting companys financial prospects example current financial crisis facing certain asian countries year 2000 compliance matters factors could cause actual results differ materially following supply demand conditions companys ability mitigate effects asian situation foreign fiscal policies profitability railroad service difficulties competitive factors pricing pressures national steel companies imports foreign steel availability recycled metals supply fluctuations recycled metals prices seasonality results one understand possible predict identify factors could cause actual results differ companys forward looking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forward looking statement item 7a quantitative qualitative disclosures market risk company periodically uses derivative financial instruments limit exposure changes interest rates derivative instruments used solely hedges speculative trading purposes represent incremental risk company discussion derivative financial instruments refer fair value financial instruments note 1 note 4 consolidated financial statements included item 8item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices recycled metals world markets steel products us west coast example increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 however primarily due asian financial crisis severely curtailed demand decreased prices fiscal 1998 1999 results metals recycling business negatively impacted fiscal 2000 company saw demand recycled metal rise unusually large supply became available certain countries part former soviet union held prices addition domestic demand finished steel products strong lower cost imports primarily asia caused average prices generally decline following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business breakdown income operations metals recycling business steel manufacturing business joint ventures additional financial information relating business segments contained note 10 notes consolidated financial statements schnitzer steel industries inc form 10k part ii continued 1 ferrous recycled metal sales metals recycling business steel manufacturing business made negotiated rate per ton intended approximate market 2 corporate expense consists primarily unallocated corporate expense services benefit metals recycling business steel manufacturing business unallocated expense income operations segment reflect income operations segment would standalone business fiscal 2000 compared fiscal 1999 revenues metals recycling business steel manufacturing business increased resulting overall improvement consolidated revenues 688 million 3338 million fiscal 2000 compared fiscal 1999 strengthening asian economies particularly positive impact volume prices metals recycling business fiscal 2000 metals recycling business generated revenues 1884 million intercompany eliminations increase 513 million 37 ferrous revenues increased 401 million 39 1418 million result higher volumes higher average selling prices primarily caused rebounding asian economies ferrous volumes increased 282000 tons 23 average selling price ferrous recycled metal increased 12 per ton 14 95 per ton metals recycling business made export shipments aggregating 761000 tons fiscal 2000 compared export shipments totaling 491000 tons prior year domestic thirdparty tonnage increased 27 247000 tons sales companys steel business decreased 8 498000 tons nonferrous revenues increased 128 million 49 388 million due higher volumes higher average selling prices increased exports strong domestic market primarily responsible nonferrous improvements well metals recycling business ability produce nonferrous products nonferrous volumes increased 217 million pounds 29 average selling price increased 005 per pound 14 steel manufacturing business recognized revenues fiscal 2000 1924 million increase 11 revenues recognized prior year although volume finished steel products sold increased average selling price per ton declined sales finished steel products increased 17 666000 tons strong demand enabled company substantially increase production sales wire rod products however average selling price declined 14 per ton 5 289 per ton decline average selling prices primarily attributable dumping lower priced steel products asian companies west coast decline average selling price also partially due change product mix fiscal 2000 steel manufacturing business shipped proportionately lowerpriced products principally wire rod prior year schnitzer steel industries inc form 10k part ii continued cost goods sold consolidated cost goods sold increased 557 million 23 2966 million decreased percentage revenues 89 compared 91 fiscal 1999 gross profit increased 131 million 54 372 million metals recycling business cost goods sold increased 371 million 1610 million intercompany eliminations cost sales per ferrous ton increased due increased foreign demand processed metal directly impacted demand cost unprocessed metals increase cost unprocessed metal offset increase average selling price increasing gross profit 50 million compared previous fiscal year income operations fiscal 2000 increased 130 million compared fiscal 1999 primarily due stronger asian economies cost goods sold steel manufacturing business increased 190 million 12 cost sales per ton excluding billets declined 13 per ton primarily due increased production spread allocation fixed costs tons lower average selling prices offset decline operating costs per ton increased sales volume resulted gross profit 107 million 07 million higher fiscal 1999 selling administrative expenses selling administrative expenses increased 28 million 265 million increase 16 million due annual salary merit increases additional bonus accruals based significant improvement results fiscal 2000 fiscal 2000 expenses also included 04 million writeoffs uncollectible debts income joint ventures companys joint ventures revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous metal increase revenues recognized joint ventures attributable higher ferrous selling prices increase tonnage shipped also fiscal 2000 revenues include full years results joint venture organized third quarter fiscal 1999 shipments ferrous metal processed joint ventures increased 28 million tons year ended august 31 2000 25 million tons prior year average selling price ferrous recycled metal increased period 108 per ton 87 per ton predominantly due strengthening asian foreign economies fiscal 2000 companys equity income joint ventures metals recycling business adversely affected 11 million reflect companys share lifo inventory adjustments comparison results fiscal 1999 benefited 33 million lifo inventory adjustments companys equity income joint ventures metals recycling business fiscal 1999 included companys 14 million share gain recognized one joint ventures sale property schnitzer steel industries inc form 10k part ii continued revenues income joint venture suppliers metal increased fiscal 1999 fiscal 2000 primarily due higher ferrous selling prices interest expense interest expense increased 04 million due increased average borrowings higher average interest rates average borrowings 1074 million fiscal 2000 exceeded average borrowings fiscal 1999 1043 million average interest rate fiscal 2000 63 compared 54 fiscal 1999 gain loss sale assets fiscal 2000 company outside board members approved sale ship leased company related party export recycled metal sale resulted 10 million loss fiscal 1999 results included steel manufacturing business sale union city california mill depot resulting gain 12 million income increased 13 million fiscal 2000 company received 07 million settlement result antitrust litigation related graphite electrodes pricing fiscal 1999 company received 10 million related antitrust settlement also company recognized additional interest income fiscal 2000 19 million related advances joint ventures 09 million investment income assets related supplemental executive retirement plan due strong domestic financial markets see note 8 income tax provision companys effective income tax rate decreased 6 fiscal 2000 55 fiscal 1999 decrease primarily due lower taxable income caused utilization 86 million net operating loss carryforwards nols acquired part 1996 acquisition proler acquiring proler 1996 company succeeded 310 million nols incurred prolers pre acquisition years federal income tax law limits amount proler preacquisition nols used company 24 million per year however extent respective annual limit exceeds taxable income taxable year unused excess may carried used subsequent taxable years previous federal tax rules limited use proler nols offset taxable income acquired proler entities new rules allow company use proler nols offset taxable income sources fiscal 2000 federal income tax law changes enacted allow company somewhat greater flexibility utilizing proler nols changes allowed company utilize annual limit 24 million fiscal 2000 well additional 62 million excess limit amounts prior years subject annual utilization limits remaining 224 million proler nols may used future years expire various amounts fiscal 2007 2012 fiscal 1999 compared fiscal 1998 revenues metals recycling business steel manufacturing business decreased resulting overall decline consolidated revenues 881 2650 million fiscal 1999 compared 3531 million fiscal 1998 asian financial crisis began fiscal 1998 continued impact results operations fiscal 1999 metals recycling business generated revenues 1371 million intercompany eliminations decrease 808 million 37 ferrous revenues declined 736 million 42 1017 million result lower volumes lower average selling prices primarily caused financial crisis asia ferrous volumes declined 211000 tons 15 average selling price ferrous recycled metal declined 39 per ton 32 83 per ton metals recycling business made export shipments aggregating 491000 tons fiscal 1999 compared export shipments totaling 720000 tons prior year domestic thirdparty tonnage declined 17 194000 tons sales companys steel business increased 12 539000 tons schnitzer steel industries inc form 10k part ii continued steel manufacturing business recognized revenues fiscal 1999 1727 million decrease 10 revenues recognized prior year although volume finished steel products sold increased average selling price per ton declined sales finished steel products increased 3 571000 tons however average selling price declined 36 per ton 11 303 per ton company feels decline average selling prices attributable dumping lower priced steel products asian companies west coast decline average selling price also partially due change product mix fiscal 1999 steel manufacturing business shipped proportionately lowerpriced products prior year cost goods sold consolidated cost goods sold declined 710 million 23 2409 million increased percentage revenues 88 fiscal 1998 91 fiscal 1999 gross profit declined 170 million 41 242 million metals recycling business cost goods sold decreased 660 million 1238 million intercompany eliminations cost sales per ferrous ton declined company lowered purchase price recycled metals scale response declining selling prices however average selling prices declined higher rate price unprepared metal gross profit metals recycling business declined 148 million metals recycling business cost goods sold year ended august 31 1999 lowered 19 million reversal environmental reserves independent consultant engaged review companys environmental issues determine potential liabilities based upon completion certain projects less anticipated costs certain previously established reserves eliminated cost goods sold steel manufacturing business declined 153 million 9 despite higher volumes sold fiscal 1999 cost sales per ton excluding billets declined 30 per ton primarily due lower recycled metals prices impact lower average selling prices offset decline operating costs per ton however resulting gross profit 100 million 33 million lower fiscal 1998 selling administrative expenses selling administrative expenses declined 04 million 237 million company endeavored contain overhead costs income joint ventures companys joint ventures revenues results operations follows thousands schnitzer steel industries inc form 10k part ii continued joint ventures metals recycling business predominantly sell recycled ferrous metal decrease revenues recognized joint ventures attributable lower ferrous selling prices impact partially offset increase tonnage shipped shipments ferrous metal processed joint ventures increased 25 million tons year ended august 31 1999 23 million tons prior year increase ferrous recycled metal partially due fact one joint ventures organized fiscal 1998 thus fiscal 1998s results reflect portion years sales average selling price ferrous recycled metal declined period 87 per ton 117 per ton predominantly due asian financial crisis weaker domestic market reduced demand countries traditionally purchase large share worldwide supply companys equity income joint ventures metals recycling business fiscal 1999 included companys 14 million share gain recognized one joint ventures sale property additionally results fiscal 1999 also benefited 33 million lifo inventory adjustments compared 22 million prior year revenues income joint venture suppliers metal declined fiscal 1998 fiscal 1999 primarily due severe weather conditions california first part fiscal 1999 impacted demand thus results companys picknpull joint venture additionally prices received auto bodies joint venture lower prior year due weakness recycled metals markets interest expense interest expense increased 02 million due increased average borrowings effect partially offset lower average interest rates average borrowings 1043 million fiscal 1999 exceeded average borrowings fiscal 1998 976 million average interest rate fiscal 1999 54 compared 58 fiscal 1998 gain loss sale assets fiscal 1999 steel manufacturing business sold union city california mill depot resulting gain 12 million fiscal 1998 results included 22 million charge reflected estimated loss company expected realize upon sale older tacoma shredders income increased 23 million fiscal 1999 company received 1 million settlement result antitrust litigation related graphite electrodes pricing also company recognized additional interest income fiscal 1999 6 million income tax provision companys effective tax rate increased 55 fiscal 1999 38 fiscal 1998 increase predominantly due lower taxable income relative amount nondeductible goodwill amortization liquidity capital resources fiscal 2000 cash generated operations 354 million comparable 368 million period last year increase cash provided growth net income largely offset impact higher accounts receivable resulting greater export demand well timing larger export shipments related collection receivable capital expenditures totaled 107 million 120 million 142 million fiscal years 2000 1999 1998 respectively part acquisitions proler mmi company assumed environmental liabilities aggregating 234 million august 31 2000 company expects significant future cash outlays incurs actual costs relating remediation environmental liabilities schnitzer steel industries inc form 10k part ii continued company unsecured revolving credit agreement 200 million fiscal 1998 maturity facility extended june 2003 august 31 2000 company also additional lines credit available 50 million uncommitted aggregate company borrowings outstanding lines 833 million august 31 2000 companys debt agreements certain restrictive covenants august 31 2000 company compliance covenants pursuant stock repurchase program company authorized repurchase 175 million shares stock market price companys stock reflective managements opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value helps company manage targeted capital structure august 31 2000 total 735800 shares purchased program fiscal 2000 company repurchased 27200 shares stock total 04 million company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing forward looking statements managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 subject risks uncertainties moreover company may time issue forward looking statements one generally identify forwardlooking statements use words expect believe words convey similar meaning one also identify statements relate strictly historical current facts likely address companys business strategy financial projections results global factors affecting companys financial prospects examples factors could cause actual results differ materially following supply demand conditions companys ability mitigate effects lower cost imports fiscal policy us abroad competitive factors pricing pressures national steel companies supply availability unprocessed metals fluctuations recycled metals prices seasonality results assumptions surrounding tax provision timing use tax credits utilization net operating loss carryforwards general profitability companys operations one understand possible predict identify factors could cause actual results differ companys forward looking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7a quantitative qualitative disclosures market risk company periodically uses derivative financial instruments limit exposure changes interest rates derivative instruments used solely hedges speculative trading purposes represent incremental risk company discussion derivative financial instruments refer fair value financial instruments note 1 note 4 consolidated financial statements included item 8item 7 managements discussion analysis financial condition results operations results operations results operations company depend large part upon demand prices recycled metals world markets steel products us west coast example increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 however primarily due asian financial crisis severely curtailed demand decreased prices fiscal 1998 1999 results metals recycling business negatively impacted fiscal 2000 company saw demand recycled metal rise unusually large supply became available certain countries part former soviet union held prices addition domestic demand finished steel products strong lower cost imports primarily asia caused average prices generally decline fiscal 2001 demand recycled metals declined us domestic steel production declined however demand asia particularly china remained firm prices still somewhat held supplies coming countries part former soviet union demand finished steel products declined due slowing us economy competition lower cost imports following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business breakdown income operations metals recycling business steel manufacturing business joint ventures corporate eliminations additional financial information relating business segments contained note 10 notes consolidated financial statements 1 ferrous recycled metal sales metals recycling business steel manufacturing business made negotiated rate per ton intended approximate market 2 corporate expense consists primarily unallocated corporate expense services benefit metals recycling business steel manufacturing business unallocated expense income operations segment reflect income operations segment would standalone business fiscal 2001 compared fiscal 2000 revenues metals recycling business steel manufacturing business lower consolidated revenues decreased 419 million 2919 million fiscal 2001 compared fiscal 2000 metals recycling business generated revenues 1824 million intercompany eliminations decrease 60 million 3 ferrous revenues decreased 81 million 6 1353 million primarily result lower average selling prices ferrous volumes decreased 24600 tons 2 average selling price ferrous recycled metal decreased 4 per ton 91 per ton 4 however prices firmed fourth quarter fiscal 2001 volume lower cost ferrous recycled metal countries former soviet union diminished metals recycling business made export shipments aggregating 777000 tons increase 16000 tons 2 fiscal 2001 compared fiscal 2000 demand asia particularly china remained strong pushed ferrous export tons higher fiscal 2001 compared fiscal 2000 softening u economy domestic thirdparty ferrous tonnage decreased 108000 ton 44 sales company’s steel manufacturing business increased 13 566000 tons due increase melt shop production company’s steel minimill nonferrous revenues increased 38 million 10 424 million due primarily higher volumes improvements processes used extract metal automobile shredding process temporary backlog unprocessed shredder residue provided higher volumes nonferrous metals increasing sales volume 182 million pounds 19 fiscal 2001 compared fiscal 2000 average nonferrous selling price decreased 003 per pound 8 due slowing demand caused primarily slowdown us economy steel manufacturing business recognized revenues 1594 million fiscal 2001 decrease 17 revenues recognized prior year sales finished steel products declined 18 546000 tons average selling price per ton increased 3 per ton 1 292 per ton decrease sales volumes came major product lines exception reinforcing bar sales volume approximated prior year levels slight increase average sales price per ton primarily due change product mix fiscal 2001 company focused selling products reinforcing bar higher margins slowing us economy well competition lower cost steel imports continues impact sales volumes prices june 5 2001 president bush asked us international trade commission investigate effects steel imports domestic steel industry section 201 1974 trade act commission determined steel imports threat domestic steel producers president could impose safeguard restrictions steel imports aid steel industry expected president rule safeguard restrictions end 2001 cost goods sold consolidated cost goods sold decreased 361 million 12 2605 million 89 revenues consistent fiscal 2000 however gross profit decreased 58 million 16 314 million cost goods sold metals recycling business decreased 12 million 1 1594 million intercompany eliminations cost sales per ferrous ton decreased demand processed metal declined allowing company lower price paid unprocessed metal gross profit decreased 43 million compared prior fiscal year decline cost unprocessed ferrous metal offset decrease average selling price per ton ferrous recycled metal cost goods sold steel manufacturing business decreased 308 million reflecting lower sales volume fiscal 2001 compared fiscal 2000 cost sales per ton excluding billets increased 4 per ton 1 compared prior fiscal year increase primarily due decreased production volume spread fixed costs fewer tons higher volume sales california higher freight distribution costs sales pacific northwest increased cost sales per ton resulted decrease gross profit 22 million 11 fiscal 2001 compared fiscal 2000 income joint ventures company’s joint ventures’ revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals decrease revenues recognized joint ventures attributable lower average ferrous selling prices partially offset increase tonnage shipped shipments ferrous metal processed joint ventures increased 31 million tons year ended august 31 2001 28 million tons prior year average selling price ferrous recycled metal decreased period 86 per ton 108 per ton predominantly due competition countries former soviet union well lower demand us steel mills lower ferrous revenues partially offset higher nonferrous revenues increase due greater nonferrous metal recovery higher ferrous volumes processed improved processes extraction nonferrous metals fiscal 2001 company’s share income joint ventures metals recycling business increased 65 million due increased sales volume increased margins efficient operations company’s joint ventures hugo neu corporation earned majority income instituted eva concurrently company led improved operational efficiencies increased profitability also hugo neu joint ventures able lower buying prices selling prices declined company also benefited 09 million reflect company’s share lifo inventory adjustments comparison results fiscal 2000 adversely affected 11 million lifo inventory adjustment revenues income joint venture suppliers metal increased fiscal 2000 fiscal 2001 primarily due increased sales company’s selfservice auto dismantling joint venture increased sales prices lower interest costs drove improvements interest expense interest expense decreased 23 million due lower average borrowings lower average interest rates company averaged borrowings 815 million fiscal 2001 compared 1074 million fiscal 2000 decrease average borrowings reflects substantial decrease borrowings fourth quarter fiscal 2000 due primarily inventory reductions first half fiscal 2001 well 75 million improvement cash flow company’s joint ventures lower borrowing level continued fiscal 2001 average interest rate fiscal 2001 58 compared 63 fiscal 2000 gain loss sale assets fiscal 2001 gain loss sale assets improved 15 million increase mainly attributable fact last year’s amount included loss 10 million sale vessel used export recycled metal income decreased 23 million fiscal 2001 compared fiscal 2000 primarily due 16 million change gains losses recognized trust fund assets nonqualified supplemental retirement plan certain company executives income also adversely impacted lower average interest rates advances notes joint venture partners resulting decrease 02 million income tax provision part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols prior fiscal 2000 federal tax law placed limitations source income could offset nols accordingly company able record potential tax benefits nols lack certainty able realize benefits fiscal 2000 federal tax law amended allowed company utilize nols offset substantially taxable income result fiscal 2000 company utilized 85 million nols determining effective tax rate included catchup 62 million nols change tax law resulted effective tax 6 fiscal 2000 fiscal 2001 company continued benefit utilization 24 million nols one primary reasons effective rate 30 compared statutory rate 34 noted federal income tax law limits company’s use nols 24 million per year unused nols may carried forward used subsequent fiscal years though ultimately expire fiscal years 2007 2012 used subject annual limit remains august 31 2001 201 million proler nols may used future years expire fiscal 2000 compared fiscal 1999 revenues metals recycling business steel manufacturing business increased resulting overall improvement consolidated revenues 688 million 3338 million fiscal 2000 compared fiscal 1999 strengthening asian economies particularly positive impact volume prices metals recycling business fiscal 2000 metals recycling business generated revenues 1884 million intercompany eliminations increase 513 million 37 ferrous revenues increased 417 million 41 1434 million result higher volumes higher average selling prices primarily caused rebounding asian economies ferrous volumes increased 282000 tons 23 average selling price ferrous recycled metal increased 12 per ton 14 95 per ton metals recycling business made export shipments aggregating 761000 tons fiscal 2000 compared export shipments totaling 491000 tons prior year domestic thirdparty tonnage increased 27 247000 tons sales company’s steel business decreased 8 498000 tons nonferrous revenues increased 126 million 49 386 million due higher volumes higher average selling prices increased exports strong domestic market primarily responsible nonferrous improvements well metals recycling business’ ability produce nonferrous products nonferrous volumes increased 217 million pounds 29 average selling price increased 005 per pound 14 steel manufacturing business recognized revenues fiscal 2000 1924 million increase 11 revenues recognized prior year although volume finished steel products sold increased average selling price per ton declined sales finished steel products increased 17 666000 tons strong demand enabled company substantially increase production sales wire rod products however average selling price declined 14 per ton 5 289 per ton decline average selling prices primarily attributable dumping lower priced steel products asian companies west coast decline average selling price also partially due change product mix fiscal 2000 steel manufacturing business shipped proportionately lowerpriced products principally wire rod prior year cost goods sold consolidated cost goods sold increased 557 million 23 2966 million decreased percentage revenues 89 compared 91 fiscal 1999 gross profit increased 131 million 54 372 million metals recycling business’ cost goods sold increased 371 million 1610 million intercompany eliminations cost sales per ferrous ton increased due increased foreign demand processed metal directly impacted demand cost unprocessed metals increase cost unprocessed metal offset increase average selling price increasing gross profit 50 million compared previous fiscal year income operations fiscal 2000 increased 130 million compared fiscal 1999 primarily due stronger asian economies cost goods sold steel manufacturing business increased 190 million 12 cost sales per ton excluding billets declined 13 per ton primarily due increased production spread allocation fixed costs tons lower average selling prices offset decline operating costs per ton increased sales volume resulted gross profit 107 million 07 million higher fiscal 1999 selling administrative expenses selling administrative expenses increased 28 million 265 million increase 16 million due annual salary merit increases additional bonus accruals based significant improvement results fiscal 2000 fiscal 2000 expenses also included 04 million writeoffs uncollectible debts income joint ventures company’s joint ventures’ revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous metal increase revenues recognized joint ventures attributable higher ferrous selling prices increase tonnage shipped also fiscal 2000 revenues include full year’s results joint venture organized third quarter fiscal 1999 shipments ferrous metal processed joint ventures increased 28 million tons year ended august 31 2000 25 million tons prior year average selling price ferrous recycled metal increased period 108 per ton 87 per ton predominantly due strengthening asian foreign economies fiscal 2000 company’s equity income joint ventures metals recycling business adversely affected 11 million reflect company’s share lifo inventory adjustments comparison results fiscal 1999 benefited 33 million lifo inventory adjustments company’s equity income joint ventures metals recycling business fiscal 1999 included company’s 14 million share gain recognized one joint ventures sale property revenues income joint venture suppliers metal increased fiscal 1999 fiscal 2000 primarily due higher ferrous selling prices interest expense interest expense increased 04 million due increased average borrowings higher average interest rates average borrowings 1074 million fiscal 2000 exceeded average borrowings fiscal 1999 1043 million average interest rate fiscal 2000 63 compared 54 fiscal 1999 gain loss sale assets fiscal 2000 company outside board members approved sale ship leased company related party export recycled metal sale resulted 10 million loss fiscal 1999 results included steel manufacturing business’ sale union city california mill depot resulting gain 12 million income increased 13 million fiscal 2000 company received 07 million settlement result antitrust litigation related graphite electrodes pricing fiscal 1999 company received 10 million related antitrust settlement also company recognized additional interest income fiscal 2000 19 million related advances joint ventures 09 million investment income assets related supplemental executive retirement plan due strong domestic financial markets see note 8 income tax provision company’s effective income tax rate decreased 6 fiscal 2000 55 fiscal 1999 decrease primarily due lower taxable income caused utilization 86 million net operating loss carryforwards nols acquired part 1996 acquisition proler acquiring proler 1996 company succeeded 314 million nols incurred proler’s pre acquisition years federal income tax law limits amount proler preacquisition nols used company 24 million per year however extent respective annual limit exceeds taxable income taxable year unused excess may carried used subsequent taxable years previous federal tax rules limited use proler nols offset taxable income acquired proler entities new rules allow company use proler nols offset taxable income sources fiscal 2000 federal income tax law changes enacted allow company somewhat greater flexibility utilizing proler nols changes allowed company utilize annual limit 24 million fiscal 2000 well additional 62 million excess limit amounts prior years subject annual utilization limits remaining 224 million proler nols may used future years expire various amounts fiscal 2007 2012 liquidity capital resources fiscal 2001 cash generated operations 86 million compared 354 million last year decrease cashflow provided operations primarily result higher yearend inventories capital expenditures totaled 93 million 107 million 120 million fiscal years 2001 2000 1999 respectively generally poor market conditions coupled larger capital investments mid late 1990’s company focused capital investment nondiscretionary capital investments shorter paybacks part acquisitions proler mmi company assumed environmental liabilities aggregating 229 million august 31 2001 company expects significant future cash outlays incurs actual costs relating remediation environmental liabilities company unsecured revolving credit agreement 200 million expires june 2003 august 31 2001 company additional lines credit available 40 million uncommitted aggregate company borrowings outstanding lines 839million august 31 2001 company’s debt agreements certain restrictive covenants august 31 2001 company compliance covenants pursuant stock repurchase program company authorized repurchase 3 million shares stock market price company’s stock reflective management’s opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value helps company manage targeted capital structure august 31 2001 total 124 million shares purchased program fiscal 2001 company repurchased 505800 shares stock total 67 million company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements future environmental obligations next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing factors could affect future results management’s discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 made pursuant safe harbor provisions private securities litigation reform act 1995 one generally identify forwardlooking statements contain “expect” “believe” words convey similar meaning one also identify statements relate strictly historical current facts examples factors affecting schnitzer steel industries inc’s whollyowned operations joint ventures company could cause actual results differ materially following cyclicality general market considerations selling prices recycled metals highly cyclical nature subject worldwide economic conditions addition cost availability recycled metals subject volatile supply demand conditions beyond company’s control resulting periodic fluctuations recycled metals prices company attempts maintain margins responding changing recycled metals selling prices adjustments metals purchase prices company’s ability limited competitive factors well impact lower prices volume scrap available company moreover increases recycled metals prices adversely affect operating results company’s steel manufacturing business increases steel prices generally lag increases ferrous recycled metals prices steel industry also highly cyclical nature sensitive general economic conditions future economic downturns stagnant economy may adversely affect performance company expects continue experience seasonal fluctuations revenues net income revenues fluctuate significantly quarter due factors seasonal slowdown construction industry important buyer company’s finished steel products timing extent slowdown also dependent weather company makes number large ferrous recycled metals shipments foreign steel producers year customer requirements shipping schedules factors limit company’s control timing shipments variations number foreign shipments quarter result fluctuations quarterly revenues earnings company’s expectations regarding ferrous metal sales prices volumes well earnings based part assumption orders customers larger shipments cancelled delayed competition recycled metals industry highly competitive volume purchases sales subject number competitive factors principally price company competition large numerous smaller companies markets purchase recyclable metals company competes number us foreign recycled metals processors sales foreign customers domestic steel industry also highly competitive steel prices highly volatile price significant competitive factor company competes several steel producers western us sales products addition recent years company experienced significant foreign competition often subsidized large government agencies assurance competition increase future june 5 2001 president bush asked us international trade commission investigate effects steel imports domestic steel industry section 201 1974 trade act october 22 2001 commission reached affirmative determination 12 33 product categories investigated threatened steel imports included 12 threatened product categories rebar merchant bar two steel manufacturing business’ larger volume higher margin products president could impose safeguard restrictions steel imports aid steel industry commission submit findings recommendations president december 2001 company cannot however predict recommendations impact prices operating results joint ventures company significant investments joint venture companies company manage daytoday activities businesses result ability control operations related financial results wholly owned businesses however impacted many risk factors mentioned therefore difficult predict financial results businesses energy supply company joint ventures utilize various energy sources operate facilities particular electricity natural gas currently represent approximately 10 cost steel manufactured companys steel manufacturing business steel manufacturing business purchases hydroelectric power longterm contracts government sources rely bonneville power administration bpa historically contracts favorable prices longterm nature company recently signed new fiveyear contract expires septemer 2006 bpa increased rates 46 october 1 2001 rates adjusted bpa every six months forward possible predict future rate changes steel manufacturing business also longterm contracts natural gas october 2000 company entered new contract set expire october 31 2002 latest contract negotiations resulted rates 30 higher previous agreement contract comes end company attempt negotiate new longterm contract however possible predict terms contract inability company negotiate favorable terms electricity natural gas energy sources could adversely affect performance company one understand possible predict identify factors could cause actual results differ company’s forwardlooking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7a quantitative qualitative disclosures market risk company entered certain marketrisk sensitive financial instruments principally longterm debt sensitivity analysis used determine potential impact market risk exposure may fair values company’s financial instruments company assessed potential risk loss fair value hypothetical changes interest rates determining effect present value future cash flows related market sensitive instruments changes discount rates used present value computations selected based market interest rates effect august 31 2001 plus minus 10 percent 10 percent change interest rates variables held constant would result immaterial effect consolidated earnings cash flows discussion market risks necessarily makes forwardlooking statements assurance actual changes market conditions rates fair values differ materially used sensitivity fair value calculations discussed factors may cause actual results differ materially include limited greater 10 percent changes interest rates changes income cash flows requiring significant changes debt instruments cash flows associated august 31 2001 company held derivatives item 8item 7 managements discussion analysis financial condition results operations critical accounting policies estimates companys discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance generally accepted accounting principles preparation financial statements requires company make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis company evaluates estimates company bases estimates historical experience various assumptions believed reasonable circumstances estimates assumptions provide basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences may material company believes following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements inventories stated lower cost market cost determined using average cost methods production accounting process utilized company record recycled metals inventory quantities relies significant estimates company relies upon perpetual inventory records utilize estimated recoveries yields based upon historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal assist validating reasonableness estimates company runs periodic tests also performs physical inventories physical inventories normally detect significant variations volume variations product density holding period production processes utilized manufacture product physical inventories generally detect smaller variations mitigate risk company adjusts physical inventories volume commodity low physical inventory accurately predict remaining volume revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured generally upon shipment title recycled metals finished steel products transfers upon shipment substantially companys ferrous export sales recycled metal made letters credit minimizing credit risk however domestic ferrous recycled metal sales nonferrous sales finished steel generally made open account historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized bad debt reserves company evaluates collectibility accounts notes advances receivable based combination factors cases management aware circumstances may impair specific customers ability meet financial obligations us record specific allowance amounts due reduce net recognized receivable amount reasonably believe collected customers maintain reserve considers total receivables outstanding historical collection rates economic trends environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonable established amount within range better another minimum amount range recorded financial statements adjustments liabilities made additional information becomes available affects estimated costs remediate number cases possible company may receive reimbursement prior insurance situations recoveries environmental remediation costs parties recorded assets collection probable deferred taxes deferred income taxes reflect differences financial reporting tax bases assets liabilities yearend based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises valuation allowance established necessary reduce deferred tax assets amount likely realized results operations results operations company depend large part upon demand prices recycled metals world markets steel products western united states example increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 however fiscal 1998 1999 asian financial crisis severely curtailed demand decreased prices causing negative impact results metal recycling business fiscal 2000 company saw demand recycled metal rise unusually large supplies recycled ferrous metal became available certain countries part former soviet union thereby holding prices addition domestic demand finished steel products strong lower cost imports primarily asia caused average prices generally decline fiscal 2001 demand recycled metals declined united states domestic steel production declined however demand asia particularly china remained firm selling prices also continued adversely affected supplies coming former soviet union demand finished steel products declined due slowing united states economy competition lower cost imports first six months fiscal 2002 recycled metals prices approached record lows due primarily weak domestic demand however second half fiscal year prices rose due improved demand domestic steel producers addition exports recycled metal former soviet union restrained higher export taxes selected export bans however domestic demand finished steel remained sluggish western united states throughout fiscal 2002 united states tariffs selected steel products announced march 2002 little effect products produced steel manufacturing business namely rebar merchant bar result record low average net selling price steel manufacturing business following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business breakdown income operations metals recycling business steel manufacturing business joint ventures corporate eliminations additional financial information relating business segments contained note 11 notes consolidated financial statements 1ferrous recycled metal sales metals recycling business steel manufacturing business made negotiated rate per ton intended approximate market 2includes yearend lifo adjustments reduced income operations 12 million 11 million fiscal 2002 2000 respectively increased income operations 09 million fiscal 2001 adjustment partially offset fiscal 2002 09 million gain nonrecurring sale jv property 3corporate expense consists primarily unallocated corporate expense services benefit metals recycling business steel manufacturing business unallocated expense income operations segment reflect income operations segment would standalone business 4impairment nonrecurring charges related metals recycling business amount shown separately assist understanding business financial results fiscal 2002 compared fiscal 2001 revenues consolidated revenues increased 279 million 9 3507 million fiscal 2002 compared fiscal 2001 revenues metals recycling business increased due higher selling prices volumes worldwide demand ferrous metals strengthened year revenues steel manufacturing business slightly lower primarily due lower average net selling prices partially offset increased sales volumes metals recycling business generated revenues 2218 million intercompany eliminations increase 167 million 8 ferrous revenues increased 179 million 12 1735 million result increase tons sold higher average selling prices net shipping cost average net selling prices ferrous volumes increased 75100 tons 5 average net selling price ferrous recycled metal increased 4 94 per ton 5 diminished supplies ferrous recycled metals countries former soviet union growing worldwide demand drove volume price increases asia especially china korea continues primary destination export sales fiscal 2002 metals recycling business made export shipments aggregating 1068000 tons increase 290000 tons 37 compared fiscal 2001 continued soft united states economy domestic thirdparty ferrous tonnage decreased 56000 ton 41 82000 tons sales companys steel manufacturing business decreased 28 407000 tons due production curtailments business nonferrous revenues decreased 13 million 3 417 million due corresponding reduction sales volume average net nonferrous selling price fiscal 2002 036 per pound decline 001 per pound fiscal 2001 steel manufacturing business recognized revenues 1666 million fiscal 2002 decrease 1 revenues recognized prior year volume finished steel products sold increased average net selling price per ton decreased compared fiscal 2001 sales finished steel products 4 569000 tons average net selling price per ton decreased 16 per ton 5 276 per ton record low decrease sales revenue primarily due lower average net selling prices major product lines partially offset increase sales volumes decrease average sales price per ton primarily due sluggish united states economy weak end user demand continuing competition lower cost steel imports shift product mix merchant bar wire rod increase sales volume due 31 greater sales volume wire rod partially offset decline sales volume merchant bar higher wire rod volume due additional demand major customer tariffs selected imported steel products enacted march april 2002 international trade commission itc section 201 1974 trade act produced significant price benefits october 2002 itc announced duty margins 360 subsidy rates 18 foreign producers wire rod products eight foreign countries anticipated duties remain effect favorably impact steel manufacturing business wire rod prices cost goods sold consolidated cost goods increased 331 million 11 3244 million 93 percent revenues compared 90 fiscal 2001 increase 93 primarily due eroded margins steel manufacturing business gross profit decreased 51 million 16 263 million cost goods sold metals recycling business increased 107 million 6 1928 million intercompany eliminations cost goods sold percentage revenues decreased 89 fiscal 2001 87 fiscal 2002 contributing 59 million increase gross profit increase gross margin fiscal 2002 primarily attributable higher selling prices higher sales volume partially offset higher prices paid suppliers ferrous recycled metals resulting 3 per ton 4 increase average ferrous metals cost sales per ton cost sales per ferrous ton increased higher selling prices higher demand processed metal pushed purchase price company paid unprocessed metal lower shipping costs per ton partially offset purchase price increases competition recyclers purchase unprocessed metal also factor cost increases cost goods sold steel manufacturing business increased 99 million 6 1691 million increased percentage revenues 95 fiscal 2001 100 fiscal 2002 increase due higher fixed costs spread fewer production tons mill curtailments began august 2001 continued throughout fiscal 2002 melt shop production fell 41 rolling mill production fell 12 compared fiscal 2001 also contributing increase 15 rise energy costs energy cost increased due 2001 western energy shortage increased contracted power rates average cost sales per ton increased 4 per ton 1 compared prior fiscal year increased cost sales per ton combined 16 per ton reduction average net selling price resulted decrease gross profit 109 million 130 fiscal 2002 compared fiscal 2001 impairment nonrecurring charges company recorded impairment nonrecurring charges 71 million fiscal 2002 company recorded nonrecurring charges 19 million early termination fixedprice alaska barge contract affreightment management determined cost effective alaska barge contract charge included 09 million writeoff note receivable 10 million payment terminate contract also impairment charge 18 million recorded elimination unprofitable carcrushing business impairment charge 11 million recorded closure underperforming yard reno nevada company sublets reno facility leases equipment third party sells recycled metal output company nonrecurring charges 15 million recorded loss early termination two vessel charter contracts related company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates shipping cost savings result contract termination totalled approximately 20 million additionally loss 08 million recorded sale nonstrategic steel forging business number charges direct result companys 2001 implementation economic value added eva tool used measure financial performance acceptable returns investment well compensate management change eva performance since implementing eva company reanalyzed business performance related outlook many assets result reviews using eva tool led many operational management changes companys business income joint ventures companys joint ventures revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals increase revenues recognized joint ventures attributable higher average net ferrous selling prices increase tonnage shipped shipments ferrous metal processed joint ventures increased 35 million tons year ended august 31 2002 31 million tons prior year average net selling price ferrous recycled metal increased period 90 per ton 86 per ton predominantly due strong demand asia especially china korea joint ventures also increased sales margins improving operational efficiencies fiscal 2002 companys share income joint ventures metals recycling business increased 138 million due increased sales volume higher average net selling prices increased margins efficient operations companys joint ventures hugo neu corporation earned majority income instituted eva concurrently company fiscal 2001 use eva continued result improved operational efficiencies increased profitability operating income fiscal 2002 reduced 12 million representing companys share jv lifo inventory adjustment compared benefit 09 million fiscal 2001 operating income fiscal 2002 also benefited 09 million representing companys share nonrecurring gain sale jv property revenues income joint venture suppliers metal increased fiscal 2001 fiscal 2002 primarily due increased sales companys selfservice auto dismantling joint venture increased sales prices efficient operations lower interest costs drove revenue growth income improvements selling commission expenses increased 08 million compared fiscal 2001 primarily due increase export commission expense caused higher ferrous recycled metals export sales general administrative expenses compared fiscal 2001 general administrative expenses increased 14 million primarily due 10 million increase wages result annual merit increases bonus accruals related companys eva performance 04 million increased insurance expense due adverse insurance market conditions since september 11 2001 interest expense fiscal 2002 interest expense decreased 28 million compared fiscal 2001 due lower average borrowings lower average interest rates companys borrowings averaged 759 million fiscal 2002 compared 815 million fiscal 2001 decrease average borrowings reflects improved cash flow result substantial decreases inventory fiscal 2002 average interest rate fiscal 2002 27 compared 58 fiscal 2001 income decreased 11 million fiscal 2002 compared fiscal 2001 primarily due 16 million decrease interest income result lower interest rates charged variable interest rate advances notes joint venture businesses addition line item includes market value adjustments changes investment performance securities held trust purpose funding future nonqualified pension payments fiscal 2002 2001 company recognized losses trust fund assets amount 07 million 04 million respectively income tax provision part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols prior fiscal 2000 federal tax law placed limitations source income could offset nols accordingly company able record potential tax benefits nols lack certainty able realize benefits fiscal 2000 change federal tax law allowed company use nols offset taxable income sources subject limit 24 million per year fiscal 2001 company continued benefit use 24 million nols one primary reasons effective rate 30 compared statutory rate 34 fiscal 2002 determined company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent corporation consolidated group california franchise income tax liability credits excess tax liability carried forward indefinitely combination nols enterprise zone tax credits made companys effective tax rate 14 fiscal 2002 compared statutory rate 34 noted federal income tax law limits companys use nols 24 million per year unused nols may carried forward used subsequent fiscal years though ultimately expire fiscal years 2007 2012 used subject annual limit remains august 31 2002 177 million proler nols may used future years expire fiscal 2001 compared fiscal 2000 revenues metals recycling business steel manufacturing business lower consolidated revenues decreased 447 million 3228 million fiscal 2001 compared fiscal 2000 metals recycling business generated revenues 2051 million intercompany eliminations decrease 58 million 3 ferrous revenues decreased 84 million 5 1556 million primarily result lower average net selling prices ferrous volumes decreased 24600 tons 2 average net selling price ferrous recycled metal decreased 4 per ton 91 per ton 4 however prices firmed fourth quarter fiscal 2001 volume lower cost ferrous recycled metal countries former soviet union diminished metals recycling business made export shipments aggregating 777000 tons increase 16000 tons 2 fiscal 2001 compared fiscal 2000 demand asia particularly china remained strong pushed ferrous export tons higher fiscal 2001 compared fiscal 2000 softening united states economy domestic thirdparty ferrous tonnage decreased 108000 ton 44 sales companys steel manufacturing business increased 13 566000 tons due increase melt shop production companys steel minimill nonferrous revenues increased 41 million 11 430 million due primarily higher volumes improvements processes used extract metal automobile shredding process temporary backlog unprocessed shredder residue provided higher volumes nonferrous metals increasing sales volume 182 million pounds 19 fiscal 2001 compared fiscal 2000 average nonferrous selling price decreased 003 per pound 8 due slowing demand caused primarily slowdown united states economy steel manufacturing business recognized revenues 1676 million fiscal 2001 decrease 18 revenues recognized prior year sales finished steel products declined 18 546000 tons average net selling price per ton increased 3 per ton 1 292 per ton decrease sales volumes came major product lines exception reinforcing bar sales volume approximated prior year levels slight increase average sales price per ton primarily due change product mix fiscal 2001 company focused selling products reinforcing bar higher margins slowing united states economy well competition lower cost steel imports continues impact sales volumes prices june 5 2001 president bush asked united states international trade commission investigate effects steel imports domestic steel industry section 201 1974 trade act commission determined steel imports threat domestic steel producers president imposed safeguard restrictions steel imports aid steel industry cost goods sold consolidated cost goods sold decreased 382 million 12 2913 million 90 revenues consistent fiscal 2000 however gross profit decreased 64 million 17 316 million cost goods sold metals recycling business decreased 03 million 1819 million intercompany eliminations cost sales per ferrous ton decreased demand processed metal declined allowing company lower price paid unprocessed metal gross profit decreased 41 million 15 compared prior fiscal year decline cost unprocessed ferrous metal offset decrease average net selling price per ton ferrous recycled metal cost goods sold steel manufacturing business decreased 337 million 17 reflecting lower sales volume fiscal 2001 compared fiscal 2000 cost sales per ton excluding billets increased 4 per ton 1 compared prior fiscal year increase primarily due decreased production volume spread fixed costs fewer tons higher volume sales california higher freight distribution costs sales pacific northwest increased cost sales per ton resulted decrease gross profit 24 million 22 fiscal 2001 compared fiscal 2000 income joint ventures companys joint ventures revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals decrease revenues recognized joint ventures attributable lower average ferrous selling prices partially offset increase tonnage shipped shipments ferrous metal processed joint ventures increased 31 million tons year ended august 31 2001 28 million tons prior year average net selling price ferrous recycled metal decreased period 86 per ton 108 per ton predominantly due competition countries former soviet union well lower demand domestic steel mills lower ferrous revenues partially offset higher nonferrous revenues increase due greater nonferrous metal recovery higher ferrous volumes processed improved processes extraction nonferrous metals fiscal 2001 companys share income joint ventures metals recycling business increased 65 million due increased sales volume increased margins efficient operations companys joint ventures hugo neu corporation earned majority income instituted eva concurrently company led improved operational efficiencies increased profitability also hugo neu joint ventures able lower buying prices selling prices declined company also benefited 09 million reflect companys share lifo inventory adjustments comparison results fiscal 2000 adversely affected 11 million lifo inventory adjustment revenues income joint venture suppliers metal increased fiscal 2000 fiscal 2001 primarily due increased sales companys selfservice auto dismantling joint venture increased sales prices lower interest costs drove improvements selling commission expenses compared fiscal 2000 decrease 04 million primarily due lower commission expense metals recycling business due decrease ferrous recycled metals export sales interest expense interest expense decreased 28 million due lower average borrowings lower average interest rates company averaged borrowings 815 million fiscal 2001 compared 1074 million fiscal 2000 decrease average borrowings reflects substantial decrease borrowings fourth quarter fiscal 2000 due primarily inventory reductions first half fiscal 2001 well 75 million improvement cash flow companys joint ventures lower borrowing level continued fiscal 2001 average interest rate fiscal 2001 58 compared 63 fiscal 2000 gain loss sale assets fiscal 2001 gain loss sale assets improved 15 million increase mainly attributable fact last years amount included loss 10 million sale vessel used export recycled metal income decreased 23 million fiscal 2001 compared fiscal 2000 primarily due 16 million change gains losses recognized trust fund assets nonqualified supplemental retirement plan certain company executives income also adversely impacted lower average interest rates advances notes joint venture partners resulting decrease 02 million income tax provision part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols prior fiscal 2000 federal tax law placed limitations source income could offset nols accordingly company able record potential tax benefits nols lack certainty able realize benefits fiscal 2000 federal tax law amended allowed company utilize nols offset substantially taxable income result fiscal 2000 company utilized 85 million nols determining effective tax rate included catchup 62 million nols change tax law resulted effective tax 6 fiscal 2000 fiscal 2001 company continued benefit utilization 24 million nols one primary reasons effective rate 30 compared statutory rate 34 noted federal income tax law limits companys use nols 24 million per year unused nols may carried forward used subsequent fiscal years though ultimately expire fiscal years 2007 2012 used subject annual limit remained august 31 2001 201 million proler nols may used future years expire liquidity capital resources fiscal 2002 cash generated operations 364 million compared 86 million last year increase cash flow provided operations primarily result improved operating profits nonrecurring items lower yearend inventories cash also generated 314 million net cash distributed companys joint ventures 156 million attributable barrowings new joint venture credit facility discussed net increase cash retained joint ventures capital expenditures totaled 96 million 93 million 107 million fiscal years 2002 2001 2000 respectively generally poor market conditions coupled larger capital investments mid late 1990s company focused capital investment nondiscretionary capital investments shorter paybacks part acquisitions proler mmi company assumed environmental liabilities aggregated 211 million august 31 2002 company expects significant future cash outlays incurs actual costs relating remediation environmental liabilities company unsecured revolving credit agreement 200 million expires june 2003 aggregate company borrowings outstanding line 60 million august 31 2002 60 million classified current liability credit agreement expires fiscal 2003 management intends replace bank credit facility new agreement management believes ability refinance facility based upon companys financial position preliminary discussions various banks participate current facility august 31 2002 company additional uncommitted lines credit available 40 million companys debt agreements certain restrictive covenants august 31 2002 company compliance covenants july 2002 companys metals recycling joint ventures hugo neu corporation entered 70 million revolving credit facility jv credit facility group banks working capital general credit purposes prior time joint ventures working capital cash needs met advances provided equally company hugo neu corporation jv credit facility expires july 2004 secured inventory receivables joint venture businesses negative pledge remaining assets company guarantor jv credit facility jv credit facility number covenants restrictions including restrictions level distributions joint venture partners august 31 2002 joint ventures compliance covenants borrowings jv credit facility totaled 350 million august 31 2002 company certain contractual obligations commercial commitments make future payments following table summarizes future obligations commitments august 31 2002 thousands 1this disclosure assumes jv credit facility renewed refinanced upon expiration company hugo neu corporation would restore previous arrangement funded onehalf joint ventures cash needs pursuant stock repurchase program company authorized repurchase 3 million shares stock market price companys stock reflective managements opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value helps company manage targeted capital structure august 31 2002 total 13 million shares purchased program fiscal 2002 company repurchased 98600 shares stock total 13 million company believes current cash balance internally generated funds existing credit facilities anticipation able refinance credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements future environmental obligations next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing factors could affect future results managements discussion analysis financial condition results operations contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 made pursuant safe harbor provisions private securities litigation reform act 1995 one generally identify forwardlooking statements contain expect believe words convey similar meaning one also identify statements relate strictly historical current facts examples factors affecting schnitzer steel industries incs whollyowned operations joint ventures company could cause actual results differ materially following cyclicality general market considerations selling prices recycled metals highly cyclical nature subject worldwide economic conditions addition cost availability recycled metals subject volatile supply demand conditions beyond companys control resulting periodic fluctuations recycled metals prices company attempts maintain margins responding changing recycled metals selling prices adjustments metals purchase prices companys ability limited competitive factors well impact lower prices volume scrap available company moreover increases recycled metals prices adversely affect operating results companys steel manufacturing business increases steel prices generally lag increases ferrous recycled metals prices steel industry also highly cyclical nature sensitive general economic conditions future economic downturns stagnant economy may adversely affect performance company expects continue experience seasonal fluctuations revenues net income revenues fluctuate significantly quarter due factors seasonal slowdown construction industry important buyer companys finished steel products timing extent slowdown also dependent weather company makes number large ferrous recycled metals shipments foreign steel producers year customer requirements shipping schedules factors limit companys control timing shipments variations number foreign shipments quarter result fluctuations quarterly revenues earnings companys expectations regarding ferrous metal sales prices volumes well earnings based part assumption orders customers larger shipments cancelled delayed competition recycled metals industry highly competitive volume purchases sales subject number competitive factors principally price company competition large numerous smaller companies markets purchase recyclable metals company competes number domestic foreign recycled metals processors sales foreign customers domestic steel industry also highly competitive steel prices highly volatile price significant competitive factor company competes several steel producers western united states sales products addition recent years company experienced significant foreign competition often subsidized large government agencies assurance competition increase future march april 2002 itc imposed tariffs imported steel section 201 1974 trade act aid domestic steel industry date tariffs significantly benefited selling prices finished steel products october 2002 itc announced duty margins 360 subsidy rate 18 wire rod products eight foreign countries company cannot however predict impact duty margins subsidy rates prices operating results joint ventures company significant investments joint venture companies company manage daytoday activities businesses result ability control operations related financial results whollyowned businesses however affected many risk factors mentioned therefore difficult predict financial results businesses energy supply company joint ventures utilize various energy sources operate facilities particular electricity natural gas currently represent approximately 10 cost steel manufactured companys steel manufacturing business steel manufacturing business purchases electric power longterm contracts government sources rely bonneville power administration bpa historically contracts favorable prices longterm nature company fiveyear contract expires september 2006 october 1 2001 bpa increased electricity rates due increased demand west coast lower supplies increase form cost recovery adjustment clause crac added bpas contract mcminnville crac additional monthly surcharge selected power charges recover costs associated buying higher priced power west coast power shortage crac bpa adjust every six months 46 october 1 2001 reduced 39 april 1 2002 32 october 1 2002 however possible predict future rate changes steel manufacturing business also longterm contracts natural gas october 2000 company entered new contract set expire october 31 2003 latest contract negotiations resulted rates 30 higher previous agreement contract comes end company attempt negotiate new longterm contract however possible predict terms contract inability company negotiate favorable terms electricity natural gas energy sources could adversely affect performance company tax laws company able reduce effective tax rate federal statutory tax rate last three years using combination net operating loss carryforwards nols state california enterprise zone tax credits foreign sales corporations extraterritorial income exclusions see note 7 consolidated financial statements company cannot predict future tax law changes might affect companys effective tax rate shipping handling metals recycling business steel manufacturing business often rely third parties handle transport products end users timely manner cost transport products affected circumstances company control fuel prices governmental regulations transportation changes market rates also products handled times union workers company cannot predict union labor relations could affect cost timeliness shipments insurance cost companys insurance affected loss experience also cycles insurance market though companys loss record relationship underwriters good cannot predict future events circumstances could cause rates materially change one understand possible predict identify factors could cause actual results differ companys forwardlooking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7a quantitative qualitative disclosures market risk company entered certain marketrisk sensitive financial instruments principally longterm debt sensitivity analysis used determine potential impact market risk exposure may fair values companys financial instruments company assessed potential risk loss fair value hypothetical changes interest rates determining effect present value future cash flows related market sensitive instruments changes discount rates used present value computations selected based market interest rates effect august 31 2002 plus minus 10 change interest rates variables held constant would result immaterial effect consolidated earnings cash flows discussion market risks necessarily makes forwardlooking statements assurance actual changes market conditions rates fair values differ materially used sensitivity fair value calculations discussed factors may cause actual results differ materially include limited greater 10 changes interest rates changes income cash flows requiring significant changes debt instruments cash flows associated august 31 2002 company held derivatives item 8item 7 managements discussion analysis financial condition results operations overview company operates three industry segments companys metals recycling business collects processes recycles steel metals facilities companys steel manufacturing business operates minimill near portland oregon melts recycled metal produces finished steel products maintains one mill depot southern california one central california companys auto parts business purchases used wrecked automobiles allows retail customers opportunity extracting parts purchase selfservice auto parts stores 17 located california two nevada one store texas utah illinois indiana additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metals joint ventures metals recycling business sell recycled metals processed facilities processing also buy sell third parties processed metals brokering note 3 notes consolidated financial statements describes auto parts business acquisition occurred february 14 2003 statement financial accounting standards 141 sfas 141 business combinations acquisition considered step acquisition due fact company significant joint venture interest acquired business number years additionally since acquisition occurred year company elected include consolidated results though occurred beginning fiscal 2003 thus fiscal 2003 statement operations balance sheet statement cash flows adjusted consolidate acquisition september 1 2002 also acquired businesses consolidated companys previous interest business form separate reporting segment called auto parts business consolidation accounting requires company adjust earnings ownership interests reporting period fiscal 2003 net income reduced 18 million minority interests net income taxes representing share income attributable various continuing minority partners business also period september 1 2002 february 14 2003 net income reduced 25 million preacquisition interests net income taxes representing share income attributable former joint venture partner prior acquisition financial results acquired business periods prior fiscal 2003 continue accounted using equity method included joint venture businesses reporting segment critical accounting policies estimates companys discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance generally accepted accounting principles preparation financial statements requires company make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis company evaluates estimates company bases estimates historical experience various assumptions believed reasonable circumstances estimates assumptions provide basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences may material company believes following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates company relies upon perpetual inventory records utilize estimated recoveries yields based upon historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal assist validating reasonableness estimates company runs periodic tests also performs physical inventories physical inventories normally detect significant variations volume variations product density holding period production processes utilized manufacture product physical inventories generally detect smaller variations mitigate risk company adjusts physical inventories volume commodity low physical inventory accurately predict remaining volume revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured generally upon shipment title metals finished steel products transfers upon shipment retail sales companys auto parts business revenues recognized customers pay salvaged vehicle parts wholesale products shipped customer location substantially companys ferrous export sales recycled metal made letters credit minimizing credit risk however domestic ferrous recycled metal sales nonferrous sales finished steel generally made open account historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized bad debt reserves company evaluates collectibility accounts notes advances receivable based combination factors cases management aware circumstances may impair specific customers ability meet financial obligations company management records specific allowance amounts due reduce net recognized receivable amount reasonably believe collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonable established amount within range better another minimum amount range recorded financial statements adjustments liabilities made additional information becomes available affects estimated costs remediate number cases possible company may receive reimbursement prior insurance situations recoveries environmental remediation costs parties recorded assets collection accomplished taxes deferred income taxes reflect differences financial reporting tax bases assets liabilities yearend based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises valuation allowance established necessary reduce deferred tax assets including net operating loss carryforwards amount likely realized periodically company reviews deferred tax assets assess whether valuation allowances continue necessary valuation allowances reversed significant evidence likely assets realized goodwill intangibles effective june 1 2001 company adopted statement financial accounting standards sfas 142 goodwill intangible assets goodwill intangible assets indefinite lives longer amortized company reviews goodwill nonamortizable intangibles annual basis impairment frequently impairment indicators arise accordance provisions sfas 142 prior adoption sfas 142 company amortized goodwill intangible assets estimated useful lives results operations fiscal 2003 companys operations improved dramatically resulting record year revenue net income companys metals recycling business steel manufacturing business recognized marked improvements last year well companys joint ventures metals recycling business benefited rising selling prices improve profitability nearly 80 also explained company acquired new business segment auto parts business fiscal 2003 segment significantly contributed earnings year results operations company depend large part upon demand prices recycled metals world markets steel products western united states example increasing steel demand prices led improved profitability period fiscal 1995 fiscal 1997 however fiscal 1998 1999 asian financial crisis severely curtailed demand decreased prices causing negative impact results metal recycling business fiscal 2000 company saw demand recycled metal rise unusually large supplies recycled ferrous metal became available certain countries part former soviet union thereby holding prices addition domestic demand finished steel products strong lower cost imports primarily asia caused average prices generally decline fiscal 2001 demand recycled metals declined united states domestic steel production declined however demand asia particularly china remained firm selling prices also continued adversely affected supplies coming former soviet union first six months fiscal 2002 recycled metals prices approached record lows due primarily surplus coupled weak domestic demand domestic demand finished steel products declined due slowing united states economy competition lower cost imports result record low average net selling price steel manufacturing business fiscal 2002 second half fiscal 2002 certain countries former soviet union started imposing export tariffs bans recycled ferrous metal result recycled ferrous metal supplies global markets declined causing prices increase many companys customers postponed purchases first quarter fiscal 2003 believing delays would cause prices decline however demand fueled primarily china korea continued remain strong company continues experience improved market conditions throughout much remainder fiscal 2003 selling prices continued rise primarily due tight supply ferrous metal available export market weakness us dollar relative foreign currencies joint ventures metals recycling business affected supply demand factors companys whollyowned metals recycling business steel manufacturing business saw higher average selling prices higher sales volumes fiscal 2003 due primarily higher valued product sales mix lower volumes competing imported steel partially attributed weakness us dollar additionally spring 2002 us government imposed antidumping countervailing duties certain wire rod imports eight foreign countries combined higher worldwide ferrous recycled metals prices primary raw material used produce much worlds wire rod improved competitive position domestic wire rod producers steel manufacturing business turned price parity imported wire products increased sales market share second quarter fiscal 2003 steel manufacturing business completed two capital projects one rolling mills allow produce higher margin specialty wire products improve packaging coiled products increase productivity wire production auto parts business segment formed second quarter fiscal 2003 result acquisition referred overview section purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers retail operations somewhat seasonal principally affected weather conditions promotional events since stores open natural elements periods prolonged wet cold extreme heat retail business tends slow due difficult customer working conditions company generally runs promotional events seasonably moderate times year likely affect buying patterns retail customers result companys first third fiscal quarters tend generate retail sales second fourth fiscal quarters slowest terms retail sales auto parts business primary source revenue sale scrap metal parts wholesale revenues wholesale product lines principally affected commodity prices shipping schedules mentioned earlier discussions regarding metal recycling business recycled metal prices increased dramatically since second quarter fiscal 2002 positively affected revenues profits auto parts business following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business auto parts business breakdown income operations metals recycling business steel manufacturing business auto parts business joint ventures corporate eliminations additional financial information relating business segments contained note 12 notes consolidated financial statements revenues year ended august 31 millions 2003 2002 2001 metals recycling business ferrous 2553 1735 1556 nonferrous 478 417 430 55 66 65 recycled metals total 3086 2218 2051 auto parts business 652 steel manufacturing business 1919 1666 1676 intercompany sales eliminations1 688 378 499 total 4969 3506 3228 income loss operations year ended august 31 millions 2003 2002 2001 metals recycling business 358 1154 84 auto parts business 220 steel manufacturing business 25 57 49 jvs metals recycling business2 248 138 65 jv suppliers metals 04 56 33 corporate expense 3 100 81 79 intercompany eliminations1 12 02 01 impairment nonrecurring charges 214 714 income operations 688 98 151 1 ferrous recycled metal sales metals recycling business steel manufacturing business auto body sales auto parts business metals recycling business made negotiated rates per ton intended approximate market consequently intercompany sales tend produce intercompany profits eliminated finished products ultimately sold third parties 2 includes yearend lifo adjustments reduced income operations 22 million 12 million fiscal 2003 2002 respectively increased income operations 09 million fiscal 2001 3 corporate expense consists primarily unallocated corporate expense services benefit three business segments unallocated expense income operations segment reflect income operations segment would standalone business 4 impairment nonrecurring charges related metals recycling business fiscal 2002 auto parts business fiscal 2003 amounts shown separately assist understanding business financial results fiscal 2003 compared fiscal 2002 revenues consolidated revenues increased 1462 million 42 4969 million fiscal 2003 compared fiscal 2002 revenues metals recycling business increased due higher selling prices volumes worldwide demand ferrous metals strengthened year revenues steel manufacturing business also increased due higher average net selling prices increased sales volumes consolidated revenues also increased 652 million due addition auto parts business consolidated business metals recycling business generated revenues 3086 million intercompany eliminations increase 867 million 39 ferrous revenues increased 818 million 47 2553 million result increase tons sold higher average selling prices net shipping cost average net selling prices ferrous sales volumes increased 255000 tons 16 average net selling price ferrous recycled metal increased 28 30 122 per ton curtailed supplies ferrous recycled metals countries former soviet union growing worldwide demand weakness us dollar drove volume price increases asia especially china korea continues primary destination export sales fiscal 2003 metals recycling business made export shipments aggregating 12 million tons increase 89000 tons 8 compared fiscal 2002 domestic thirdparty ferrous tonnage also increased 38000 tons 46 120000 tons sales companys steel manufacturing business increased 31 535000 tons due increased demand business nonferrous revenues increased 61 million 15 478 million due primarily higher average prices average net nonferrous selling price fiscal 2003 042 per pound increase 006 per pound fiscal 2002 steel manufacturing business revenues increased 253 15 revenues recognized prior year 1919 million fiscal 2003 primarily due higher average net selling prices higher volumes major product lines volume finished steel products sold increased along average net selling price per ton compared fiscal 2002 sales finished steel products 9 622000 tons average net selling price per ton increased 15 per ton 5 291 per ton increase average sales price per ton primarily due higher valued product sales mix lower supplies competing importing steel partially attributed weakness us dollar also towards end fiscal 2003 second quarter company steel producers increased selling prices rebar additionally merchant bar selling prices increased modestly adjust costs production increase sales volume due 30 increase volume wire rod 6 increase sales volume rebar higher wire rod volume due import duties imposed us government spring 2002 certain wire rod products increase rebar volumes primarily due increased demand wholesale customers bought inventory ahead effective date announced price increases previously mentioned auto parts business acquired february 14 2003 considered step acquisition allowing consolidation financial results beginning fiscal 2003 revenues fiscal 2003 included 652 million related auto parts business comparable revenues recognized financial statement purposes fiscal 2002 order aid readers understanding financial performance segment pro forma fiscal 2002 revenues auto parts business 583 million 69 million 12 increase primarily caused increase wholesale revenues driven higher average sales prices scrapped auto bodies due rising ferrous recycled metal prices wholesale prices also benefited implementation new core distribution center aggregated production volumes provided improved venue sell products competing customers retail revenues also due growth part sales admissions pricing cost goods sold consolidated cost goods sold increased 886 million 27 4130 million 83 percent revenues compared 93 fiscal 2002 decrease 83 primarily due improved margins coming principally higher selling prices companys business segments cost goods sold metals recycling business increased 560 million 28 2559 million intercompany eliminations cost goods sold percentage revenues decreased 90 fiscal 2002 83 fiscal 2003 contributing 307 million increase gross profit increase gross margin fiscal 2003 primarily attributable higher selling prices higher sales volume partially offset higher prices paid suppliers ferrous recycled metals higher export freight rates resulting 18 per ton 18 increase average ferrous metals cost sales per ton cost sales per ferrous ton increased higher selling prices higher demand processed metal pushed purchase price company paid unprocessed metal competition recyclers purchase unprocessed metal also factor cost increases average export freight rate climbed 4 per ton fiscal 2003 compared fiscal 2002 cost goods sold steel manufacturing business increased 218 million 13 1910 million decreased percentage revenues 102 fiscal 2002 100 fiscal 2003 decrease due higher average sales price per ton lowered fixed cost per ton due larger production volumes spreading fixed costs tons produced partially offset higher prices paid scrap metal melt shop production increased 32 rolling mill production increased 16 compared fiscal 2002 fiscal 2002 production volumes temporarily curtailed order reduce inventory better match customer demand average cost sales per ton increased 10 per ton 3 compared prior fiscal year increase cost sales per ton offset 15 per ton increase average net selling price gross profit improved 35 million 135 fiscal 2003 compared fiscal 2002 auto parts business cost sales 05 million 1 lower fiscal 2003 compared pro forma cost sales fiscal 2002 percentage revenues cost sales decreased 63 55 improvement due higher margins realized wholesale sales partially offset higher labor costs impairment nonrecurring charges connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites company recorded impairment nonrecurring charges 71 million fiscal 2002 company recorded nonrecurring charges 19 million early termination fixedprice alaska barge contract affreightment management determined cost effective alaska barge contract charge included 09 million writeoff note receivable 10 million payment terminate contract also impairment charge 18 million recorded elimination unprofitable carcrushing business impairment charge 11 million recorded closure underperforming yard reno nevada nonrecurring charges 15 million recorded loss early termination two vessel charter contracts related company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates shipping cost savings result contract termination totaled approximately 20 million additionally loss 08 million recorded sale nonstrategic steel forging business income joint ventures companys joint ventures revenues results operations follows thousands year ended august 31 2003 2002 total revenues external customers recognized joint ventures metals recycling business processing 616958 480157 brokering 251431 144962 joint venture suppliers metals 8877 61762 877266 686881 income joint ventures recognized company joint ventures metals recycling business 24827 13766 joint venture suppliers metals 406 5624 24421 19390 joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals increase revenues recognized joint ventures attributable higher average net ferrous selling prices shipments ferrous metal processed joint ventures 33 million tons year ended august 31 2003 compared 35 million tons prior year volume ferrous metal brokered joint ventures increased 18 million tons fiscal 2003 compared 12 million tons prior year average net selling price ferrous recycled metal increased period 118 per ton 90 per ton predominantly due strong demand asia especially china korea joint ventures also increased sales margins improving operational efficiencies fiscal 2003 companys share income joint ventures metals recycling business increased 248 million due higher average net selling prices increased margins efficient operations companys joint ventures hugo neu corporation earned majority income instituted eva concurrently company fiscal 2001 use eva coupled management changes continued result improved operational efficiencies increased profitability operating income fiscal 2003 reduced 22 million representing companys share jv lifo inventory adjustment compared reduction 12 million fiscal 2002 revenues joint venture suppliers metals decreased 529 million fiscal 2002 compared fiscal 2003 decrease caused reclassification fiscal 2003 picknpull joint venture consolidated included new business segment auto parts business excluding change caused reclassification revenues decreased 70 million fiscal 2003 compared last year due lower selling prices lower demolition revenue companys equity income joint ventures excluding impact picknpull decreased 11 million primarily due slowdown us economy selling commission expenses increased 24 million compared fiscal 2002 primarily due increase export commission expense caused higher ferrous recycled metals export sales general administrative expenses compared fiscal 2002 general administrative expenses increased 62 million consolidation auto parts business represents 50 million increase remainder increase primarily due increased bonus accruals directly related improvement companys eva performance interest expense fiscal 2003 interest expense decreased 05 million compared fiscal 2002 due lower average interest rates borrowings companys borrowings averaged 705 million fiscal 2003 compared 759 million fiscal 2002 average interest rate fiscal 2003 21 compared 27 fiscal 2002 income expenses income expenses decreased 07 million fiscal 2003 compared fiscal 2002 difference principally due addition auto parts business harbor maintenance tax refund received fiscal 2002 addition line item includes market value adjustments changes investment performance securities held trust purpose funding future nonqualified pension payments company recognized gains trust fund assets amount 04 million fiscal 2003 losses 04 million fiscal 2002 income tax provision companys effective rate 27 lower 35 federal statutory tax rate three primary reasons 1 implementation sfas 142 eliminated amortization goodwill nondeductible 2 export sales federal law taxed lower rate domestic sales increased 3 net operating loss carryforwards accompanied earlier acquisition continue provide benefit prior years tax rate 20 benefited two latter items well onetime recognition california tax credits generated previous ten years part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols company recognized immediate tax benefit nols instead company set offsetting 314 million valuation allowance ultimate use nols uncertain given thencurrent federal tax law proscription applying nols taxable income postacquisition income generated proler change federal tax law 1999 however allowed annual 24 million nol applied taxable income sources proler due change tax law company released annual 24 million valuation allowance recognized corresponding 08 million tax benefit fiscal years 2001 2002 2003 major reason companys effective tax rates lower statutory rates years remaining balance unused nols stands 153 million august 31 2003 expire fiscal years 2007 2012 used company also acquired 07 million credits part proler acquisition nols valuation allowance set offset credits ultimate use made likely subsequent liberalization federal tax law part valuation allowance yet released credits likely used nols used expire credits carried forward indefinitely fiscal 2002 company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent corporation consolidated group california franchise income tax liability credits excess tax liability carried forward indefinitely credits combined release 24 million valuation allowance pertaining nols major reasons companys effective tax rate 14 fiscal 2002 well statutory rate 34 fiscal 2002 compared fiscal 2001 revenues consolidated revenues increased 278 million 9 3506 million fiscal 2002 compared fiscal 2001 revenues metals recycling business increased due higher selling prices volumes worldwide demand ferrous metals strengthened year revenues steel manufacturing business slightly lower primarily due lower average net selling prices partially offset increased sales volumes metals recycling business generated revenues 2218 million intercompany eliminations increase 166 million 8 ferrous revenues increased 179 million 12 1735 million result increase tons sold higher average selling prices net shipping cost average net selling prices ferrous volumes increased 75000 tons 5 average net selling price ferrous recycled metal increased 3 94 per ton 3 diminished supplies ferrous recycled metals countries former soviet union growing worldwide demand drove volume price increases asia especially china korea continued primary destination export sales fiscal 2002 metals recycling business made export shipments aggregating 1068000 tons increase 291000 tons 37 compared fiscal 2001 continued soft united states economy domestic thirdparty ferrous tonnage decreased 57000 ton 41 82000 tons sales companys steel manufacturing business decreased 28 407000 tons due production curtailments business nonferrous revenues decreased 13 million 3 417 million due corresponding reduction sales volume average net nonferrous selling price fiscal 2002 036 per pound decline 001 per pound fiscal 2001 steel manufacturing business recognized revenues 1666 million fiscal 2002 decrease 1 revenues recognized prior year volume finished steel products sold increased average net selling price per ton decreased compared fiscal 2001 sales finished steel products 4 569000 tons average net selling price per ton decreased 16 per ton 5 276 per ton record low decrease sales revenue primarily due lower average net selling prices major product lines partially offset increase sales volumes decrease average sales price per ton primarily due sluggish united states economy weak end user demand continuing competition lower cost steel imports shift product mix merchant bar wire rod increase sales volume due 31 greater sales volume wire rod partially offset decline sales volume merchant bar higher wire rod volume due additional demand major customer tariffs selected imported steel products enacted march april 2002 international trade commission itc section 201 1974 trade act produce significant price benefits cost goods sold consolidated cost goods increased 335 million 11 3244 million 93 percent revenues compared 90 fiscal 2001 increase 93 primarily due eroded margins steel manufacturing business gross profit decreased 56 million 18 262 million cost goods sold metals recycling business increased 184 million 10 1999 million intercompany eliminations cost goods sold percentage revenues increased 88 fiscal 2001 90 fiscal 2002 gross profit increased 18 million compared fiscal 2001 increase gross margin fiscal 2002 primarily attributable higher selling prices higher sales volume partially offset higher prices paid suppliers ferrous recycled metals resulting 5 per ton 5 increase average ferrous metals cost sales per ton cost sales per ferrous ton increased higher selling prices higher demand processed metal pushed purchase price company paid unprocessed metal lower shipping costs per ton partially offset purchase price increases competition recyclers purchase unprocessed metal also factor cost increases cost goods sold steel manufacturing business increased 98 million 6 1692 million increased percentage revenues 95 fiscal 2001 100 fiscal 2002 increase due higher fixed costs spread fewer production tons mill curtailments began august 2001 continued throughout fiscal 2002 melt shop production fell 29 rolling mill production fell 11 compared fiscal 2001 also contributing increase 15 rise energy costs energy cost increased due 2001 western energy shortage increased contracted power rates average cost sales per ton increased 4 per ton 2 compared prior fiscal year increased cost sales per ton combined 16 per ton reduction average net selling price resulted decrease gross profit 108 million 131 fiscal 2002 compared fiscal 2001 impairment nonrecurring charges company recorded impairment nonrecurring charges 71 million fiscal 2002 company recorded nonrecurring charges 19 million early termination fixedprice alaska barge contract affreightment management determined cost effective alaska barge contract charge included 09 million writeoff note receivable 10 million payment terminate contract also impairment charge 18 million recorded elimination unprofitable carcrushing business impairment charge 11 million recorded closure underperforming yard reno nevada company sublets reno facility leases equipment third party sells recycled metal output company nonrecurring charges 15 million recorded loss early termination two vessel charter contracts related company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates shipping cost savings result contract termination totaled approximately 20 million additionally loss 08 million recorded sale nonstrategic steel forging business number charges direct result companys 2001 implementation economic value added eva tool used measure financial performance acceptable returns investment well compensate management change eva performance since implementing eva company reanalyzed business performance related outlook many assets result reviews using eva tool led many operational management changes companys business income joint ventures companys joint ventures revenues results operations follows thousands year ended august 31 2002 2001 total revenues external customers recognized joint ventures metals recycling business processing 480157 447689 brokering 144962 108274 joint venture suppliers metals 61762 53381 686881 609344 income joint ventures recognized company joint ventures metals recycling business 13766 6549 joint venture suppliers metals 5624 3288 19390 9837 joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals increase revenues recognized joint ventures attributable higher average net ferrous selling prices increase tonnage shipped shipments ferrous metal processed joint ventures increased 35 million tons year ended august 31 2002 31 million tons prior year average net selling price ferrous recycled metal increased period 90 per ton 86 per ton predominantly due strong demand asia especially china korea joint ventures also increased sales margins improving operational efficiencies fiscal 2002 companys share income joint ventures metals recycling business increased 138 million due increased sales volume higher average net selling prices increased margins efficient operations companys joint ventures hugo neu corporation earned majority income instituted eva concurrently company fiscal 2001 use eva continued result improved operational efficiencies increased profitability operating income fiscal 2002 reduced 12 million representing companys share jv lifo inventory adjustment compared benefit 09 million fiscal 2001 operating income fiscal 2002 also benefited 09 million representing companys share nonrecurring gain sale jv property revenues income joint venture suppliers metal increased fiscal 2001 fiscal 2002 primarily due increased sales companys selfservice auto dismantling joint venture increased sales prices efficient operations lower interest costs drove revenue growth income improvements selling commission expenses increased 07 million compared fiscal 2001 primarily due increase export commission expense caused higher ferrous recycled metals export sales general administrative expenses compared fiscal 2001 general administrative expenses increased 14 million primarily due 10 million increase wages result annual merit increases bonus accruals related companys eva performance 04 million increased insurance expense due adverse insurance market conditions since september 11 2001 interest expense fiscal 2002 interest expense decreased 28 million compared fiscal 2001 due lower average borrowings lower average interest rates companys borrowings averaged 759 million fiscal 2002 compared 815 million fiscal 2001 decrease average borrowings reflected improved cash flow result substantial decreases inventory fiscal 2002 average interest rate fiscal 2002 27 compared 58 fiscal 2001 income decreased 12 million fiscal 2002 compared fiscal 2001 primarily due 16 million decrease interest income result lower interest rates charged variable interest rate advances notes joint venture businesses addition line item includes market value adjustments changes investment performance securities held trust purpose funding future nonqualified pension payments fiscal 2002 2001 company recognized losses trust fund assets amount 07 million 04 million respectively income tax provision part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols prior fiscal 2000 federal tax law placed limitations source income could offset nols accordingly company able record potential tax benefits nols lack certainty able realize benefits fiscal 2000 change federal tax law allowed company use nols offset taxable income sources subject limit 24 million per year fiscal 2001 company continued benefit use 24 million nols one primary reasons effective rate 30 compared statutory rate 34 fiscal 2002 determined company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent corporation consolidated group california franchise income tax liability credits excess tax liability carried forward indefinitely combination nols enterprise zone tax credits made companys effective tax rate 14 fiscal 2002 compared statutory rate 34 noted federal income tax law limits companys use nols 24 million per year unused nols may carried forward used subsequent fiscal years though ultimately expire fiscal years 2007 2012 used subject annual limit remains august 31 2002 177 million proler nols may used future years expire liquidity capital resources fiscal 2003 cash generated operations 409 million compared 364 million last year increase cash flow provided operations primarily result improved operating profits fiscal 2002 inventories declined 312 million generating cash flow amount capital expenditures totaled 218 million 96 million 93 million fiscal years 2003 2002 2001 respectively increase due primarily costs associated dock renovation improvement projects companys portland oregon oakland california recycling facilities result acquisitions completed current prior years company environmental liabilities aggregated 218 million august 31 2003 company expects significant future cash outlays incurs actual costs relating remediation environmental liabilities may 30 2003 company entered agreement refinance revolving bank credit facility new facility unsecured matures may 2006 provides 150 million credit availability facilitys interest rates vary company also additional unsecured line credit 20 million uncommitted companys debt agreements certain restrictive covenants august 31 2003 company compliance covenants aggregate bank borrowings outstanding 79 million july 2002 companys metals recycling joint ventures hugo neu corporation entered 70 million revolving credit facility jv credit facility group banks working capital general credit purposes prior time joint ventures working capital cash needs met advances provided equally company hugo neu corporation jv credit facility expires july 2004 secured inventory receivables joint venture businesses company guarantor jv credit facility jv credit facility number covenants restrictions including restrictions level distributions joint venture partners august 31 2003 joint ventures compliance covenants borrowings jv credit facility totaled 30 million august 31 2003 interest rates jv credit facility higher obtained company management generally considers prudent joint ventures reduce facility balance remitting cash joint venture partners joint venture agreements allow distributions joint venture partners distributions declared fiscal 2003 instead cash flow operations primarily used fund working capital expenditures cash received joint ventures fiscal 2003 lower fiscal 2002 company certain contractual obligations commercial commitments make future payments following table summarizes future obligations commitments august 31 2003 thousands less 13 45 5 total 1 year years longterm debt1 87265 220 79315 30 7700 operating leases2 130018 7021 11555 7520 103922 letters credit 1993 jv credit facility 503 15000 total 234276 24234 90870 7550 111622 1 company 150 million credit facility group banks working capital general purposes facility expires may 2006 2 companys operating leases increased 147 million result acquisition auto parts business 3 disclosure assumes jv credit facility renewed refinanced upon expiration company hugo neu corporation would restore previous arrangement funded onehalf joint ventures cash needs pursuant stock repurchase program company authorized repurchase 3 million shares stock market price companys stock reflective managements opinion appropriate valuation stock management believes repurchasing shares conditions enhances shareholder value helps company manage targeted capital structure fiscal 2003 company made share repurchases august 31 2003 total 13 million shares purchased program company believes current cash balance internally generated funds existing credit facilities provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements future environmental obligations next year longer term company may seek finance business expansion additional borrowing arrangements additional equity financing factors could affect future results form 10k including item 1 part 1and items 7 7a part ii contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 made pursuant safe harbor provisions private securities litigation reform act 1995 one generally identify forwardlooking statements contain expect believe anticipate estimate plans words convey similar meaning one also identify statements relate strictly historical current facts examples factors affecting schnitzer steel industries incs whollyowned operations joint ventures company could cause actual results differ materially following cyclicality general market considerations selling prices recycled metals highly cyclical nature subject worldwide economic conditions addition cost availability recycled metals subject volatile supply demand conditions beyond companys control resulting periodic fluctuations recycled metals prices company attempts maintain margins responding changing recycled metals selling prices adjustments metals purchase prices companys ability limited competitive factors well impact lower prices volume recycled metal available company moreover increases recycled metals prices adversely affect operating results companys steel manufacturing business increases steel prices generally lag increases ferrous recycled metals prices steel industry also highly cyclical nature sensitive general economic conditions future economic downturns stagnant economy may adversely affect performance company expects continue experience seasonal fluctuations revenues net income revenues fluctuate significantly quarter due factors seasonal slowdown construction industry important buyer companys finished steel products timing extent slowdown also dependent weather another factor may affect revenues relates seasonal reduction demand foreign customers tend reduce finished steel production summer months offset higher energy costs also severe weather conditions may affect companys global market conditions company makes number large ferrous recycled metals shipments foreign steel producers year customer requirements shipping schedules factors limit companys control timing shipments variations number foreign shipments quarter result fluctuations quarterly revenues earnings companys expectations regarding ferrous metal sales prices volumes well earnings based part number assumptions example uncertainties relating customer orders metal availability estimated freight rates cost volume inventory yet processed production output etc auto parts business experiences modest seasonal fluctuations demand retail stores open elements periods extreme temperatures precipitation customers tend delay purchases wait milder conditions result retail sales generally higher spring fall fiscal year lower winter summer months competition recycled metals industry highly competitive volume purchases sales subject number competitive factors principally price company competition large numerous smaller companies markets purchase recyclable metals company competes number domestic foreign recycled metals processors sales foreign customers recent past lower cost ferrous recycled metals supplies countries former soviet union adversely affected companys ferrous recycled metals selling prices volumes currently countries export tariffs outright export bans significantly reduced export volumes lowered worldwide supply ferrous recycled metals tariffs bans positive effect companys selling prices volumes however company cannot predict countries former soviet union change export policies effect changes might companys operating results domestic steel industry also highly competitive steel prices highly volatile price significant competitive factor company competes several steel producers western united states sales products recent years company experienced significant foreign competition sometimes subsidized large government agencies assurance competition increase future march april 2002 itc imposed tariffs imported steel section 201 1974 trade act temporarily aid domestic steel industry 2003 tariffs found violation global trade rules world trade organization wto dispute panel wto issued final report expected us government would appeal decision date however tariffs significantly benefited selling prices finished steel products west coast united states spring 2002 us government imposed antidumping countervailing duties wire rod products eight foreign countries duties assisted company increasing sales wire rod products expiration termination duties could corresponding adverse effect december 2002 nucor corporation assumed ownership assets birmingham steel corp steel manufacturing business seattle washington nucor corporation leader setting prices companys markets significant share west coast finished steel market considered aggressive competitor long term impact nucors ownership operation birmingham steels seattle facility steel manufacturing business metals recycling business operating results cannot determined time additionally recently steel manufacturing business also competed north star mill kingman arizona sold nucor facility currently idle future startup operations could impact companys market joint ventures company significant investments joint venture companies company manage daytoday activities businesses result ability control operations related financial results consolidated businesses however affected many risk factors mentioned therefore difficult predict financial results businesses additionally two joint ventures continue use lifo inventory accounting tends defer income taxes historically effects lifo adjustments difficult predict energy supply company joint ventures utilize various energy sources operate facilities particular electricity natural gas currently represent approximately 10 cost steel manufactured companys steel manufacturing business steel manufacturing business purchases electric power longterm contract mcminnville water light mcminnville turn relies bonneville power administration bpa historically contracts favorable prices longterm nature company fiveyear contract expires september 2006 october 1 2001 bpa increased electricity rates due increased demand west coast lower supplies increase form cost recovery adjustment clause crac added bpas contract mcminnville crac additional monthly surcharge selected power charges recover costs associated buying higher priced power west coast power shortage bpa adjust crac every six months possible predict future rate changes steel manufacturing business also contract natural gas current contract expires october 31 2003 new contract signed expires october 31 2004 new contract price increased 15 company unable negotiate favorable terms electricity natural gas energy sources could adversely affect performance company tax laws company able reduce effective tax rate federal statutory tax rate last three years using combination net operating loss carryforwards nols state california enterprise zone tax credits foreign sales corporations extraterritorial income exclusions company cannot predict future tax law changes might affect companys effective tax rate currency fluctuations demand companys foreign customers partially driven foreign currency fluctuations relative us dollar recent weakness us dollar relative foreign currencies significant factor increases recycled metals prices last year well resulted increasing cost certain finished steel imports strengthening us dollar could adversely affect competitiveness companys products markets company competes company control fluctuations dynamics could affect companys revenues earnings shipping handling metals recycling business steel manufacturing business often rely third parties handle transport products end users timely manner cost transport products particular ocean freight affected circumstances company control fuel prices political events governmental regulations transportation changes market rates due carrier availability insurance cost companys insurance affected loss experience also cycles insurance market company cannot predict future events circumstances could cause rates materially change war terrorist activities natural disasters auto parts business auto parts business competes fullservice selfservice auto dismantlers well larger well financed retail auto parts businesses retail customers periodically auto parts business increases prices may affect customer flow buying patterns ultimate impact changes cannot predicted also business competes automobile inventory dismantlers used car dealers auto auctions metal recyclers inventory costs fluctuate significantly depending market conditions prices recycled metal auto parts business subject number risks could prevent maintaining exceeding current levels profitability volatile supply demand conditions affecting prices volumes markets products services raw materials environmental issues local worldwide economic conditions increased competition business integration management transition issues one understand possible predict identify factors could cause actual results differ companys forwardlooking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7aitem 7 managements discussion analysis financial condition results operations overview company operates three industry segments companys metals recycling business collects processes recycles steel metals facilities companys steel manufacturing business operates minimill near portland oregon melts recycled metal produces finished steel products maintains one mill depot southern california one central california companys auto parts business purchases used wrecked automobiles allows retail customers opportunity extracting parts purchase selfservice auto parts stores 17 located california three canada two nevada one store texas utah illinois indiana additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metals joint ventures metals recycling business sell recycled metals processed facilities processing also buy sell third parties processed metals brokering schnitzer steel industries inc form 10k critical accounting policies estimates companys discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance generally accepted accounting principles preparation financial statements requires company make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis company evaluates estimates company bases estimates historical experience various assumptions believed reasonable circumstances estimates assumptions provide basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences may material company believes following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates company relies upon perpetual inventory records utilize estimated recoveries yields based upon historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal assist validating reasonableness estimates company runs periodic tests also performs monthly physical inventories physical inventories may detect significant variations volume variations product density holding period production processes utilized manufacture product physical inventories generally detect smaller variations mitigate risk company adjusts physical inventories volume commodity low physical inventory accurately predict remaining volume addition company establishes inventory reserves mitigate risk significant adjustments determined reasonable revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metals finished steel products transfers upon shipment based either cif fob terms retail sales companys auto parts business revenues recognized customers pay salvaged vehicle parts wholesale products shipped customer location environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonably established amount within range better another minimum amount range recorded financial statements adjustments liabilities made additional information becomes available affects estimated costs remediate number cases possible company may receive reimbursement prior insurance potentially responsible parties identified claim situations recoveries environmental remediation costs parties recorded asset realization claim recovery deemed probable reasonably estimable schnitzer steel industries inc form 10k goodwill assessing recoverability goodwill intangible assets indefinite lives management must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future may required record impairment charges previously recorded adopted statement financial accounting standards sfas 142 goodwill intangible assets required assess goodwill impairment minimum annually using twostep process begins estimation fair value reporting unit first step screen impairment second step measures amount impairment tests utilize fair value amounts determined estimated future cash flows developed management longlived assets required assess potential impairments longlived assets accordance sfas 144 accounting impairment longlived assets events changes circumstances indicate carrying amount asset may recoverable impaired asset written estimated fair value based upon recent information available estimated fair market value generally measured discounting estimated future cash flows developed management companys longlived assets primarily include property plant equipment used operations taxes deferred income taxes reflect differences financial reporting tax bases assets liabilities yearend based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises valuation allowance established necessary reduce deferred tax assets including net operating loss carryforwards amount likely realized periodically company reviews deferred tax assets assess whether valuation allowances necessary results operations fiscal 2004 companys operations improved dramatically resulting record year revenue net income companys metals recycling business steel manufacturing business recognized marked improvements last year well companys joint ventures metals recycling business benefited rising selling prices improve profitability 148 addition auto parts business contributed earnings growth year results operations company depend large part upon demand prices recycled metals world markets steel products western united states fiscal 2004 strong worldwide demand limited supply recycled metals drove metals recycling business average selling prices time highs market prices recycled ferrous metals fluctuate periodically significant impact results operations whollyowned joint ventures metals recycling business steel manufacturing business saw significantly higher average selling prices slightly higher sales volumes fiscal 2004 compared fiscal 2003 sales prices volumes benefited strong demand steel products west coast united states improvements us economy lower steel imports partially attributed weakness us dollar higher ocean freight rates auto parts business segment formed second quarter fiscal 2003 result acquisition purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers retail operations somewhat seasonal principally affected weather conditions promotional events since stores open natural elements periods prolonged wet cold extreme heat retail business tends slow due difficult customer working conditions result companys first third fiscal quarters tend generate retail sales second fourth fiscal quarters slowest terms retail sales auto parts business primary source revenue sale scrap metal parts wholesale revenues wholesale product lines principally affected commodity prices shipping schedules mentioned earlier discussions regarding metal schnitzer steel industries inc form 10k recycling business recycled metal prices increased dramatically fiscal 2003 positively affected revenues profits auto parts business addition auto parts business completed acquisition fiscal 2004 added three stores canada original 23 stores acquired fiscal 2003 following tables set forth information regarding breakdown revenues companys metals recycling business steel manufacturing business auto parts business breakdown operating income metals recycling business steel manufacturing business auto parts business joint ventures corporate eliminations additional financial information relating business segments contained note 12 notes consolidated financial statements schnitzer steel industries inc form 10k fiscal 2004 compared fiscal 2003 revenues consolidated revenues increased 1914 million 39 6882 million fiscal 2004 compared fiscal 2003 revenues fiscal 2004 increased company businesses primarily result increased prices demand worldwide ferrous metals market including addition new export customers located outside china significant improvements demand coupled lower steel imports led increases selling prices finished steel products sold steel manufacturing business auto parts business benefited increased ferrous metals prices sales autobodies addition auto parts business acquired three retail locations canada added revenue operating income segment metals recycling business metals recycling business generated revenues 4563 million intercompany eliminations increase 1477 million 48 ferrous revenues increased 1378 million 54 3930 million result higher average selling prices net shipping cost average net selling prices higher shipping costs billed customers slight increase volume sold average net selling price ferrous recycled metal increased 62 per ton 51 184 per ton represents 1118 million revenue increase average export shipping costs increased 57 prior year represent 199 million revenue increase addition ferrous sales volumes increased 18 33000 tons represents 41 million increase ferrous revenue export volume 11 prior year moreover 60 total ferrous sales export shipments asia last two fiscal years fiscal 2004 ferrous export sales china decreased 34 total ferrous exports compared 60 fiscal 2003 addition ferrous export sales south korea increased approximately 53 total ferrous export sales fiscal 2004 compared 28 ferrous export sales fiscal 2003 new customers thailand india purchased 10 export sales volume fiscal 2004 sales volume companys steel manufacturing business increased 15 618000 tons due increased demand finished steel business nonferrous revenues increased 92 million 19 570 million due primarily higher average prices average net nonferrous selling price fiscal 2004 048 per pound increase 006 per pound fiscal 2003 auto parts business auto parts business generated revenue 815 million intercompany eliminations increase 163 million 25 prior year increase result higher wholesale revenues driven higher average sales prices scrapped autobodies due rising ferrous recycled metal prices march 2004 acquisition three retail store locations canada steel manufacturing business steel manufacturing business generated revenues 2713 million increase 794 million 41 prior year sales prices increased 113 per ton 39 represents 707 million increase sales volumes increased 3 represents 59 million revenue increase selling prices combination increased demand passing along rapidly rising raw materials energy costs required production process cost goods sold consolidated cost goods sold increased 1172 million 28 prior year cost goods sold decreased percentage revenue 83 fiscal 2003 77 fiscal 2004 reduction cost goods sold percentage revenue due profit margin improvements companys business segments led steel manufacturing business metals recycling business cost goods sold metal recycling business increased 1020 million 40 3579 million cost goods sold percentage revenues decreased 83 fiscal 2003 78 fiscal 2004 gross profit increased 457 million 984 million year increase gross profit attributable higher average net selling prices per ton compared fiscal 2003 average ferrous metals cost sales per ton schnitzer steel industries inc form 10k increased 37 due primarily higher purchase costs unprocessed ferrous metals higher export sales shipping costs generally change cost unprocessed metal strong correlation changes average selling price however generally delay timing changes net selling prices change cost unprocessed metal thus selling prices rose compared last year cost unprocessed metal since purchase costs increase rate selling prices experienced significant increases margins auto parts business auto parts business cost goods sold increased 102 million 28 prior year percentage revenue cost goods sold increased 55 57 increase due higher car purchase costs increases labor costs gross profit increased 61 million 21 prior year due increased revenue steel manufacturing business cost goods sold steel manufacturing business increased 515 million 27 2425 million cost goods sold percentage revenues fiscal 2004 decreased 89 100 fiscal 2003 decrease cost goods sold percentage revenue attributable higher average selling prices higher sales volumes receipt final 18 million electrode price fixing settlement offset 11 million pension charge average cost goods sold per ton increased 69 per ton 24 compared prior fiscal year increase cost sales per ton offset 114 per ton increase average net selling price gross profit improved 279 million fiscal 2004 compared fiscal 2003 impairment nonrecurring charges fiscal 2002 companys portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues docks substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 35 million recorded fourth quarter fiscal 2004 writeoff renovation costs incurred prior suspension connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites operating income joint ventures companys joint ventures revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals increase revenues recognized joint ventures attributable higher average net ferrous selling prices higher volumes shipments ferrous metal processed joint ventures 36 million tons year ended schnitzer steel industries inc form 10k august 31 2004 compared 33 million tons prior year volume ferrous metal brokered joint ventures increased 27 million tons fiscal 2004 compared 17 million tons prior year came primarily increased market share mexico latin america coupled product line expansion scrap metal related commodities average net selling price ferrous recycled metal increased period 187 per ton 118 per ton due worldwide supply demand factors affecting whollyowned metals recycling business fiscal 2004 companys share income joint ventures metals recycling business increased 617 million due higher average net selling prices increased margins efficient operations benefiting similar market factors pricing described discussion relating companys whollyowned metals recycling business companys joint ventures hugo neu corporation earned nearly operating income companys share operating income global brokering joint venture increased 23 million fiscal 2003 113 million fiscal 2004 companys share joint venture operating income fiscal 2004 also included estimated 34 million joint venture contract new york city processing disposal curbside recycling materials commenced april 2004 contract new york city interim contract companys present intention participate anticipated longtem contract income stream contract could end time operating income fiscal 2004 reduced 61 million representing companys share joint venture lifo inventory adjustment compared reduction 22 million fiscal 2003 selling expenses selling expenses increased 08 million fiscal 2003 primarily due increased advertising expenses auto parts business general administrative expenses general administrative expenses increased 110 million fiscal 2003 higher general administrative expenses due higher bonus expense well increased spending sarbanesoxley compliance professional fees companys bonus plan based upon principles economic value added eva directly tied financial performance company given companys recent record financial performance bonus expense significantly higher fiscal 2004 interest expense fiscal 2004 interest expense increased 03 million compared fiscal 2003 due higher average debt balances fiscal 2004 income tax provision 31 tax rate fiscal 2004 compares tax rate 27 fiscal 2003 increase tax rate primarily attributable reduction estimated extraterritorial income exclusion eti tax benefits export sales increase partially offset reversal 61 million deferred tax valuation allowance associated net operating loss minimum tax credit carryforwards companys tax rate expected increase fiscal 2005 due change tax law phasing eti tax benefits next two years deferred tax valuation allowance fully reversed fiscal 2003 compared fiscal 2002 revenues consolidated revenues increased 1462 million 42 4969 million fiscal 2003 compared fiscal 2002 revenues metals recycling business increased due higher selling prices volumes worldwide demand ferrous metals strengthened year revenues steel manufacturing business also increased due higher average net selling prices increased sales volumes consolidated revenues also increased 652 million due addition auto parts business consolidated business metals recycling business generated revenues 3086 million intercompany eliminations increase 867 million 39 ferrous revenues increased 818 million 47 2553 million result increase tons sold higher average selling prices net shipping cost average net selling prices ferrous sales volumes increased 255000 tons 16 average net selling price ferrous recycled metal increased 28 30 122 per ton curtailed supplies ferrous recycled metals countries former soviet union growing worldwide demand weakness us dollar drove volume price increases fiscal 2003 metals recycling business made export shipments aggregating 12 million tons increase 89000 tons 8 compared fiscal 2002 domestic thirdparty ferrous tonnage also increased 38000 tons 46 120000 tons sales companys steel manufacturing business increased 31 535000 tons due increased demand business nonferrous revenues increased 61 million 15 478 million due primarily higher average prices average net nonferrous selling price fiscal 2003 042 per pound increase 006 per pound fiscal 2002 schnitzer steel industries inc form 10k steel manufacturing business revenues increased 253 million 15 revenues recognized prior year 1919 million fiscal 2003 primarily due higher average net selling prices higher volumes major product lines volume finished steel products sold increased along average net selling price per ton compared fiscal 2002 sales finished steel products 9 622000 tons average net selling price per ton increased 15 per ton 5 291 per ton increase average sales price per ton primarily due higher valued product sales mix lower supplies competing importing steel partially attributed weakness us dollar also towards end fiscal 2003 second quarter company steel producers increased selling prices rebar coiled rebar additionally merchant bar selling prices increased modestly adjust costs production increase sales volume due 30 increase volume wire rod 6 increase sales volume rebar higher wire rod volume due import duties imposed us government spring 2002 certain wire rod products increase rebar volumes primarily due increased demand wholesale customers bought inventory ahead effective date announced price increases previously mentioned auto parts business acquired february 14 2003 considered step acquisition allowing consolidation financial results beginning fiscal 2003 revenues fiscal 2003 included 652 million related auto parts business comparable revenues recognized financial statement purposes fiscal 2002 order aid readers understanding financial performance segment pro forma fiscal 2002 revenues auto parts business 583 million 69 million 12 increase primarily caused increase wholesale revenues driven higher average sales prices scrapped autobodies due rising ferrous recycled metal prices wholesale prices also benefited implementation new core distribution center aggregated production volumes provided improved venue sell products competing customers retail revenues also due growth part sales admissions pricing cost goods sold consolidated cost goods sold increased 886 million 27 4130 million 83 percent revenues compared 93 fiscal 2002 decrease 83 primarily due improved margins coming principally higher selling prices companys business segments cost goods sold metals recycling business increased 560 million 28 2559 million intercompany eliminations cost goods sold percentage revenues decreased 90 fiscal 2002 83 fiscal 2003 contributing 307 million increase gross profit increase gross margin fiscal 2003 primarily attributable higher selling prices higher sales volume partially offset higher prices paid suppliers ferrous recycled metals higher export freight rates resulting 18 per ton 18 increase average ferrous metals cost sales per ton cost sales per ferrous ton increased higher selling prices higher demand processed metal pushed purchase price company paid unprocessed metal competition recyclers purchase unprocessed metal also factor cost increases average export freight rate climbed 4 per ton fiscal 2003 compared fiscal 2002 cost goods sold steel manufacturing business increased 218 million 13 1910 million decreased percentage revenues 102 fiscal 2002 100 fiscal 2003 decrease due higher average sales price per ton lowered fixed cost per ton due larger production volumes spreading fixed costs tons produced partially offset higher prices paid scrap metal melt shop production increased 32 rolling mill production increased 16 compared fiscal 2002 fiscal 2002 production volumes temporarily curtailed order reduce inventory better match customer demand average cost sales per ton increased 10 per ton 3 compared prior fiscal year increase cost sales per ton offset 15 per ton increase average net selling price gross profit improved 35 million 135 fiscal 2003 compared fiscal 2002 auto parts business cost sales 05 million 1 lower fiscal 2003 compared pro forma cost sales fiscal 2002 percentage revenues cost sales decreased 63 55 improvement due higher margins realized wholesale sales partially offset higher labor costs schnitzer steel industries inc form 10k impairment nonrecurring charges connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites company recorded impairment nonrecurring charges 71 million fiscal 2002 company recorded nonrecurring charges 19 million early termination fixedprice alaska barge contract affreightment management determined cost effective alaska barge contract charge included 09 million writeoff note receivable 10 million payment terminate contract also impairment charge 18 million recorded elimination unprofitable carcrushing business impairment charge 11 million recorded closure underperforming yard reno nevada nonrecurring charges 15 million recorded loss early termination two vessel charter contracts related company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates shipping cost savings result contract termination totaled approximately 20 million additionally loss 08 million recorded sale nonstrategic steel forging business operating income joint ventures companys joint ventures revenues results operations follows thousands joint ventures metals recycling business predominantly sell recycled ferrous nonferrous metals increase revenues recognized joint ventures attributable higher average net ferrous selling prices shipments ferrous metal processed joint ventures 33 million tons year ended august 31 2003 compared 35 million tons prior year volume ferrous metal brokered joint ventures increased 17 million tons fiscal 2003 compared 12 million tons prior year average net selling price ferrous recycled metal increased period 118 per ton 90 per ton predominantly due strong demand asia especially china korea joint ventures also increased sales margins improving operational efficiencies fiscal 2003 companys share income joint ventures metals recycling business increased 248 million due higher average net selling prices increased margins efficient operations companys joint ventures hugo neu corporation earned majority income instituted eva concurrently company fiscal 2001 use eva coupled management changes continued result improved operational efficiencies increased profitability operating income fiscal 2003 reduced 22 million representing companys share jv lifo inventory adjustment compared reduction 12 million fiscal 2002 schnitzer steel industries inc form 10k revenues joint venture suppliers metals decreased 529 million fiscal 2002 compared fiscal 2003 decrease caused reclassification fiscal 2003 picknpull joint venture consolidated included new business segment auto parts business excluding change caused reclassification revenues decreased 70 million fiscal 2003 compared last year due lower selling prices lower demolition revenue companys equity income joint ventures excluding impact picknpull decreased 11 million primarily due slowdown us economy selling expenses increased 24 million compared fiscal 2002 primarily due increase export commission expense caused higher ferrous recycled metals export sales general administrative expenses compared fiscal 2002 general administrative expenses increased 62 million consolidation auto parts business represents 50 million increase remainder increase primarily due increased bonus accruals directly related improvement companys eva performance interest expense fiscal 2003 interest expense decreased 05 million compared fiscal 2002 due lower average interest rates borrowings companys borrowings averaged 705 million fiscal 2003 compared 759 million fiscal 2002 average interest rate fiscal 2003 21 compared 27 fiscal 2002 income expenses income expenses decreased 07 million fiscal 2003 compared fiscal 2002 difference principally due addition auto parts business harbor maintenance tax refund received fiscal 2002 addition line item includes market value adjustments changes investment performance securities held trust purpose funding future nonqualified pension payments company recognized gains trust fund assets amount 04 million fiscal 2003 losses 04 million fiscal 2002 income tax provision companys effective rate 27 fiscal 2003 lower 35 federal statutory tax rate three primary reasons 1 implementation sfas 142 eliminated amortization goodwill nondeductible 2 export sales federal law taxed lower rate domestic sales increased 3 net operating loss carryforwards accompanied earlier acquisition continued provide benefit fiscal 2002 tax rate 14 benefited two latter items well onetime recognition california tax credits generated previous ten years part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols company recognized immediate tax benefit nols instead company set offsetting 314 million valuation allowance ultimate use nols uncertain given thencurrent federal tax law proscription applying nols taxable income postacquisition income generated proler change federal tax law 1999 however allowed annual 24 million nol applied taxable income sources proler due change tax law company released annual 24 million valuation allowance recognized corresponding 08 million tax benefit fiscal years 2003 2002 major reason companys effective tax rates lower statutory rates years company also acquired 07 million credits part proler acquisition nols valuation allowance set offset credits part valuation allowance released august 31 2003 credits likely used nols used expire credits carried forward indefinitely fiscal 2002 company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent company california franchise income tax liability taxable income apportionable zone credits excess tax liability carried forward indefinitely credits combined release 24 million valuation allowance pertaining schnitzer steel industries inc form 10k nols major reasons companys effective tax rate 14 fiscal 2002 well statutory rate 35 liquidity capital resources fiscal 2004 cash generated operations 732 million compared 409 million fiscal 2003 increase cash flow operations primary related improvement net income offset reinvestment cash flow hugo neu joint ventures increase inventories result higher inventory quantities hand august 31 2004 increased inventory costs raw materials divisions capital expenditures totaled 222 million 218 million 96 million fiscal years 2004 2003 2002 respectively capital expenditures fiscal 2004 included production improvement projects including partial payments new stateoftheart mega shredder companys oakland california recycling facility major furnace replacement steel manufacturing business march 2004 company completed acquisition three selfservice used auto parts stores canada purchase price 137 million fiscal 2004 company also made additional postclosing payments 118 million related acquisition pick pull auto dismantling inc closed february 2003 result acquisitions completed prior years company 215 million environment liabilities august 31 2004 next 12 months company expects pay approximately 93 million relating previously accrued remediation projects connection one metals recycling facilities located state washington hylebos waterway additionally company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities august 31 2004 company committed unsecured bank credit facility totaling 150 million matures may 2006 credit facility contains provision whereby company may upon obtaining consent bank group extend term agreement one year may 2007 company provided notice intention request extension bank group agreed request extension subject company providing standard representations warranties may 2006 original maturity date company currently anticipates able provide required representations warranties agreement extended company also additional unsecured credit lines totaling 20 million uncommitted companys debt agreements certain restrictive covenants august 31 2004 company aggregate bank borrowings outstanding facilities 600 million compliance covenants july 2002 companys metals recycling joint ventures hugo neu corporation entered revolving credit facility jv credit facility group banks working capital general corporate purposes prior time joint ventures working capital cash needs met advances provided equally company partner hugo neu corporation february 2004 facility increased 110 million jv credit facility expires january 26 2005 secured inventory receivables joint venture businesses company guarantor jv credit facility jv credit facility number covenants restrictions including restrictions level distributions joint venture partners august 31 2004 debt outstanding credit facility joint ventures compliance covenants companys present intention renew facility upon expiration case company partner need revert funding cash needs joint ventures equal basis joint venture agreements allow distributions joint venture partners two year period ended august 31 2004 company recorded 860 million operating income representing share earnings joint ventures however time company received cash distributions instead hugoneu joint ventures utilizing available cash flow fund expansion working capital business growth investment stateoftheart equipment improve efficiencies capabilities business pay borrowings jv credit facility schnitzer steel industries inc form 10k joint ventures metals recycling business purchasing installing three new megashredders fiscal 2005 estimated cost 36 million joint venture partners anticipate using longterm equipment financing facility support purchase joint ventures would make principal interest payments financing facility operating income company certain contractual obligations make future payments following table summarizes future obligations august 31 2004 thousands pursuant stock repurchase program began 1997 company authorized repurchase 30 million shares stock management believes repurchases would enhance shareholder value fiscal year 2004 company made share repurchases august 31 2004 company repurchased total 13 million shares program company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements anticipate making contributions approximately 60 million various pension plans fiscal 2005 company believes current cash resources internally generated funds existing credit facilities access capital markets provide adequate financing capital expenditures working capital joint ventures stock repurchases debt service requirements post retirement obligations future environmental obligations next schnitzer steel industries inc form 10k twelve months longer term company may seek finance business expansion additional borrowing arrangements additional equity financing factors could affect future results form 10k including item 1 part l item 7 part ii contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 made pursuant safe harbor provisions private securities litigation reform act 1995 one generally identify forwardlooking statements contain expect believe anticipate estimate plans words convey similar meaning one also identify statements relate strictly historical current facts examples factors affecting schnitzer steel industries incs whollyowned operations joint ventures company could cause actual results differ materially following cyclicality general market considerations purchase selling prices recycled metals highly cyclical nature subject worldwide economic conditions addition cost availability recycled metals subject global supply demand conditions volatile beyond companys control resulting periodic fluctuations recycled metals prices working capital requirements company attempts maintain grow margins responding changing recycled metals selling prices adjustments metals purchase prices companys ability limited competitive market factors additionally changing prices could potentially impact volume recycled metal available company subsequent volume processed metal sold company inventory levels timing collections levels relating companys accounts receivable balances moreover increases recycled metals selling prices adversely affect operating results companys steel manufacturing business increases steel prices generally lag increases ferrous recycled metals prices steel industry also highly cyclical nature sensitive general economic conditions future economic downturns stagnant economy may adversely affect performance company expects continue experience seasonal fluctuations revenues net income revenues fluctuate significantly quarter due factors seasonal slowdown construction industry important buyer companys finished steel products timing extent slowdown also dependent weather another factor may affect revenues relates seasonal reduction demand foreign customers tend reduce finished steel production corresponding scrap metal requirements summer months offset higher energy costs also severe weather conditions may affect companys global market conditions company makes number large ferrous recycled metals shipments foreign steel producers year customer requirements shipping schedules factors limit companys control timing shipments variations number foreign shipments quarter result fluctuations quarterly revenues earnings companys expectations regarding ferrous metal sales prices volumes well earnings based part number assumptions difficult predict example uncertainties relating customer orders metal availability estimated freight rates ship availability cost volume unprocessed inventory production output etc auto parts business experiences modest seasonal fluctuations demand retail stores open elements periods extreme temperatures precipitation customers tend delay purchases wait milder conditions result retail sales generally higher spring fall calendar year lower winter summer months additionally auto parts business subject number risks could prevent maintaining exceeding current levels profitability volatile supply demand conditions affecting prices volumes markets products services raw materials environmental issues local worldwide schnitzer steel industries inc form 10k economic conditions increased competition ultimate success companys growth acquisition plans business integration management transition issues competition recycled metals industry highly competitive volume purchases sales subject number competitive factors principally price company competes large numerous smaller companies markets purchase recyclable metals company also competes number domestic foreign recycled metals processors brokers processed unprocessed metal well sales domestic foreign customers example 2001 2002 lower cost ferrous recycled metals supplies certain foreign countries adversely affected market selling prices ferrous recycled metals since many countries imposed export restrictions significantly reduced export volumes lowered worldwide supply ferrous recycled metals restrictions believed positive effect companys selling prices given intricacies global markets operate company cannot predict foreign countries change trading policies effect changes might companys operating results time united states foreign governments impose regulations restrictions trade markets company operates fiscal 2004 company completed filing requirements china continue allow shipment recycled metals china documents part certification process ensure safe industrial agricultural production china also unusual various constituencies petition government entities impose new restrictions change current laws imposed restrictions could affect companys margins well ability ship goods foreign customers alternatively restrictions could also affect global availability ferrous recycled metals thereby affecting companys volumes margins result difficult predict impact pending future trade restrictions operations company metals recycling business significant domestic competitors include regional steel mills brokers compete recycled metal purpose providing mill feedstock produce finished steel periods market supplies metal short supply buyers may times react raising buying prices levels reasonable relation normal market conditions result company may raise buying prices maintain production levels may result compressed margins auto parts business competes fullservice selfservice auto dismantlers well larger well financed retail auto parts chains retail customers periodically auto parts business increases prices may affect customer flow buying patterns additionally markets company stores pricing power experiences markets one store operates segment expands company may experience new competition others attempting replicate companys business model ultimate impact dynamics cannot predicted also business competes automobile inventory dismantlers used car dealers auto auctions metal recyclers inventory costs fluctuate significantly depending market conditions prices recycled metal domestic steel industry also highly competitive steel prices highly volatile price significant competitive factor company competes domestically several steel producers western united states sales products recent years company experienced significant foreign competition sometimes subsidized large government agencies assurance competition increase future spring 2002 us government imposed antidumping countervailing duties wire rod products eight foreign countries duties assisted company increasing sales wire rod products expiration termination duties could corresponding adverse effect december 2002 nucor corporation nucor assumed ownership assets birmingham steel corp acquired steel manufacturing business seattle washington nucor corporation leader setting finished steel prices companys finished steel markets significant share west coast steel market considered aggressive competitor nucor consolidated much west coast domestic steel production 2002 purchase former birmingham steel mill seattle washington former north star mill kingman schnitzer steel industries inc form 10k arizona kingman mill idle since 2003 future startup operations could negatively impact companys recycled metal finished steel markets prices margins potentially cash flow geographical concentration company competes scrap metal business whollyowned metals recycling business well joint venture businesses last years significant portion revenues operating profits earned segments generated sales asian countries principally china south korea addition companys sales countries also concentrated relatively customers vary depending buying cycles general market conditions due concentration sales countries relatively small customer base significant change buying patterns change political events change regulatory requirements tariffs export restrictions within united states foreign countries severe weather conditions general changes economic conditions could adversely affect financial results company union contracts company number union contracts expire fiscal year 2005 labor contract negotiations commenced unions company unable reach agreement terms new contract unions company could subject work slowdowns work stoppages post retirement benefits company number post retirement benefit plans include defined benefit multiemployer plans companys contributions defined benefit plans determined actuarial calculations based number estimates including expected longterm rate return plan assets allocation plan assets equity fixed income investments expected rate compensation increases well factors changes actual rates year cause increases decreases companys annual contributions defined benefit plans changes expenses recognized current fiscal year management actuary evaluate rates annually adjust necessary companys union employees participate number multiemployer pension plans company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company unable determine relative portion estimate future liability multiemployer pension plans company learned fourth quarter 2004 one multiemployer plans would meet erisa minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service certain relief minimum funding standard cannot determine whether relief granted absent relief plans contributing employers required make additional contributions pay excise tax may equal exceed full amount deficiency company estimates share required additional contribution 2004 plan year approximately 11 million accrued amount fiscal 2004 joint ventures company significant investments joint venture companies substantial five metals recycling joint ventures hugo neu corporation hnc case daytoday activities joint venture business managed companys joint venture partner company result company ability control predict operations cash flow expenditures debt related financial results consolidated businesses therefore difficult predict financial results joint ventures recent years companys relationship chief executive officer hnc significant joint venture partner deteriorated disagreements regarding business decisions well personality clashes company believe issues materially affected operations operating results joint ventures shown dramatic financial improvement since fiscal 2000 company currently disputing hncs recent unilateral assertion right paid certain commissions sales joint venture engaged global brokering recycled metals described detail note 7 notes consolidated financial statements item 8 described liquidity capital resources companys present intention renew 110 million jv credit facility matures january 2005 company hnc revert funding cash needs joint ventures equal basis hnc fund share joint venture cash needs operations global brokering joint venture relied extensively jv credit facility working capital support could adversely affected company believes desirable company hnc end current joint venture relationships however joint venture agreements provide mechanism break ventures preliminary discussions regarding possible transactions terminate relationship occur time discussions resulted agreement regarding structure valuation terms transaction discussions periodically continue company evaluate disclosure obligations presently intend make disclosure regarding existence status discussions unless agreement reached ever schnitzer steel industries inc form 10k company believes desirable company hnc end current joint venture relationships however joint venture agreements provide mechanism break ventures preliminary discussions regarding possible transactions terminate relationship occur time discussions resulted agreement regarding structure valuation terms transaction discussions periodically continue company evaluate disclosure obligations presently intend make disclosure regarding existence status discussions unless agreement reached ever joint venture businesses affected many risk factors mentioned document additionally two joint ventures continue use lifo inventory accounting tends defer income taxes historically effects lifo adjustments recorded fourth quarter fiscal year difficult predict energy supply company joint ventures utilize various energy sources operate facilities particular electricity natural gas currently represent approximately 9 cost steel manufactured companys steel manufacturing business steel manufacturing business purchases electric power longterm contract mcminnville water light mcminnville turn relies bonneville power administration bpa historically contracts favorable prices longterm nature company fiveyear contract expires september 2006 october 1 2001 bpa increased electricity rates due increased demand west coast lower supplies increase form cost recovery adjustment clause crac added bpas contract mcminnville crac additional monthly surcharge selected power charges recover costs associated buying higher priced power west coast power shortage bpa adjust crac every six months possible predict future rate changes steel manufacturing business also contract natural gas 450 mmbtu current contract expires may 31 2009 obligates business purchase minimum amounts gas fixed rate effective november 1 2004 natural gas rate reduced 439 per mmbtu take pay contract minimum average usage 3575 mmbtu per day gas used sold open market gains losses recorded cost sales company unable negotiate favorable terms electricity natural gas energy sources could adversely affect performance company tax laws company able reduce effective tax rate federal statutory tax rate last three years using combination net operating loss carryforwards nols tax credits state california enterprise zones federal extraterritorial income exclusion eti tax benefits associated making foreign sales response recent determinations world trade organization eti tax benefit constituted illegal export subsidy congress passed american jobs creation act 2004 act became law october 22 2004 key provision act eliminates eti deduction next two years offsetting part deduction qualified production activities income regulations issued explaining new deduction projection effect companys worldwide tax rate would necessarily imprecise current projection tax rate would approximate 36 fiscal 2005 companys worldwide tax rate also apt higher fiscal 2005 two reasons unrelated act net operation losses nols used gaap purposes discovery significant state tax credits unlikely noted items served reduce effective tax rate recent years currency fluctuations demand companys foreign customers partially driven foreign currency fluctuations relative us dollar recent weakness us dollar relative foreign currencies significant factor increases recycled metals prices last year well resulted increasing cost certain finished steel imports strengthening us dollar could adversely affect competitiveness companys products markets company competes company control fluctuations dynamics could affect companys revenues earnings schnitzer steel industries inc form 10k shipping handling metals recycling business steel manufacturing business often rely third parties handle transport products end users timely manner cost transport products particular ocean freight affected circumstances company control fuel prices political events governmental regulations transportation changes market rates due carrier availability estimating future operating results company makes certain assumptions regarding shipping costs given recent tightness ocean freight market company experienced significant increases shipping costs adversely affected operating income since difficult predict future costs shipping companys products actual results could differ materially forecasts insurance cost companys insurance affected loss experience also cycles insurance market company cannot predict future events circumstances could cause rates materially change war terrorist activities natural disasters asset acquisition disposition throughout companys history made number acquisitions divestures management attempts improve value company shareholders last years activity principally limited acquisitions related auto parts business anticipated company continue pursue additional expansion auto parts business well business segments acquisition disposition comes inherent risks make difficult predict ultimate success transaction acquisition disposition may negative andor unexpected impact companys cash flow operating income net income earnings per share financial position intercompany sales auto parts business sells autobodies metals recycling business metals recycling business sells ferrous recycled metal steel manufacturing business prices intended approximate market company consolidates results accordance generally accepted accounting principles company eliminates intercompany sales purchases also eliminates estimated profit remaining inventory profit elimination end reporting period estimating future operating financial performance company makes assumptions regarding forecasted profit elimination computation impact quarterly financial results company small variations price sales volume production volume purchase prices volumes within company third parties result significant differences forecasted profit elimination actual results possible predict identify factors could cause actual results differ companys forwardlooking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7aitem 7 management’s discussion analysis financial condition results operations overview company operates three industry segments company’s metals recycling business collects processes recycles steel metals facilities company’s steel manufacturing business operates minimill near portland oregon melts recycled metal produces finished steel products maintains one mill depot southern california maintains one central california company’s auto parts business purchases used wrecked automobiles allows retail customers opportunity extracting parts purchase selfservice auto parts stores 17 located california three canada two missouri nevada one store ohio virginia texas utah illinois indiana august 31 2005 additionally company noncontrolling partner joint ventures suppliers unprocessed metals prior october 1 2005 joint ventures metals recycling business former joint ventures metals recycling business sold recycled metals processed facilities processing also bought sold third parties’ processed metals trading schnitzer steel industries inc form 10k management’s discussion analysis financial condition results operations generally discusses company’s historical business thus include information related businesses acquired subsequent august 31 2005 critical accounting policies estimates company’s discussion analysis financial condition results operations based upon consolidated financial statements prepared accordance generally accepted accounting principles preparation financial statements requires company make estimates judgments affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities ongoing basis company evaluates estimates company bases estimates historical experience various assumptions believed reasonable circumstances estimates assumptions provide basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions differences may material company believes following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates company relies upon perpetual inventory records utilize estimated recoveries yields based upon historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal assist validating reasonableness estimates company runs periodic tests also performs monthly physical inventories physical inventories may detect significant variations volume variations product density holding period production processes utilized manufacture product physical inventories necessarily detect significant variances seldom detect smaller variations mitigate risk company adjusts physical inventories volume commodity low physical inventory accurately predict remaining volume addition company establishes inventory reserves mitigate risk significant adjustments determined reasonable revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metals finished steel products transfers upon shipment based either cost insurance freight cif free board fob terms retail sales company’s auto parts business revenues recognized customers pay salvaged vehicle parts wholesale products shipped customer location environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonably established amount within range better another minimum amount range recorded financial statements adjustments liabilities made additional information becomes available affects estimated costs remediate number cases possible company may receive schnitzer steel industries inc form 10k reimbursement prior insurance potentially responsible parties identified claim situations recoveries environmental remediation costs parties recorded asset realization claim recovery deemed probable reasonably estimable goodwill assessing recoverability goodwill intangible assets indefinite lives management must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future company may required record impairment charges previously recorded company adopted statement financial accounting standards sfas 142 goodwill intangible assets required assess goodwill impairment minimum annually using twostep process begins estimation fair value reporting unit first step determines whether impairment occurred second step measures amount impairment tests utilize fair value amounts determined estimated future cash flows developed management longlived assets company required assess potential impairments longlived assets accordance sfas 144 accounting impairment longlived assets events changes circumstances indicate carrying amount asset may recoverable impaired asset written estimated fair value based upon recent information available estimated fair market value generally measured discounting estimated future cash flows developed management company’s longlived assets primarily include property plant equipment used operations taxes deferred income taxes reflect differences financial reporting tax bases assets liabilities yearend based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises valuation allowance established necessary reduce deferred tax assets including net operating loss carryforwards amount likely realized periodically company reviews deferred tax assets assess whether valuation allowances necessary results operations fiscal 2005 company’s operations improved significantly resulting another record year revenue net income company’s metals recycling business steel manufacturing business recognized marked improvements last year well company’s joint ventures metals recycling business benefited rising selling prices improve profitability addition auto parts business contributed earnings growth year principally due new store additions rising prices crushed autobodies recycled metal results operations company depend large part upon demand prices recycled metals world markets steel products western united states beginning fiscal 2004 continuing first half fiscal 2005 strong worldwide demand combined tight supply recycled metals created significant price volatility drove metals recycling business’ average selling prices unprecedented highs average selling prices declined second half fiscal 2005 began firm rise late part company’s fourth quarter market prices recycled ferrous metals fluctuate periodically unusually volatile last two years higher prices significant impact results operations whollyowned operations joint ventures metals recycling business lesser extent auto parts business auto parts business purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells crushed autobodies metal recyclers auto parts business acquired four new stores january 2005 represents 15 increase number stores last yearend new stores led increases retail wholesale revenues addition revenues wholesale product lines principally affected commodity metal prices shipping schedules auto parts business benefited improved pricing crushed autobodies metals compared last year selfservice retail operations schnitzer steel industries inc form 10k somewhat seasonal affected weather conditions promotional events since stores open natural elements periods prolonged wet cold extreme heat retail business tends slow due difficult customer working conditions result company’s first third fiscal quarters tend generate greatest retail sales second fourth fiscal quarters slowest terms retail sales first half fiscal 2005 west coast steel manufacturers including company built inventory levels anticipation spring construction period also first half fiscal 2005 many fabricators steel distributors used traditionally slow sales period reduce inventory levels purchases steel products reduced sales volumes normal levels second half 2005 experienced higher sales volume result customers replenishing reduced inventory levels prepare west coast construction season well increasing consumption steel western us average net selling prices company’s steel products remained relatively high increasing 27 prior year fluctuations scrap metals market pricing caused buyers steel anticipate future price decreases adjusted buying patterns addition rise amount imported finished steel products principally chinese wire rod delivered west coast lower selling price company’s comparable products september 30 2005 company completed separation termination metals recycling joint ventures hugo neu corporation see note 14 notes consolidated financial statements details agreement september 30 2005 company acquired greenleaf auto recyclers llc “greenleaf” five store properties leased greenleaf certain greenleaf debt obligations greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops greenleaf currently operates 22 locations throughout united states see note 14 notes consolidated financial statements details transaction october 31 2005 company purchased substantially assets regional recycling llc regional operates ten metals recycling facilities located georgia alabama see note 14 notes consolidated financial statements details transaction following tables set forth information regarding breakdown revenues company’s metals recycling business steel manufacturing business auto parts business breakdown operating income respective segments well joint venture income corporate expense intercompany eliminations information include amounts adjustments related joint venture separation acquisitions greenleaf regional additional financial information relating business segments contained note 12 notes consolidated financial statements schnitzer steel industries inc form 10k 1 includes yearend lifo adjustments increased operating income 28 million fiscal 2005 reduced operating income 61 million 22 million fiscal 2004 2003 respectively 2 corporate expense consists primarily unallocated corporate expense services benefit three business segments unallocated expense operating income segment reflect operating income segment would standalone business 3 ferrous recycled metal sales metals recycling business steel manufacturing business autobody sales auto parts business metals recycling business made negotiated rates per ton intended approximate market consequently intercompany sales produce intercompany profits eliminated finished products sold third parties 4 environmental matters impairment charges related metals recycling business fiscal 2005 2004 auto parts business fiscal 2003 amounts shown separately assist understanding business’ financial results fiscal 2005 compared fiscal 2004 revenues consolidated revenues year ended august 31 2005 increased 1649 million 24 8531 million 6882 million prior year higher revenues resulted higher average net selling prices metals recycling business steel manufacturing business well higher wholesale retail revenues auto parts business revenues fiscal 2005 increased metals recycling business primarily result increased prices worldwide ferrous metals market higher raw material costs increasing steel consumption drove increases selling prices finished steel products sold steel manufacturing business auto parts business revenues benefited increased prices sales autobodies recycled metal addition auto parts business acquired four retail locations second quarter fiscal 2005 added revenue operating income segment prior year metals recycling business generated revenues 5801 million fiscal 2005 intercompany eliminations increase 1238 million 27 prior year ferrous revenues increased 953 million 24 4882 million result higher average selling prices net shipping cost average net selling prices higher shipping costs slight increase volume sold average net sales price ferrous metals increased 25 230 per ton represents 863 million revenue increase prior year cost freight included revenues increased 53 million prior year due primarily higher ocean chartering costs export shipping costs volatile fiscal 2005 increased 9 average prior year total ferrous sales volumes increased slightly approximately 20000 tons 1 represents 37 million revenue increase prior year company’s portland oregon dock renovation see “environmental matters impairment charges” expected service spring 2006 closure dock since march 2005 prevented company moving bulk export shipments facility however company made operational adjustments partially offset impact closure schnitzer steel industries inc form 10k sales steel manufacturing business increased 8000 tons 1 625000 tons due increased steel production result new furnace installed december 2004 partially offset reduced sales furnace replacement shutdown nonferrous revenue increased 137 million 24 707 million due higher average selling prices higher volumes average net nonferrous selling price fiscal 2005 056 per pound increase 008 per pound 17 addition sales volume increased 7 1257 million pounds increases average selling price volume related strong worldwide demand especially asia improved byproduct recoveries nonferrous metals ferrous metals shredding process fiscal 2005 metals recycling business also recognized revenues 212 million increase 148 million revenues fiscal 2004 majority increase relates recording certain sales company’s asian subsidiary typically subsidiary serves broker result revenues recorded normally limited brokerage commissions fiscal 2005 subsidiary made sales pig iron dealer thus sales proceeds included revenues related cost included company’s cost goods sold fiscal 2005 auto parts business generated revenue 1078 million intercompany eliminations year ended august 31 2005 increase 263 million 32 prior year increase result higher wholesale revenues driven higher average sales prices scrapped autobodies due rising ferrous recycled metal prices higher prices volumes wholesale parts addition retail revenues increased result acquisition four retail store locations january 2005 steel manufacturing business generated revenues 3155 million year ended august 31 2005 increase 442 million 16 prior fiscal year average net selling price increased 108 per ton 27 512 per ton represents 635 million increase revenue increase average net selling prices due combination factors including increased worldwide steel consumption higher raw material costs manufacturers passed form higher prices however sales volumes decreased 8 593000 tons reduced revenues 200 million lower sales volume primarily due abnormally high inventory levels held fabricators distributors steel first half fiscal 2005 many company’s customers used normal seasonal decline consumption winter months reduce inventory levels cost goods sold consolidated cost goods sold increased 894 million 17 year ended august 31 2005 compared last fiscal year cost goods sold decreased percentage revenues 78 73 gross profit increased 755 million 2302 million latest fiscal year compared fiscal 2004 driven profit improvements company’s metals recycling auto parts steel manufacturing business segments cost goods sold metals recycling business increased 776 million 21 4387 million percentage revenues cost goods sold decreased compared fiscal 2004 79 76 gross profit increased 462 million 1414 million increase gross profit primarily attributable higher average net selling prices per ton decrease cost goods sold percent revenue positive inventory adjustments cost goods sold reduced 75 million net inventory adjustments compared 33 million inventory adjustments fiscal 2004 fiscal 2005 several piles ferrous metal inventory fully utilized revealing higher inventory volumes company previously estimated resulting net decrease cost goods sold compared last year average ferrous metals cost sales per ton increased 22 due primarily higher purchase costs unprocessed ferrous metals generally change cost unprocessed metal strong correlation changes average selling price thus selling prices rose compared last year cost unprocessed ferrous metal auto parts business’ cost goods sold increased 190 million 41 year ended august 31 2005 compared prior fiscal year higher cost sales primarily due higher car purchase costs resulted higher scrap metal prices addition seven new stores since beginning fiscal 2004 new stores located california tend higher cost goods sold percentage revenues percentage revenues cost goods sold increased 57 61 compared prior year due higher car purchase costs addition seven new stores since beginning last year earn lower margin previously schnitzer steel industries inc form 10k owned stores gross profit increased 73 million 21 related increased wholesale revenue earned higher market rates scrap metals addition seven new stores since beginning last year steel manufacturing business’ cost goods sold increased 265 million 11 2689 million percentage revenues cost goods sold decreased compared fiscal 2004 89 85 average cost goods sold per ton increased 76 per ton 20 compared prior year primarily caused higher raw material costs recycled metal alloys estimated 5 million costs resulting melt shop shut december 2004 install new furnace increase cost sales offset 108 per ton increase average net selling price gross profit improved 177 million 466 million fiscal 2005 operating income joint ventures company’s joint ventures’ revenues results operations follows thousands revenues joint ventures metals recycling business segment fiscal increased 6598 million 43 compared period last year primarily due 18 13 increases average net selling prices per ton processing trading businesses respectively 11 increase total volume ferrous recycled metal sold prior year increase average net selling price per ton due supply demand circumstances described earlier company’s whollyowned businesses company’s share joint venture operating income fiscal 2005 increased 696 million 616 million fiscal 2004 fiscal 2005 processing joint ventures recorded yearend lifo adjustments increased operating income 28 million adjustments reduced operating income 61 million fiscal 2004 additionally joint ventures experienced higher purchase prices unprocessed metals effect partially offset increases selling prices volumes company’s share joint venture operating income fiscal 2005 included charge 26 million share environmental costs second quarter fiscal 2005 connection negotiation separation termination company’s metals recycling joint ventures hugo neu corporation company conducted environmental due diligence investigation certain joint venture businesses agreed acquire identified certain environmental risks estimated remediation costs accrued company’s share operating income trading joint venture decreased 113 million fiscal 2004 91 million fiscal 2005 19 decrease september 30 2005 company completed separation termination metals recycling joint ventures hugo neu corporation see note 14 notes consolidated financial statements details agreement accordingly fiscal 2006 include one month operating income joint ventures metals recycling business schnitzer steel industries inc form 10k selling general administrative expense compared fiscal 2004 selling general administrative expense fiscal year increased 94 million 20 increase result increased salaries 23 million increased legal professional fees 56 million vesting stock options 10 million increased selling administrative costs 27 million auto parts business segment primarily related new stores offset 34 million decrease expense company’s bonus program approximately 11 million increased salaries related auto parts business primarily due expansion management infrastructure allow growth business segment increase legal professional fees result approximately 40 million incurred related investigations past practice making improper payments customers asia discussed note 7 notes consolidated financial statements additional 16 million spent compliance sarbanesoxley including increased independent audit fees use outside experts advise assist company various projects company’s bonus program considers operating income utilization operating assets improvements prior year determine bonus expense company’s anticipated bonus expense less prior year company’s business segments’ results exceed targeted improvements fiscal 2005 extent fiscal 2004 percentage revenues selling general administrative expense decreased 02 percentage points 67 65 due spreading expenses higher revenues environmental matters impairment charges fiscal 2005 company recorded environmental charges 135 million additional estimated costs related ongoing remediation head hylebos waterway adjacent company’s tacoma washington metals processing facility estimate liability initially recognized part 1995 acquisition tacoma facility cost estimate based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company increased environmental accrual 135 million primarily account additional estimated costs complete work second dredging season company filed lawsuit dredge contractor recover significant portion increased costs however generally accepted accounting principles allow company recognize benefits recovery receipt highly probable number years prior company’s acquisition proler international corp proler operated industrial waste landfill texas proler utilized dispose auto shredder residue one operations august 2002 proler entered texas commission environmental quality tceq voluntary cleanup program vcp toward pursuit vcp certificate completion former landfill site fiscal 2005 tceq issued conditional certificate completion requiring company perform ongoing groundwater monitoring annual inspections maintenance reporting result resolution issue company reduced reserve related site 16 million fiscal 2002 company’s portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues dock’s substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 35 million recorded fiscal write renovation costs incurred prior suspension interest expense interest expense fiscal 2005 decreased 59 08 million compared fiscal 2004 decrease result lower average debt balances fiscal 2005 compared fiscal 2004 income tax provision 353 tax rate fiscal 2005 higher 31 fiscal 2004 primarily fiscal 2004 tax rate benefited final release valuation allowance previously offset net operating losses minimum tax credit carryforwards 353 rate approximates 35 federal statutory rate projected extraterritorial income exclusion eti benefits export sales largely offset state income taxes schnitzer steel industries inc form 10k fiscal 2004 compared fiscal 2003 revenues consolidated revenues increased 1914 million 39 6882 million fiscal 2004 compared fiscal 2003 revenues fiscal 2004 increased company businesses primarily result increased prices demand worldwide ferrous metals market including addition new export customers located outside china significant improvements demand coupled lower steel imports led increases selling prices finished steel products sold steel manufacturing business auto parts business benefited increased ferrous metals prices sales autobodies addition auto parts business acquired three retail locations canada added revenue operating income segment metals recycling business generated revenues 4563 million intercompany eliminations increase 1477 million 48 ferrous revenues increased 1378 million 54 3930 million result higher average selling prices net shipping cost average net selling prices higher shipping costs billed customers slight increase volume sold average net selling price ferrous recycled metal increased 62 per ton 51 184 per ton represents 1118 million revenue increase average export shipping costs increased 57 prior year represent 199 million revenue increase addition ferrous sales volumes increased 18 33000 tons represents 41 million increase ferrous revenue export volume 11 prior year moreover 60 company’s total ferrous sales export shipments asia last two fiscal years fiscal 2004 ferrous export sales china decreased 34 total ferrous exports compared 60 fiscal 2003 addition ferrous export sales south korea increased approximately 53 total ferrous export sales fiscal 2004 compared 28 ferrous export sales fiscal 2003 new customers thailand india purchased 10 company’s export sales volume fiscal 2004 sales volume company’s steel manufacturing business increased 15 618000 tons due increased demand finished steel business nonferrous revenues increased 92 million 19 570 million due primarily higher average prices average net nonferrous selling price fiscal 2004 048 per pound increase 006 per pound fiscal 2003 auto parts business generated revenue 815 million intercompany eliminations increase 163 million 25 prior year increase result higher wholesale revenues driven higher average sales prices scrapped autobodies due rising ferrous recycled metal prices march 2004 acquisition three retail store locations canada steel manufacturing business’ generated revenues 2713 million increase 794 million 41 prior year sales prices increased 113 per ton 39 represents 707 million increase sales volumes increased 3 represents 59 million revenue increase selling prices combination increased demand passing along rapidly rising raw materials cost goods sold consolidated cost goods sold increased 1174 million 28 prior year cost goods sold decreased percentage revenue 84 fiscal 2003 78 fiscal 2004 reduction cost goods sold percentage revenue due profit improvements company’s business segments led steel manufacturing business cost goods sold metal recycling business increased 1022 million 39 3611 million cost goods sold percentage revenues decreased 84 fiscal 2003 79 fiscal 2004 gross profit increased 456 million 952 million year increase gross profit attributable higher average net selling prices per ton compared fiscal 2003 average ferrous metals cost sales per ton increased 40 due primarily higher purchase costs unprocessed ferrous metals higher export sales shipping costs generally change cost unprocessed metal strong correlation changes average selling price however generally delay timing changes net selling prices change cost unprocessed metal thus selling prices rose compared last year cost unprocessed metal since purchase costs increase rate selling prices experienced significant increases margins schnitzer steel industries inc form 10k auto parts business’ cost goods sold increased 102 million 28 prior year percentage revenue cost goods sold increased 55 57 increase due higher car purchase costs increases labor costs gross profit increased 61 million 21 prior year due increased revenue cost goods sold steel manufacturing business increased 515 million 27 2425 million cost goods sold percentage revenues fiscal decreased 89 100 fiscal 2003 decrease cost goods sold percentage revenue attributable higher average selling prices higher sales volumes receipt final 18 million electrode price fixing settlement offset 11 million pension charge average cost goods sold per ton increased 69 per ton 24 compared prior fiscal year increase cost sales per ton offset 114 per ton increase average net selling price gross profit improved 279 million fiscal 2004 compared fiscal 2003 impairment nonrecurring charges fiscal 2002 company’s portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues dock’s substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 35 million recorded fourth quarter fiscal 2004 writeoff renovation costs incurred prior suspension connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts business’s store locations environmental proceedings pending sites operating income joint ventures company’s joint ventures’ revenues results operations follows thousands increase revenues recognized joint ventures metals recycling business attributable higher average net ferrous selling prices higher volumes shipments ferrous metal processed joint ventures 36 million tons year ended august 31 2004 compared 33 million tons prior year volume ferrous metal traded joint ventures increased 27 million tons fiscal 2004 compared 17 million tons prior year came primarily increased market share mexico latin america coupled product line expansion scrap metal related commodities average net selling price ferrous recycled metal increased period 187 per ton 118 per ton due worldwide supply demand factors affecting whollyowned metals recycling business schnitzer steel industries inc form 10k fiscal 2004 company’s share income joint ventures metals recycling business increased 617 million due higher average net selling prices increased margins efficient operations benefiting similar market factors pricing described discussion relating company’s whollyowned metals recycling business company’s joint ventures hugo neu corporation earned nearly operating income company’s share operating income global trading joint venture increased 23 million fiscal 2003 113 million fiscal 2004 company’s share joint venture operating income fiscal 2004 also included estimated 34 million joint venture contract new york city processing disposal curbside recycling materials commenced april 2004 operating income fiscal 2004 reduced 61 million representing company’s share joint venture lifo inventory adjustment compared reduction 22 million fiscal 2003 selling general administrative expenses selling general administrative expenses increased 116 million fiscal 2003 higher expenses due higher bonus expense increased spending sarbanesoxley compliance professional fees increased advertising expenses auto parts business company’s bonus plan based upon principles economic value added eva directly tied financial performance company given company’s record financial performance fiscal 2004 bonus expense significantly higher fiscal 2004 fiscal 2003 interest expense fiscal 2004 interest expense increased 03 million compared fiscal 2003 due higher average debt balances fiscal 2004 income tax provision 31 tax rate fiscal 2004 compares tax rate 27 fiscal 2003 increase tax rate primarily attributable reduction estimated extraterritorial income exclusion eti tax benefits export sales increase partially offset reversal 61 million deferred tax valuation allowance associated net operating loss minimum tax credit carryforwards liquidity capital resources fiscal 2005 cash generated operations 735 million compared 732 million fiscal 2004 slight change cash flow operations primarily related improvement net income changes deferred taxes offset decrease due changes company’s accrued liabilities balance related income taxes payroll slight increase noncash joint venture income increase prepaid expenses primarily related company’s refundable prepaid income tax balances end fiscal 2005 reduction accounts payable balances due timing payments decline accrued expenses increase inventories due rising procurement costs volumes capital expenditures totaled 482 million 222 million 218 million fiscal years 2005 2004 2003 respectively capital expenditures fiscal included 45 million partial payments new megashredder company’s oakland california export facility 20 million purchase leased property housing company’s portland oregon metals recycling facility see note 9 notes consolidated financial statements 14 million major repairs dock facility 28 million installation new furnace steel manufacturing business company anticipates fiscal 2006 capital expenditures approximately 800 million capital projects expected include installation megashredder completion dock repairs portland facility installation megashredder general modernization everett facility installation megashredder oakland facility additionally company incur expenditures convert certain greenleaf stores fullservice selfservice modernize stores auto parts business company 235 million accrued environmental liabilities august 31 2005 next 12 months company expects pay approximately 75 million primarily relating previously accrued remediation projects connection one metals recycling facilities located state washington hylebos waterway additionally company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities schnitzer steel industries inc form 10k august 31 2005 company committed unsecured bank credit facility totaling 150 million maturing may 2006 company also additional unsecured credit lines totaling 20 million uncommitted company’s debt agreements certain restrictive covenants august 31 2005 company outstanding borrowings facilities compliance covenants november 8 2005 company amended restated committed bank credit agreement increased size borrowing facility 400 million extended term november 2010 agreement certain restrictive covenants july 2002 company’s metals recycling joint ventures hugo neu corporation entered revolving credit facility jv credit facility group banks working capital general corporate purposes february 2004 facility increased 110 million august 31 2005 debt outstanding jv credit facility jv credit facility terminated upon separation hugo neu schnitzer joint ventures september 30 2005 september 30 2005 company acquired greenleaf auto recyclers llc ‘greenleaf’ five store properties leased greenleaf certain greenleaf debt obligations greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops greenleaf currently operates 22 locations throughout united states total consideration acquisition 44 million subject postclosing adjustments upon closing agreement separation termination company’s joint ventures hugo neu corporation hnc september 30 2005 hnc paid company 523 million cash subject postclosing adjustments company also received approximately 15 million previously undistributed earnings joint ventures net company’s share outstanding borrowings jv credit facility date addition company received 728 million cash distributions joint ventures fiscal 2005 october 31 2005 company acquired substantially assets regional recycling llc ‘regional recycling’ metals recycling business ten facilities located georgia alabama purchase price 655 million cash assumption certain liabilities consideration recently acquired businesses funded company’s existing cash balances credit facility company expects record estimated environmental liabilities result due diligence performed connection acquisitions schnitzer steel industries inc form 10k company certain contractual obligations make future payments following table summarizes future obligations august 31 2005 thousands 1 company 400 million credit facility expiring november 2010 group banks working capital general purposes facility replaced facility 150 million existed august 31 2005 2 steel manufacturing business takeorpay natural gas contract igi resources requires minimum purchase 3500 mmbtu per day tiered pricing whether amount utilized natural gas price august 31 2005 662 mmbtu rate increased 690 november 1 2005 amount utilized may resold igi resources contract expires may 31 2009 3 steel manufacturing business electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 pursuant stock repurchase program approved 1996 company authorized repurchase 30 million shares stock management believes repurchases would enhance shareholder value management evaluates long short range forecasts well anticipated sources uses cash determining course action would best enhance shareholder value result fiscal 2004 2005 company made significant investments capital equipment completed several acquisitions grow business enhance shareholder value fiscal year 2005 company made share repurchases august 31 2005 company repurchased total 13 million shares program company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements company anticipates making contributions approximately 50 million various pension plans fiscal 2006 amount excludes contributions may made businesses acquired subsequent august 31 2005 additionally company anticipates contributions one multiemployer plans steel manufacturing business discussed “post retirement benefits” “factors could affect future results” historically company’s available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs schnitzer steel industries inc form 10k company believes current cash resources internally generated funds existing credit facilities access capital markets provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases debt service requirements post retirement obligations future environmental obligations next twelve months longer term company may seek finance business expansion additional borrowing arrangements additional equity financing factors could affect future results form 10k including item 1 part l item 7 part ii contains forwardlooking statements within meaning section 27a securities act 1933 section 21e securities act 1934 made pursuant safe harbor provisions private securities litigation reform act 1995 one generally identify forwardlooking statements contain “expect”“believe”“anticipate”“estimate” words convey similar meaning one also identify statements relate strictly historical current facts examples factors affecting company could cause actual results differ materially following cyclicality general market considerations purchase selling prices recycled metals highly cyclical nature subject worldwide economic conditions addition cost availability recycled metals subject global supply demand conditions volatile beyond company’s control resulting periodic fluctuations recycled metals prices working capital requirements company attempts maintain grow margins responding changing recycled metals selling prices adjustments metals purchase prices company’s ability limited competitive market factors additionally changing prices could potentially impact volume recycled metal available company subsequent volume processed metal sold company inventory levels timing collections levels relating company’s accounts receivable balances moreover increases recycled metals selling prices adversely affect operating results company’s steel manufacturing business increases steel prices generally lag increases ferrous recycled metals prices steel industry also highly cyclical nature sensitive general economic conditions future economic downturns stagnant economy may adversely affect performance company expects continue experience seasonal fluctuations revenues net income revenues fluctuate significantly quarter due factors seasonal slowdown construction industry important buyer company’s finished steel products weather economic conditions united states abroad also cause fluctuations revenue net income another factor may affect revenues relates seasonal reduction demand foreign customers tend reduce finished steel production corresponding scrap metal requirements summer months offset higher energy costs company makes number large ferrous recycled metals shipments foreign steel producers year customer requirements shipping schedules factors limit company’s control timing shipments variations number foreign shipments quarter result fluctuations quarterly revenues earnings company’s expectations regarding ferrous metal sales prices volumes well earnings based part number assumptions difficult predict example uncertainties relating customer orders metal availability estimated freight rates ship availability cost volume unprocessed inventory production output etc auto parts business experiences modest seasonal fluctuations demand retail stores open elements periods extreme temperatures precipitation customers tend delay purchases wait milder conditions result retail sales generally higher spring fall calendar year lower winter summer months percentage revenue auto parts’ business’ wholesale sales including sales autobodies well cores engines transmissions alternators nonferrous metals continued grow past years due nature wholesale business closely tied prices recycled metals auto schnitzer steel industries inc form 10k parts business’ results increasingly subject volatility global recycled metals market historically additionally auto parts business subject number risks could prevent maintaining exceeding current levels profitability volatile supply demand conditions affecting prices volumes markets products services raw materials environmental issues local worldwide economic conditions increasing competition changes automotive technology ultimate success company’s growth acquisition plans ability build infrastructure support company’s growth plans integration issues fullservice business model backlog historically company generally entered export ferrous sales contracts selling forward 60 90 days knowing price processed material sold costs involved processing metals company generally able take advantage differential timing purchases sales negotiate prices suppliers secure profitable transactions august 31 2005 historical metals recycling business backlog firm orders 373 million compared 787 million august 31 2004 export ferrous metal shipments timing forward contracts may impact company’s revenues quartertoquarter basis well profitability export shipments ferrous metals competition recycled metals industry highly competitive volume purchases sales subject number competitive factors principally price company competes large numerous smaller companies markets purchase recyclable metals company also competes number domestic foreign recycled metals processors brokers processed unprocessed metal well sales domestic foreign customers example 2001 2002 lower cost ferrous recycled metals supplies certain foreign countries adversely affected market selling prices ferrous recycled metals since many countries imposed export restrictions significantly reduced export volumes lowered worldwide supply ferrous recycled metals restrictions believed positive effect company’s selling prices given intricacies global markets operate company cannot predict foreign countries change trading policies effect changes might company’s operating results time united states foreign governments impose regulations restrictions trade markets company operates fiscal 2005 company received certificate china allows company continue shipping recycled metals china certificate part process designed ensure safe industrial agricultural production china unusual various constituencies petition government entities impose new restrictions change current laws imposed restrictions could affect company’s margins well ability ship goods foreign customers alternatively restrictions could also affect global availability ferrous recycled metals thereby affecting company’s volumes margins result difficult predict impact pending future trade restrictions operations company metals recycling business significant domestic competitors include regional steel mills brokers compete recycled metal purpose providing mill feedstock produce finished steel periods market supplies metal short supply buyers may times react raising buying prices levels reasonable relation normal market conditions result company may raise buying prices maintain production levels may result compressed margins auto parts business competes fullservice selfservice auto dismantlers well larger well financed traditional retail auto parts chains retail customers periodically auto parts business increases prices may affect customer flow buying patterns additionally markets company stores pricing power experiences markets one store operates segment expands company may experience new competition others attempting replicate company’s business model ultimate impact dynamics cannot predicted also business competes automobile inventory dismantlers used car dealers auto auctions metal recyclers inventory costs fluctuate significantly depending market conditions prices recycled metal schnitzer steel industries inc form 10k domestic steel industry also highly competitive steel prices highly volatile price significant competitive factor company competes domestically several steel producers western united states sales products recent years company experienced significant foreign competition sometimes subsidized large government agencies assurance competition increase future spring 2002 us government imposed antidumping countervailing duties wire rod products eight foreign countries duties assisted company increasing sales wire rod products expiration termination duties could corresponding adverse effect company experienced increased competition certain products principally chinese wire rod foreign importers fiscal 2005 company believes rise import levels attributable increase selling prices west coast market potentially allow import sales profitable foreign companies steel manufacturing industry consolidating last several years result one west coast manufacturing facility closed remains idle future startup operations currently idle facility could negatively impact company’s recycled metal finished steel markets prices margins potentially cash flow general given unprecedented profitability levels company recycled metals steel companies last two years competitors may attracted company’s markets may adversely affect company’s ability protect profit margins geographical concentration company competes scrap metal business metals recycling business last years significant portion revenues operating profits earned business generated sales asian countries principally china south korea addition company’s sales countries also concentrated relatively customers vary depending buying cycles general market conditions company’s sales expanded broader geographic area recent business acquisitions always significant change buying patterns change political events change regulatory requirements tariffs export restrictions within united states foreign countries severe weather conditions general changes economic conditions could adversely affect financial results company pending investigation discussed part item 3 “legal proceedings” form 10k board directors authorized audit committee engage independent counsel conduct thorough independent investigation company’s past practice making improper payments purchasing managers customers asia connection export sales recycled ferrous metals board directors also authorized directed existence results investigation voluntarily reported us department justice doj securities exchange commission sec company cooperate fully agencies audit committee notified doj sec independent investigation engaged outside counsel assist independent investigation instructed outside counsel fully cooperate doj sec provide agencies information obtained result independent investigation august 23 2005 company received sec formal order investigation related independent investigation audit committee continuing independent investigation company including audit committee continues cooperate fully doj sec investigations audit committee doj sec company’s past practice making improper payments expected affect company’s previously reported financial results including reported 10k however probable sec doj impose penalties company result investigations company unable estimate either timing amount range penalties company made provision penalties financial statements company cannot predict results aforementioned investigations whether company employees subject disgorgement remedial actions following completion investigations possible investigations could lead criminal charges civil enforcement proceedings civil lawsuits union contracts company number union contracts several recently renegotiated including contract covering company’s steel manufacturing business company unable reach agreement terms new contracts unions future negotiations company could subject work slowdowns work stoppages schnitzer steel industries inc form 10k post retirement benefits company number post retirement benefit plans include defined benefit supplemental executive retirement benefit plan serbp multiemployer plans company’s contributions defined benefit serbp plans determined actuarial calculations based number estimates including expected longterm rate return plan assets allocation plan assets equity fixed income investments expected rate compensation increases well factors changes actual rates year cause increases decreases company’s annual contributions defined benefit plans changes expenses recognized current fiscal year management actuary evaluate rates annually adjust necessary company’s union employees participate number multiemployer pension plans company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company learned fiscal 2004 one multiemployer plans steel manufacturing business would meet erisa minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service certain relief minimum funding standard irs tentatively responded indicating willingness consider granting relief provided plan’s contributing employers including company agree increased contributions increased contributions estimated average 6 per year compounded annually plan reaches funded status required irs increases would based company’s current contribution level plan approximately 17 million per year based commitments majority employers participating plan make increased contributions plan trustees proceeded relief request awaiting formal approval irs absent relief irs plan’s contributing employers required make additional contributions pay excise tax may equal exceed full amount deficiency company estimated share required additional contribution 2004 plan year approximately 11 million accrued amount fiscal 2004 future funding deficiency assessments company possible multiemployer plan obtains waiver irs plan reaches minimum funded status level required irs recently acquired businesses future business acquisitions discussed part item 1 “business overview recent transactions” company recently completed transactions separate terminate metals recycling joint venture relationships hugo neu corporation hnc purchase regional recycling llc greenleaf auto recyclers llc separation joint ventures company acquired direct ownership metals recycling businesses new england hawaii metals trading business russia baltic sea region daytoday operations businesses overseen hnc prior separation company depend key employees businesses particularly involved metals trading operations becoming employed company providing continuity businesses well company hiring additional key employees help manage businesses loss failure hire key personnel transition issues could adversely affect company additionally given significance recently acquired businesses relative size company integration businesses challenging failure adequately integrate businesses may result adverse impacts company’s profitability throughout company’s history made number acquisitions management attempts improve value company shareholders anticipated company continue pursue additional expansion metals recycling business auto parts business acquisition comes inherent risks make difficult predict ultimate success transaction acquisition may negative andor unexpected impact company’s cash flow operating income net income earnings per share financial position schnitzer steel industries inc form 10k trading business risks schnitzer global exchange “sge” company’s trading entity acquired september 2005 various risks associated business operations sge operates foreign countries varying degrees political risk advances occasionally loans money suppliers delivery materials later date credit also periodically extended foreign steel mills due nature business profit margins thinner company’s processing business thus unsold inventory may susceptible losses also trading business lower barriers entry making company potentially susceptible competition processing business replacement installation capital equipment company installs new equipment constructs facilities overhauls existing equipment facilities including export terminals time projects take several months complete require use outside contractors experts require special permits easements high degrees risk examples major capital projects include installation megashredder metal recycling yard overhaul export loading facility furnace replacement steel mill many times process preparing site installation company required temporarily halt limit production period time problems encountered installation construction process company may lose ability process materials may impact amount revenue able earn may increase operating expenses additionally may also result building inventory levels market conditions occur result lower selling prices company’s profit margins may adversely impacted either case company’s ability reasonably predict financial results may hampered reliance key pieces equipment company relies key pieces equipment various manufacturing processes key items include shredders ship loading facilities metals recycling locations transformer furnace melt shop rolling mills company’s steel manufacturing business including electrical power natural gas supply company’s locations one key pieces equipment mechanical failure company unable correct failure revenues operating income may adversely impacted practical company taken steps reduce risks maintaining supply spare parts performing regular preventative maintenance program maintaining welltrained maintenance team capable making company’s repairs portland dock renovation company’s portland oregon dock renovation expected service spring 2006 closure dock temporarily impacted company’s ability move bulk export shipments result inventory levels higher normal location factor could impact company’s profitability inventory ultimately sold lower prices would normally case inventory sold within typical 60 90 day period energy supply company utilizes various energy sources operate facilities particular electricity natural gas currently represent approximately 7 cost steel manufactured company’s steel manufacturing business steel manufacturing business purchases electric power longterm contract mcminnville water light mcminnville turn relies bonneville power administration bpa historically contracts favorable prices longterm nature company’s electric power contract expires september 2011 october 1 2001 bpa increased electricity rates due increased demand west coast lower supplies increase form cost recovery adjustment clause crac added bpa’s contract mcminnville crac additional monthly surcharge selected power charges recover costs associated buying higher priced power west coast power shortage bpa adjust crac every six months possible predict future rate changes steel manufacturing business also contract natural gas 662 mmbtu current contract expires may 31 2009 obligates business purchase minimum amounts gas fixed rate effective november 1 2005 natural gas rate increased 690 per mmbtu take pay contract minimum average usage 3500 mmbtu per day gas used sold open market gains losses recorded cost sales schnitzer steel industries inc form 10k company unable negotiate favorable terms electricity natural gas energy sources could adversely affect performance company environmental matters company records accruals estimated environmental remediation claims loss contingency accrued company’s assessment indicates probable liability incurred amount liability reasonably estimated company’s estimates based upon currently available facts presently enacted laws regulations estimated liabilities subject revision future periods based actual costs new information changes laws regulations tax laws company’s tax rate last three years benefited state income tax credits federal extraterritorial income exclusion eti export sales final releases valuation allowance previously offsetting net operating losses minimum tax credit carryforwards accompanied 1996 business acquisition company’s future tax rates benefit eti although american jobs creation act 2004 “the act” gradually eliminate eti benefit compensating company’s loss eti benefit new deduction act qualified production activities income effect new deduction company’s effective tax rate determinable newlyissued final regulations explaining examined company also likely continue benefit state tax credits currency fluctuations demand company’s foreign customers partially driven foreign currency fluctuations relative us dollar strengthening us dollar could adversely affect competitiveness company’s products markets company competes company control fluctuations dynamics could affect company’s revenues earnings company conducts transactions us dollars shipping handling metals recycling business steel manufacturing business often rely third parties handle transport products end users timely manner cost transport products affected circumstances company control fuel prices political events governmental regulations transportation changes market rates due carrier availability estimating future operating results company makes certain assumptions regarding shipping costs steel manufacturing business relies availability rail cars transport finished goods customers raw materials mill use production process market demand rail cars along west coast high reduced number rail cars available steel manufacturing business transport finished goods addition steel manufacturing business utilizes rail cars provide inexpensive form transportation delivering scrap metal mill production although company expects able maintain adequate supply scrap metal larger portion materials anticipated delivered using trucks company anticipates change delivery may lead increased raw material costs company’s providence rhode island facility acquired conjunction separation termination metals recycling joint ventures hugo neu corporation discussed part item 1 “business overview recent transactions” leased port providence longterm lease facility expired several years ago parties verbally agreed terms longterm lease facility finalization lease expected shortterm new lease finalized company fails secure another similar facility company’s ability ship recycled metals costeffectively region would significantly impacted schnitzer steel industries inc form 10k insurance cost company’s insurance affected loss experience also cycles insurance market company cannot predict future events circumstances could cause rates materially change war terrorist activities natural disasters possible predict identify factors could cause actual results differ company’s forwardlooking statements consequently reader consider list complete statement potential risks uncertainties company assume obligation update forwardlooking statement item 7aitem 7 management’s discussion analysis financial condition results operations overview company operates three industry segments metals recycling business purchases collects processes recycles steel metal facilities trades brokers scrap metal auto parts business purchases used salvaged automobiles allows customers opportunity purchase parts self service full service auto parts stores auto parts business also supplier autobodies metals recycling business processes autobodies sellable recycled metal steel manufacturing business purchases recycled metal metals recycling business uses minimill near portland oregon melt recycled metal produce finished steel products steel manufacturing business also maintains mill depots southern central california company provides end life cycle solution variety products vertically integrated business including resale used auto parts processing autobodies metal products manufacturing scrap metal finished steel products key factors affecting industries company operates following market factors trends affect company competitors markets operate competition recycled metal steel industries highly competitive volume purchases sales subject number factors principally price us metal processors steel manufacturers experienced significant foreign competition recent years example 2001 2002 lower cost recycled ferrous metals supplies certain foreign countries adversely affected market selling prices recycled ferrous metals since many countries imposed export restrictions significantly reduced export volumes lowered world supply recycled ferrous metals believed positive effect domestic metal processors’ selling prices addition recent years worldwide demand finished steel products growing faster rate available supply recycled ferrous metal one primary raw materials used manufacture steel result strong demand tight supply recycled metals average selling prices since 2004 remained high historical standards consolidation steel industry significant consolidation global steel industry within past years us steel industry significantly consolidated primarily led mittal united states steel corporation nucor corporation steel dynamics consolidation also taking place central eastern europe well china government china publicly stated expects consolidation chinese steel industry top several producers china account majority national production cross border consolidation also occurred aim achieving greater efficiency economies scale particularly response effective consolidation undertaken raw material suppliers consumers steel products consolidation scrap metal industry metals recycling industry consolidating last several years primarily due increase scrap metal prices growth globalized demand scrap metal high degree fragmentation ability large wellcapitalized processors achieve competitive advantages investing capital improvements improve efficiencies lower processing costs fragmentation auto parts industry auto parts industry characterized diverse fragmented competition comprised large number aftermarket used part suppliers sizes companies range large multinational corporations serve original equipment manufacturers aftermarket worldwide basis small local producers supply parts particular car model addition new competition arisen recently internetbased companies auto parts industry also characterized wide range consumers markets consumers tend demand original replacement parts others price sensitive exhibit minimal brand loyalty cyclicality recycled metal steel industries highly cyclical affected significantly general economic conditions factors worldwide production capacity fluctuations imports exports fluctuations metal purchase prices tariffs processed metal steel prices sensitive number supply demand factors recently steel markets experiencing larger pronounced cyclical fluctuations primarily driven substantial increase chinese production consumption trend combined upward pressure costs key inputs mainly metals energy well transportation costs logistics presents increasing challenge steel producers key drivers maintaining competitive position positive financial performance challenging environment product differentiation customer service cost reductions improved efficiencies economies scale pricing sales volume increases domestic steel manufacturing industry continues experience strong customer demand steel products especially finished steel products strong demand high domestic prices resulted increase competition imported steel metals recycling industry strong demand tight supplies expected result market conditions continue higher historical averages remain subject normal cyclical volatility raw material energy supply costs key raw materials energy particular natural gas continued increase steeply due imbalances supply demand certain regions well higher freight costs although steel prices typically follow trends raw material prices steel price surcharges often implemented contracted steel prices recover increases input costs percentage changes may proportional could also time lag purchase prices recycled metals obtained metals processors generally followed trends selling prices steelmaking customers regional market characteristics impacting cost acquire material regional purchase prices influenced available supply material driven number factors including population base existence industries utilize metals manufacturing process costeffective transportation infrastructure provides ability transport recycled metals processing facilities purchase prices also driven competition recycled metal heavily influenced number metals recyclers steel manufacturers located particular region addition purchase prices remained high historical standards number competitors recycled metal increased although ability larger metals recyclers invest capital improvements improve efficiencies lower cost processing remains competitive advantage shipping handling metal recycling steel manufacturing industries highly sensitive transportation costs cost transport products impacted many factors including fuel prices political events governmental regulations transportation changes market rates due carrier availability particular steel manufacturers rely availability rail cars transport finished goods customers raw materials mill use production process recent market demand rail cars along west coast united states high reduced number available rail cars metal recycling companies also rely availability cargo ships transport ferrous nonferrous bulk exports overseas markets demand ocean going vessels also strong reduced number ships available transport product markets changes delivery methods increased use trucks scrap metal delivery may lead increased raw material costs currency fluctuations demand foreign customers partially driven foreign currency fluctuations relative us dollar strengthening us dollar could adversely affect competitiveness products metals recycling auto parts steel manufacturing industries companies industries control fluctuations dynamics could affect revenues operating income significant factors affecting results operations financial position company’s results operations financial position impacted following significant factors relating specifically company geographical concentration historically significant portion profits earned metals recycling business generated sales asian countries principally china south korea addition company’s sales countries also concentrated relatively customers whose purchases vary depending buying cycles general market conditions however 2006 company achieved objective greater diversity export sales increased exports taiwan turkey spain malaysia india egypt mexico areas europe asia always significant change buying patterns political events changes regulatory requirements tariffs export restrictions united states foreign countries severe weather conditions general changes economic conditions could adversely affect financial results company union contracts company number union contracts several recently renegotiated company unable reach agreement terms new contracts unions future negotiations company could subject work slowdowns work stoppages post retirement benefits company number post retirement benefit plans include defined benefit defined contribution supplemental executive retirement benefit plan “serbp” multiemployer plans company’s contributions defined benefit serbp plans determined actuarial calculations based number estimates including expected longterm rate return plan assets allocation plan assets equity fixed income investments expected rate compensation increases well factors changes actual rates year cause increases decreases company’s annual contributions defined benefit plans changes expenses recognized current fiscal year 2006 company froze benefit accruals defined benefit plan elected provide future benefits enhanced defined contribution plan recently acquired businesses future business 2006 company completed transactions separate terminate certain metals recycling joint venture relationships well acquisitions metals recycling auto parts businesses given significance recently acquired businesses relative size company rapid integration businesses critical element company’s success company believes made substantial progress achieving integration 2006 fiscal year foreign business risks company’s metals recycling business faces risks associated business operations including business activities foreign countries varying degrees political risk advances loans money suppliers delivery materials later date credit also periodically extended foreign steel mills due nature global trading business operating margins thinner parts company’s metals recycling business performs valueadded processing thus unsold inventory may susceptible losses addition time united states foreign governments impose regulations restrictions trade markets company operates could affect global availability recycled ferrous metals replacement installation capital equipment company installs new equipment constructs facilities overhauls existing equipment facilities including export terminals time projects take several months complete require use outside contractors experts require special permits easements involve high degree risk many times process preparing site installation company required temporarily halt limit production period time problems encountered installation construction process company may lose ability process materials may impact amount revenue able earn may increase operating expenses may result increased inventory levels reliance key pieces equipment company relies key pieces equipment various manufacturing processes include shredders ship loading facilities metals recycling locations transformer furnace melt shop rolling mills company’s steel manufacturing business electrical power natural gas supply company’s locations one key pieces equipment mechanical failure company unable correct failure revenues operating income could adversely impacted overview company’s strategy acquisitions company intends continue focus growth valuecreating acquisitions company pursue acquisitions believes create shareholder value earn aftertax income excess cost capital company’s continued strong balance sheet cash flows operations available borrowing capacity company believes attractive position complete reasonably priced acquisitions fitting company’s longterm strategic plans processing manufacturing technology improvements company made significant investments modern equipment ensure technology cost efficient order produce high quality products maximize economies scale company continue invest equipment improve efficiency capabilities businesses fiscal 2006 2005 2004 company spent 87 48 22 million respectively capital improvements expenditures incurred order modernize company’s metal processing facilities self service full service auto body stores perform selected efficiency improvements steel manufacturing facility company believes projects provide aftertax returns excess cost capital create shareholder value information technology fiscal 2006 company continued technology investment plan upgrade software hardware order address needs brought company’s recent expected growth plan also provided development common software hardware platforms company’s businesses creation centralized data center addition chief information officer expansion company’s technology team detailed discussion company’s strategy see part item 1 “business strategic focus” critical accounting estimates company identified critical accounting estimates important company’s portrayal financial condition operating results estimates require difficult subjective judgments including whether estimates required made matters inherently uncertain different estimates reasonably could used changes estimate reasonably likely occur could materially impact financial statements significant estimates underlying accompanying consolidated financial statements include inventory valuation goodwill intangible asset valuation environmental costs contingencies assessment valuation deferred income taxes income tax contingencies pension plan assumptions stockbased compensation assumptions revenue recognition inventories company’s inventories primarily consist ferrous nonferrous unprocessed metal used salvaged vehicles inventories stated lower cost market cost ferrous nonferrous metal determined principally using average cost method company’s used salvage vehicle inventory cost established based upon price company pays vehicle includes buying dismantling applicable storage towing fees accounting process utilized company record unprocessed metal used salvage vehicle inventory quantities relies significant estimates respect unprocessed metal inventory company relies perpetual inventory records utilize estimated recoveries yields based historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal assist validating reasonableness estimates company runs periodic tests also performs monthly physical inventories however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect significant variances seldom detect smaller variations mitigate risk company adjusts physical inventories volume commodity low physical inventory accurately predict remaining volume addition company establishes inventory reserves mitigate risk significant adjustments determined reasonable goodwill intangible assets assessing recoverability goodwill intangible assets indefinite lives management must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future company may required record impairment charges previously recorded accordance statement financial accounting standards 142 goodwill intangible assets “sfas 142” company required assess goodwill impairment least annually using twostep process begins estimation fair value reporting unit first step determines whether impairment occurred second step measures amount impairment tests utilize fair value amounts determined estimated future cash flows developed management environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements adjustments liabilities made additional information becomes available affects estimated costs remediate number cases possible company may receive reimbursement insurance potentially responsible parties identified claim situations recoveries environmental remediation costs parties recorded asset realization claim recovery deemed probable reasonably estimable deferred taxes deferred income taxes reflect fiscal yearend differences financial reporting tax bases assets liabilities based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises valuation allowance established necessary reduce deferred tax assets including net operating loss carryforwards extent assets likely realized periodically company reviews deferred tax assets assess whether valuation allowance necessary pension plans company sponsors defined pension plan certain nonunion employees pension plans significant cost business related obligations expected settled far future accounting defined benefit pension plans results current recognition liabilities net periodic pension cost employees’ expected service periods based terms plans impact company’s investment funding decisions measurement pension obligations recognition liabilities costs require significant assumptions two critical assumptions discount rate expected longterm rate return assets plan may impact company’s financial condition results operations actual results often differ assumptions relating longterm rates return equities fixed income securities economic factors detail regarding company’s pension plans refer liquidity capital resources contained item 7 note 12 “employee benefits” notes consolidated financial statements item 8 financial statements supplementary data stockbased compensation effective september 1 2005 company adopted fair value recognition provisions sfas 123 revised 2004 “sharedbased payment” “sfas 123r” requires recognition fair value stockbased compensation net income company elected utilize modified prospective transition method adopting sfas 123r therefore restated results prior periods transition method compensation expense based grant date fair value estimated accordance original provisions sfas 123 “sharebased payment” stockbased compensation awards granted prior yet vested september 1 2005 recognized net income periods date adoption stockbased compensation expense sharebased payments awards granted september 1 2005 based grant date fair value estimated accordance provisions sfas 123r company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally fiveyear vesting term stock options threeyear performance period performancebased shares company estimated forfeiture rate based historical experience preceding five fiscal years determining appropriate fair value model calculating fair value sharebased payment awards require input subjective assumptions including expected life sharebased payment awards stock price volatility based historical monthend closing stock prices assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management judgment result factors change company uses different assumptions company’s stockbased compensation expense could materially different future addition company required estimate expected forfeiture rate recognize expense shares expected fully vest company’s actual forfeiture rate materially different estimate stockbased compensation expense could significantly different company recorded current period see note 13 “stock incentive plan” notes consolidated financial statements item 8 financial statements supplementary data revenue recognition company recognizes revenue provisions made returns historically sales returns adjustments impacted ultimate collection revenues company’s revenue fiscal 2006 double fiscal 2005 revenue mostly due acquisitions however based returns adjustments fiscal 2006 historical information company changed practice making provisions returns foreign currencies manage exposure exchange risk associated accounts receivable denominated foreign currency company enters foreign currency forward contracts stabilize us dollar amount transaction maturity contracts designated hedging instruments accounting purposes accordingly realized unrealized gains losses settled unsettled forward contracts recognized income consolidated statements operations cash settlement nonhedge derivative instruments classified investing activity consolidated statements cash flows company held foreign currency forward contracts denominated euros total notional amounts 21 million august 31 2006 fair value contracts estimated based quoted market prices contract rate comparable market rate yearend liability august 31 2006 immaterial company hold foreign currency forward contracts fiscal 2005 2004 list intended comprehensive list company’s accounting estimates see notes consolidated financial statements item 8 financial statements supplementary data details regarding accounting policies disclosures required generally accepted accounting principles business overview fiscal 2006 transition year company metals recycling business completed acquisition made substantial progress integrating assets acquired regional recycling significantly enlarged company’s nonferrous volumes established presence company southeastern united states separation hugo neu joint ventures among things provided company deep water export facilities east coast hawaii acquired minority interest rhode island operation auto parts business completed acquisition greenleaf added full service capability platform also made substantial progress integration steel manufacturing business recorded best year history production revenues operating income overall company doubled revenues compared fiscal 2005 also began number large capital improvement projects believes improve productivity enhance company’s future competitiveness company’s results operations depend large part demand prices recycled metal world markets steel products western united states company’s deep water port facilities west east coasts united states hawaii allow company take advantage increasing demand recycled metal steel manufacturers located europe asia mexico egypt company’s processing facilities southeastern us also provide access growing steel manufacturing industry region market prices recycled ferrous nonferrous metal fluctuate periodically generally higher unusually volatile past three years higher prices significant impact results operations metals recycling business lesser extent auto parts business acquisitions company completed following significant transactions 2006 • september 30 2005 company completed separation termination metals recycling joint ventures hnc • september 30 2005 company acquired greenleaf five store properties leased greenleaf certain greenleaf debt obligations greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops • october 31 2005 company purchased substantially assets regional company operates nine metals recycling facilities located georgia alabama focused nonferrous metals assets acquired regional • march 21 2006 company purchased minority interest mrl subsidiary company took control mrl operations upon separation termination joint venture hnc mrl operates metals recycling facility rhode island see note 7 “business combinations” notes consolidated financial statements item 8 financial statements supplementary data details transactions results operations following tables set forth information regarding breakdown revenues company’s metals recycling business auto parts business steel manufacturing business breakdown operating income respective segments joint venture income corporate expense intercompany eliminations additional financial information relating business segments contained note 17 “segment information” notes consolidated financial statements item 8 financial statements supplementary data 1 company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning 2006 fiscal year instead date acquisition increases revenues operating income resulted election offset statement operations preacquisition interests net tax see note 7 “business combinations” notes consolidated financial statements item 8 financial statements supplementary data 2 result hnc joint venture separation termination agreement joint venture segment eliminated results two entities acquired transaction company previous interest remaining joint ventures consolidated metals recycling business beginning fiscal 2006 3 corporate expense consists primarily unallocated corporate expense services benefit three business segments unallocated expense operating income segment reflect operating income segment would standalone business 4 recycled ferrous metal sales metals recycling business steel manufacturing business autobody sales auto parts business metals recycling business made negotiated rates per ton intended approximate market consequently intercompany revenues produce intercompany operating income recognized finished products sold third parties fiscal 2006 compared fiscal 2005 revenues consolidated revenues fiscal 2006 increased 1855 million 1002 million 117 change prior year increase revenues primarily result current year acquisitions metals recycling business auto parts business steel manufacturing business also contributed additional revenues result increased production existing facility metals recycling business generated revenues 1407 million fiscal 2006 intercompany eliminations increase 827 million 142 prior year ferrous revenues 1132 million increase 644 million 132 increase result acquisitionrelated volume increases offset partially decrease average net sales price ferrous metal ferrous volumes increased 4561 million tons sold 2696 million ton 145 increase prior year primarily result sales acquired entities average net sales price processed ferrous metal decreased 215 per ton fiscal 2006 230 per ton fiscal 2005 change 6 entirely market driven beginning fourth quarter 2005 worldwide markets ferrous scrap metal softened slightly due lower demand asian customers average prices declining second quarter 2006 however beginning third quarter demand began increase fourth quarter average prices higher realized early part 2005 global trade operation acquired hnc contributed 330 million revenues fiscal 2006 based ferrous sales approximately 13 million tons nonferrous revenues 267 million increase 196 million 277 prior year increase result increase sales acquired entities increase sale price nonferrous revenues nonferrous volumes increased approximately 302 million pounds sold 176 million pound 140 increase prior year primarily result sales acquired entities volumes regional operations acquired hnc separation termination contributed 164 million increase nonferrous revenues year average net sales price nonferrous metal increased 087 per pound fiscal 2006 056 per pound fiscal 2005 change 57 similar change ferrous prices entirely market driven 2006 demand recycled nonferrous metals copper tin aluminum used manufacturing increased significantly leading significantly higher prices addition company’s acquisition regional 2006 purchases higher grade nonferrous material increased contributed increase overall average prices nonferrous sales amount billed customers freight included revenues increased 139 million increase 80 million 135 prior year amount 48 million result current year acquisitions 32 million due increase number ferrous shipments fiscal 2006 fiscal 2005 metals recycling business sold 668000 tons ferrous metal steel manufacturing business fiscal 2006 43000 ton 7 increase due increased demand steel products fiscal 2006 metals recycling business also recognized revenues 8 million decrease 13 million 60 compared fiscal 2005 decrease relates primarily 15 million dealer brokerage commissions earned company’s asian subsidiary sales pig iron 2005 occur 2006 brokerage commissions recorded revenues related cost included company’s cost goods sold fiscal 2005 remaining difference primarily result additional docking fees earned company 2006 auto parts business generated revenues 218 million intercompany eliminations fiscal 2006 increase 110 million 102 prior year increase primarily result acquisition full service auto parts stores current year accounted 90 million increase coupled full year operations four self service stores acquired january 2005 steel manufacturing business generated revenues 387 million fiscal 2006 increase 71 million 23 prior fiscal year increase result 19 increase number tons sold current year coupled increase average net selling price year average net selling price increased 528 per ton represents 16 per ton 3 increase prior year due combination factors including increased worldwide steel consumption higher raw material costs manufacturers passed form higher prices sales volumes increased 703000 tons increase prior year 110000 tons 19 increased sales volume primarily due increased demand customers capital improvements company enabled steel mill increase output meet demand cost goods sold consolidated cost goods sold increased 1527 million 893 million 141 change compared fiscal 2005 cost goods sold increased percentage revenues 74 82 cost goods sold metals recycling business increased 1235 million represents 784 million 174 change fiscal 2005 majority increase attributable current year acquisitions percentage revenues cost goods sold 88 fiscal 2006 compared 78 fiscal 2005 change primarily attributable acquisitions regional businesses acquired hnc separation termination experiencing narrower operating margins company’s historical west coast operations lower operating margins businesses due part competitive markets materials northeast southeast regions us higher operating expenses company’s everett massachusetts facility due outdated inefficient equipment lower margins generally company’s ferrous metal trading activities company made substantial progress major capital improvement program upgrade infrastructure equipment newlyacquired everett massachusetts johnston rhode island facilities throughout company order become efficient improve productivity compared fiscal 2005 average ferrous metal cost goods sold per ton increased 3 due primarily due higher purchase costs unprocessed ferrous metal time average net sales price per ton declined 6 auto parts business’ cost goods sold increased 142 million fiscal 2006 represents 78 million 121 change compared fiscal 2005 63 million total increase attributable current year acquisition full service auto parts stores percentage revenues cost goods sold 65 compared 59 fiscal 2005 lower margins primarily attributable company’s entry full service used parts market higher costs associated purchase removal parts sold full service distribution model increased demand competition unprocessed metals increased costs purchase cars self service distribution model steel manufacturing business’ cost goods sold increased 307 million change 38 million 14 fiscal 2005 percentage revenues cost goods sold decreased 79 compared 85 fiscal 2005 average cost goods sold per ton decreased 415 per ton change 8 per ton 2 compared prior year reduction reflects combination increased production 698000 tons steel production fiscal 2006 compared 618000 tons fiscal 2005 reductions labor costs raw material melt shop conversion costs reflecting efficiencies gained installation new electric arc furnace midfiscal 2005 production incentives negotiated company’s production employees beginning fiscal 2006 cost electricity remained 5 cost goods sold natural gas increasing 2 3 cost goods sold selling general administrative expense fiscal 2006 selling general administrative expense increased 157 million 99 million 170 change fiscal 2005 increase 55 million selling general administrative expenses attributable operations acquired businesses also 15 million increase prior year expenses related investigations past practice making improper payments purchasing managers company’s customers asia discussed note 11 “commitments contingencies” notes consolidated financial statements item 8 financial statements supplementary data additionally increases 7 million due contract labor legal accounting fees mostly due erp installation 7 million salaries bonuses management 3 million 123r expense recognized percentage revenues selling general administrative expense increased 8 compared 7 prior year due previously mentioned items environmental matters fiscal 2006 company recorded estimated environmental liabilities 13 million 8 million 4 million related greenleaf regional hnc acquisitions respectively based due diligence performed connection acquisitions fiscal 2005 company recorded environmental charges 14 million additional estimated costs related ongoing remediation head hylebos waterway adjacent company’s tacoma washington metal processing facility estimate liability initially recognized part 1995 acquisition tacoma facility cost estimate based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company increased environmental accrual 14 million primarily account additional estimated costs complete work second dredging season company filed lawsuit dredge contractor recover significant portion increased costs 2006 company made 7 million payments resulting reserve 4 million august 31 2006 number years prior company’s acquisition proler international corp “proler” proler operated industrial waste landfill texas proler utilized dispose auto shredder residue one operations august 2002 proler entered tceq vcp toward pursuit vcp certificate completion former landfill site fiscal 2005 tceq issued conditional certificate completion requiring company perform ongoing groundwater monitoring annual inspections maintenance reporting result resolution issue company reduced reserve 2005 related site 2 million portland harbor december 2000 epa designated portland harbor 55 mile stretch willamette river portland oregon superfund site company’s metals recycling deep water terminal facility portland oregon located adjacent portland harbor epa identified least 69 prps including company crawford street corporation “csc” subsidiary company operate formerly owned operated sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined unclear whether extent company csc liable environmental costs damages associated superfund site also unclear whether extent natural resource damage claims third party contribution damages claims asserted company reserve established company csc participated certain preliminary portland harbor study efforts parties consent order entered epa prps “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” however company csc could become liable share costs study later stage proceedings separately oregon department environmental quality “deq” requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company csc deq investigations company csc sites focused controlling current releases contaminants willamette river company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site formerly owned csc deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices “bmps” provide effective source control avoid release contaminants sites proposed deq implementation bmps resolution investigation additionally epa recently released made available public lwg’s “round two” data involving hundreds sediment samples taken throughout six mile harbor site company process reviewing data cost investigations remediation associated properties cost employment source control bmps reasonably estimable completion data review company recorded 1 million reserve estimated share costs investigation incurred date lwg liability recorded either future investigation costs remediation portland harbor fiscal 2006 company csc together approximately 27 prps participating lwg’s rifs received letters lwg one members respect participating lwg rifs potential claims past costs cost allocation reimbursement company csc declines participate continued implementation rifs possible could subject epa deq enforcement orders litigation lwg members company cooperating discussions agencies lwg continuing evaluate alleged liabilities context available technical factual legal information interest expense interest expense fiscal 2006 increased 3 million change 2 million 313 compared fiscal 2005 increase result higher average debt balances fiscal 2006 compared fiscal 2005 primarily complete integrate acquisitions well support increased level working capital requirements operations acquisitions company’s capital improvement program income tax provision 37 tax rate fiscal 2006 higher 35 fiscal 2005 primarily year’s effective tax rate increased penalties profits disgorgement expensed connection making improper payments purchasing managers 14 million nondeductible see item 3 legal proceedings secondary reason current year’s increased effective tax rate current year 57 million gain disposition joint venture interests see note 7 business combinations likely benefit either extraterritorial income exclusion export sales section 199 domestic manufacturing deduction reduces company’s effective tax rate operating income acquisition greenleaf stock purchase included federal net operating losses “nols” 15 million expire years 2022 2024 used company’s use nols restricted federal income tax law 1 million year fiscal 2005 compared fiscal 2004 revenues consolidated revenues year ended august 31 2005 increased 165 million 24 853 million 688 million prior year higher revenues resulted higher average net selling prices metals recycling business steel manufacturing business well higher wholesale retail revenues auto parts business revenues fiscal 2005 increased metals recycling business primarily result increased prices worldwide ferrous metal market higher raw material costs increasing steel consumption drove increases selling prices finished steel products sold steel manufacturing business auto parts business revenues benefited increased prices sales autobodies recycled metal addition auto parts business acquired four retail locations second quarter fiscal 2005 added revenue operating income segment prior year metals recycling business generated revenues 580 million fiscal 2005 intercompany eliminations increase 124 million 27 prior year ferrous revenues increased 95 million 24 488 million result higher average selling prices net shipping costs average net selling prices higher shipping costs slight increase volume sold average net sales price ferrous metal increased 25 230 per ton prior year amount billed customers freight included revenues increased 5 million prior year due primarily higher ocean chartering costs export shipping costs volatile fiscal 2005 increased 9 average prior year total ferrous sales volumes increased slightly approximately 20000 tons 1 prior year sales steel manufacturing business increased 8000 tons 1 625000 tons due increased steel production result new furnace installed december 2004 partially offset reduced sales furnace replacement shutdown nonferrous revenue increased 14 million 24 71 million due higher average selling prices higher volumes average net nonferrous selling price fiscal 2005 056 per pound increase 008 per pound 17 addition nonferrous sales volume increased 7 126 million pounds increases average selling price volume related strong worldwide demand especially asia improved byproduct recoveries nonferrous metal ferrous metal shredding process fiscal 2005 metals recycling business also recognized revenues 21 million increase 15 million 250 fiscal 2004 majority increase relates recording certain sales company’s asian subsidiary typically subsidiary serves broker result revenues recorded normally limited brokerage commissions fiscal 2005 subsidiary made sales pig iron dealer thus sales proceeds included revenues related cost included company’s cost goods sold fiscal 2005 auto parts business generated revenue 108 million intercompany eliminations year ended august 31 2005 increase 26 million 32 prior year increase result higher wholesale revenues driven higher average sales prices scrapped autobodies due rising recycled ferrous metal prices higher prices volumes wholesale parts addition retail revenues increased result acquisition four retail store locations january 2005 steel manufacturing business generated revenues 315 million year ended august 31 2005 increase 44 million 16 prior fiscal year average net selling price increased 108 per ton 27 512 per ton increase average net selling prices due combination factors including increased worldwide steel consumption higher raw material costs manufacturers passed form higher prices however sales volumes decreased 8 593000 tons lower sales volume primarily due abnormally high inventory levels held fabricators distributors steel first half fiscal 2005 many company’s customers used normal seasonal decline consumption winter months reduce inventory levels cost goods sold consolidated cost goods sold increased 634 million 98 million change 18 compared fiscal 2004 cost goods sold decreased percentage revenues 77 73 cost goods sold metals recycling business increased 78 million 21 451 million percentage revenues cost goods sold decreased compared fiscal 2004 79 76 cost goods sold reduced 8 million net inventory adjustments compared 3 million inventory adjustments fiscal 2004 fiscal 2005 several piles ferrous metal inventory fully utilized revealing higher inventory volumes company’s previous estimates thereby resulting credit cost goods sold compared last year average ferrous metal cost goods sold per ton increased 22 due primarily higher purchase costs unprocessed ferrous metal generally change cost unprocessed metal strong correlation changes average selling price thus selling prices rose compared last year cost unprocessed ferrous metal auto parts business’ cost goods sold increased 19 million 42 year ended august 31 2005 compared prior fiscal year higher cost goods sold primarily due higher car purchase costs resulted higher scrap metal prices addition seven new stores since beginning fiscal 2004 new stores located california tend higher cost goods sold percentage revenues percentage revenues cost goods sold increased 56 59 compared prior year due higher car purchase costs addition seven new stores since beginning last year earn lower margin previously owned stores steel manufacturing business’ cost goods sold increased 27 million 11 269 million percentage revenues cost goods sold decreased compared fiscal 2004 89 85 average cost goods sold per ton increased 76 per ton 20 compared prior year primarily caused higher raw material costs recycled metal alloys estimated 5 million costs resulting melt shop shut december 2004 install new furnace increase cost goods sold offset 108 per ton increase average net selling price operating income joint ventures company’s joint ventures’ revenues results operations follows revenues joint ventures metals recycling business segment fiscal 2005 increased 660 million 43 compared period last year primarily due 18 13 increases average net selling prices per ton processing trading businesses respectively 11 increase total volume recycled ferrous metal sold prior year increase average net selling price per ton due supply demand circumstances described earlier company’s whollyowned businesses company’s share joint venture operating income fiscal 2005 increased 69 million 62 million fiscal 2004 fiscal 2005 processing joint ventures recorded yearend lifo adjustments increased operating income 3 million adjustments reduced operating income 6 million fiscal 2004 additionally joint ventures experienced higher purchase prices unprocessed metal effect partially offset increases selling prices volumes company’s share joint venture operating income fiscal 2005 included charge 3 million share environmental costs second quarter fiscal 2005 connection negotiation separation termination company’s metals recycling joint ventures hugo neu corporation company conducted environmental due diligence investigation certain joint venture businesses agreed acquire identified certain environmental risks estimated remediation costs accrued company’s share operating income trading joint venture decreased 11 million fiscal 2004 9 million fiscal 2005 19 decrease september 30 2005 company completed separation termination metals recycling joint ventures hnc see note 7 “business combinations” notes consolidated financial statements item 8 financial statements supplementary data details agreement accordingly fiscal 2006 included one month operating income joint ventures metals recycling business selling general administrative expense compared fiscal 2004 selling general administrative expense fiscal year increased 9 million 19 increase result increased salaries 2 million increased legal professional fees 6 million vesting stock options 1 million increased selling administrative costs 3 million auto parts business segment primarily related new stores offset 3 million decrease expense company’s bonus program approximately 1 million increased salaries related auto parts business primarily due expansion management infrastructure allow growth business segment increase legal professional fees result approximately 4 million incurred related investigations past practice making improper payments purchasing managers company’s customers asia discussed note 11 “commitments contingencies” notes consolidated financial statements item 8 financial statements supplementary data additional 2 million spent compliance sarbanesoxley including increased independent audit fees use outside experts advise assist company various projects company’s bonus program considers operating income utilization operating assets improvements prior year determine bonus expense company’s anticipated bonus expense less prior year company’s business segments’ results exceed targeted improvements fiscal 2005 extent fiscal 2004 percentage revenues selling general administrative expense decreased less 1 due spreading expenses higher revenues environmental matters impairment charges fiscal 2005 company recorded environmental charges 14 million additional estimated costs related ongoing remediation head hylebos waterway adjacent company’s tacoma washington metal processing facility estimate liability initially recognized part 1995 acquisition tacoma facility cost estimate based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company increased environmental accrual 14 million primarily account additional estimated costs complete work second dredging season company filed lawsuit dredge contractor recover significant portion increased costs number years prior company’s acquisition proler operated industrial waste landfill texas proler utilized dispose auto shredder residue one operations august 2002 proler entered tceq vcp toward pursuit vcp certificate completion former landfill site fiscal 2005 tceq issued conditional certificate completion requiring company perform ongoing groundwater monitoring annual inspections maintenance reporting result resolution issue company reduced reserve related site 2 million fiscal 2002 company’s portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues dock’s substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 4 million recorded fiscal 2004 write renovation costs incurred prior suspension interest expense interest expense fiscal 2005 decreased 59 1 million compared fiscal 2004 decrease result lower average debt balances fiscal 2005 compared fiscal 2004 income tax provision 35 tax rate fiscal 2005 higher 31 fiscal 2004 primarily fiscal 2004 tax rate benefited final release valuation allowance previously offset net operating losses minimum tax credit carryforwards 35 rate fiscal 2005 approximates 35 federal statutory rate projected extraterritorial income exclusion benefits export sales largely offset state income taxes liquidity capital resources cash flows company relies cash provided operating activities primary source liquidity supplemented current cash resources existing credit facilities access capital markets fiscal 2006 net cash provided operating activities 105 million compared 146 million fiscal 2005 74 million fiscal 2004 41 million decline cash operating activities 2006 compared 2005 result lower net income 4 million decrease impact noncash items 75 million offset smaller increase working capital fiscal 2006 38 million decrease impact noncash items primarily related noncash gain disposition joint venture assets 2006 57 million tax benefits employee stock options 18 million difference environmental accruals 12 million deferred taxes 11 million offset greater depreciation 11 million higher distribution joint venture earnings 12 million lower increase working capital 2006 primarily result difference accrued liabilities 13 million prepaid expense current assets 19 million higher accounts payable 11 million offset greater increase inventories 35 million decrease accounts receivable 7 million lower environmental liability 5 million 72 million increase cash provided operating activities fiscal 2005 compared 2004 result higher net income 36 million increase impact noncash items 100 million offset differences change working capital 64 million increase impact noncash items primarily related distribution earnings joint ventures 64 million tax benefits employee stock options 14 million deferred taxes 13 million greater increase cash used working capital primarily result changes accrued liabilities 21 million reduction environmental liabilities 12 million increased prepaid expenses current assets 9 million fiscal 2006 net cash used investing activities 198 million compared 72 million fiscal 2005 47 million fiscal 2004 125 million increase cash outflows investing activities 2006 compared 2005 primarily related higher capital expenditures 38 million acquisitions 55 million 25 million increase cash outflows investing activities 2005 compared 2004 primarily related higher capital expenditures 26 million fiscal 2006 net cash provided financing activities 97 million compared net cash used financing activities 65 million fiscal 2005 17 million fiscal 2004 161 million increase cash financing activities 2006 compared 2005 result company’s increased borrowings 2006 whereas company repaying debt balances 2005 47 million decrease cash investing activities fiscal 2005 compared fiscal 2004 primarily reflected increase company’s repayment debt capital expenditures capital expenditures totaled 87 million 48 million 22 million fiscal years 2006 2005 2004 respectively increases capital expenditures primarily reflect company’s significant investments modern equipment improve efficiency capabilities businesses enhance company’s competitiveness capital expenditures fiscal 2006 included 18 million partial payments installation new megashredders company’s oakland california everett massachusetts portland oregon export facilities 7 million major repairs dock portland facility 30 million upgrades equipment infrastructure company’s metals recycling facilities company also expended 7 million conversion five sites acquired greenleaf acquisition company’s self service store model 10 million projects company’s steel manufacturing facility designed improved efficiency increase output 7 million upgrade company’s information technology infrastructure including installation new erp system common company’s operations company anticipates capital expenditures fiscal 2007 total 81 million capital projects expected include completion megashredder projects modifications reheat furnace billet yard craneway steel manufacturing facility additionally company incur expenditures convert certain greenleaf stores full service self service modernize stores auto parts business make improvements company’s information technology infrastructure accrued environmental liabilities accrued environmental liabilities august 31 2006 41 million compared 24 million august 31 2005 increases environmental liabilities primarily reflect company’s estimated environmental liabilities related acquisitions made fiscal 2006 course fiscal 2007 company expects pay approximately 4 million primarily relating previously accrued remediation projects connection one metals recycling facilities located state washington hylebos waterway additionally company expects require significant future cash outlays incurs actual costs relating remediation environmental liabilities debt november 8 2005 company entered amended restated committed unsecured bank credit agreement bank america na administrative agent lender lenders party thereto new agreement provides fiveyear 400 million revolving loan maturing november 2010 prior agreement provided 150 million revolving loan maturing may 2006 interest outstanding indebtedness restated agreement based company’s option either libor plus spread 0625 125 amount spread based pricing grid tied company’s leverage ratio higher prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 015 025 based pricing grid tied company’s leverage ratio company also additional unsecured uncommitted credit line increased march 1 2006 5 million 15 million interest outstanding indebtedness set bank time borrowing credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2006 company 95 million outstanding borrowings facilities compliance covenants acquisitions fiscal 2006 company acquired several businesses purchases funded company’s existing cash balances credit facility company however received 37 million cash connection hnc joint venture separation termination fiscal 2006 company completed following acquisitions • upon closing agreement separation termination company’s joint ventures hnc september 30 2005 company received 37 million cash company also received approximately 17 million previously undistributed earnings joint ventures • september 30 2005 company acquired greenleaf five store properties leased greenleaf certain greenleaf debt obligations total consideration acquisition 45 million subject postclosing adjustments • october 31 2005 company acquired substantially assets regional company operates nine metals recycling facilities located georgia alabama focused nonferrous metals assets acquired regional purchase price 69 million cash including assumption certain liabilities • march 21 2006 company purchased minority interest mrl subsidiary company took control mrl operations upon separation termination joint venture hnc mrl operates metals recycling facility rhode island purchase price 25 million paid cash offbalance sheet arrangements company party offbalance sheet arrangements reasonably likely current future material effect company’s financial conditions results operations cash flows contractual obligations commitments company certain contractual obligations make future payments following table summarizes future obligations august 31 2006 1 company 400 million credit facility expiring november 2010 group banks working capital general purposes facility replaced facility 150 million existed august 31 2005 2 steel manufacturing business takeorpay natural gas contract currently requires minimum purchase 3500 mmbtu per day tiered pricing whether amount utilized effective april 1 2006 natural gas price increased 785 per mmbtu contract expires may 31 2009 3 steel manufacturing business electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 stock repurchase program pursuant stock repurchase program amended 2001 october 2006 company authorized repurchase 47 million shares stock management deems repurchases appropriate management evaluates long shortrange forecasts well anticipated sources uses cash determining course action would best enhance shareholder value company make share repurchases last two fiscal years pursuant amendment 2001 company authorized repurchase 30 million shares august 31 2006 company repurchased total 13 million shares program leaving 17 million shares available repurchase october 2006 company’s board directors approved increase shares authorized repurchase 30 million bringing total remaining program 47 million pension contributions company maintains defined benefit plan certain nonunion employees 2006 pension benefits frozen employees covered plan employees participating defined benefit plan employees company receive future retirement benefits defined contribution retirement plans sponsored company makes periodic contributions fund plans within range allowed applicable regulations company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements 2006 company froze benefit accruals defined benefit plan anticipates making contributions 2007 company expects make contributions various defined contribution plans approximately 5 million 2007 additionally company anticipates making contributions excess 3 million multiemployer plans including contribution 2 million multiemployer plan benefiting union employees steel manufacturing business annual contributions defined benefit pension plans current cost business related benefit obligations expected settled far future accounting defined benefit pension plans results current recognition liabilities net periodic pension cost employees expected service periods based terms plan impact company’s investment funding decisions measurement pension obligations recognition liabilities costs require significant assumptions two critical assumptions discount rate expected longterm rate return assets plan may impact company’s financial condition results operation basis selection discount rate august 31 measurement date determined matching timing payment expected pension obligations defined benefit plan corresponding yield investment grade corporate bonds equivalent maturities determined data published federal reserve board rates used august 31 2006 2005 590 575 respectively company believes data provided accurate matching pension obligations maturities bonds measured therefore material adjustments rates required expected longterm rate return defined benefit plan assets reflects management’s expectations longterm rates return funds invested provide benefits included projected benefit obligations company established expected longterm rate return assumption plan assets considering historical rates return period time consistent longterm nature underlying obligations plan estimated rate return assumption august 31 measurement date based upon combination historical rates return earned investments equivalent benchmark indices asset classes period several decades capital market expectations determined periodic survey data rate return assumption used intended longterm assumption subject change merely year toyear changes actual investment performance company reduced longterm rate return assumption 8 7 effective august 31 2006 company frozen benefits defined benefit plan anticipate making contributions plan however changes discount rate actual investment returns different expected longterm rate return plan assets could require company make future contributions company believes additional funding requirements would material impact financial condition significant changes estimates factors could result material change company’s pension obligation causing related increase decrease reported net operating results period change estimate actual experience differs actuarial assumptions used determining benefit obligations company recognizes actuarial gain loss amounts generally amortized remaining service lives active employees august 31 2006 company actuarial loss 3 million company reviewed reasons gains losses determined greater provision lump sum settlements needed adjusted assumptions accordingly company provide health life insurance benefits retired employees see note 12 consolidated financial statements form 10k discussion company’s retirement benefit plans assessment liquidity capital resources historically company’s available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs company believes current cash resources internally generated funds existing credit facilities access capital markets provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases debt service requirements postretirement obligations future environmental obligations next twelve months longerterm company may seek finance business expansion additional borrowing arrangements additional equity financing item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion company’s operations three fiscal years ended august 31 2007 following discussion analysis provides information management believes relevant assessment understanding company’s results operations financial condition discussion may contain forward looking statements anticipate results based management’s plans subject uncertainty discussion read conjunction consolidated financial statements related notes thereto selected financial data operating statistics contained elsewhere form 10k business company operates three reportable segments mrb apb smb mrb purchases collects processes recycles steel metal facilities trades brokers scrap metal apb purchases used salvaged vehicles sells serviceable used auto parts selfservice fullservice auto parts stores apb also supplier autobodies mrb processes autobodies saleable recycled metal smb purchases recycled metal mrb uses minimill near portland oregon melt recycled metal produce finished steel products smb also maintains mill depots central southern california company provides end life cycle solution variety products integrated businesses including resale used auto parts processing autobodies metal products manufacturing scrap metal finished steel products company’s results operations depend large part demand prices recycled metal global markets steel products western us company’s deep water port facilities west east coasts us hawaii allow company take advantage increasing demand recycled metal steel manufacturers located europe asia mexico mediterranean company’s processing facilities southeastern us also provide access growing automobile steel manufacturing industries region market prices recycled ferrous nonferrous metal fluctuate periodically generally increased past three years higher prices significant impact results operations mrb lesser extent apb key factors trends affecting industries company operates results operations following key factors trends affect industries company operates competition consolidation scrap metal industry steel industry fragmentation auto parts industry volatility price sales volume decreases metals recycling industry following key factors trends specifically affect company’s results operations integration acquired businesses foreign business risks replacement installation capital equipment reliance key pieces equipment geographic concentration union relationships pension postretirement benefits foregoing key factors trends discussed elsewhere annual report executive overview company completed another successful year fiscal 2007 achieving record sales levels sixth consecutive year company generated consolidated revenues 26 billion fiscal 2007 increase 718 million 39 19 billion fiscal 2006 consolidated operating income fiscal 2007 increased 39 million 22 175 million fiscal 2006 214 million fiscal 2007 increase revenues generated segments increase operating income driven primarily improved financial results mrb net income fiscal 2007 131 million decrease 12 million 8 compared prior year net income 143 million diluted net income per share year 432 7 decrease fiscal 2006 net income fiscal 2006 included 35 million gain net tax separation termination hnc joint ventures partially offset 15 million charge related sec doj investigations company’s past payment practices asia fiscal 2007 mrb increased revenues 682 million 49 21 billion 14 billion fiscal 2006 increase included 550 million increase ferrous revenues 49 17 billion 129 million increase nonferrous revenues 48 396 million increase ferrous revenues driven 21 increase sales tons 22 increase average net sales price increase nonferrous revenues driven 27 increase sales tons 17 increase average net sales price operating income mrb 166 million 8 revenues fiscal 2007 compared 128 million 9 revenues fiscal 2006 increase operating income reflects impact higher sales volume prices majority higher material costs recovered higher net sales prices discussed additional volume resulted operating income reduced percent sales offsetting increases average sales prices volume 30 million increase sga expenses compared prior year primarily due 21 million higher compensation costs result increased headcount bonuses sharebased compensation expense 5 million increase allocated erp information technology costs fiscal 2007 apb increased revenues 48 million 22 266 million 218 million fiscal 2006 increase included 10 million increase core revenue 35 prior year 13 million increase scrap vehicle revenue 38 selfservice stores prior year 22 million increase fullservice revenue prior year increase core revenue primarily due 22 increase average core sales per car 32000 increase cars crushed increase scrap vehicle revenue due 41 increase average scrap sales price per car 21000 increase tons shipped increase fullservice revenue due higher parts sales across several product types result full year revenues greenleaf acquired first quarter fiscal 2006 operating income apb 29 million 11 revenue fiscal 2007 compared 28 million 13 revenues fiscal 2006 slight increase operating income fiscal 2007 reflects impact higher sales volume prices majority higher car costs recovered higher sales prices discussed additional volume resulted operating income reduced percent revenue increases operating income offset 7 million increase sga expenses compared prior year primarily attributable 6 million increase allocated erp information technology costs 2 million increase compensation expenses fiscal 2007 smb increased revenues 38 million 10 425 million 387 million fiscal 2006 increase prior year result higher average net sales prices finished steel products due part strong demand increased sales volumes improved product mix sales volumes increased 10000 tons 1 713000 tons fiscal 2007 compared prior year average net selling price increased 47 per ton 9 575 per ton fiscal 2007 compared fiscal 2006 resulted increased revenues 34 million operating income smb 64 million 15 revenues fiscal 2007 compared 75 million 19 revenues fiscal 2006 decrease operating income primarily result higher raw material costs higher conversion costs could passed smb’s customers higher prices also fiscal 2007 company repurchased 25 million shares approximately 8 total shares outstanding total cost 110 million authority granted board directors business acquisitions company intends continue focus growth valuecreating acquisitions pursue acquisition opportunities believes create shareholder value earn aftertax income excess cost capital company’s continued strong balance sheet cash flows operations available borrowing capacity company believes attractive position continue complete reasonably priced acquisitions fitting company’s longterm strategic plans fiscal 2007 company completed following acquisitions • december 2006 company acquired metals recycling business provide additional sources scrap metals megashredder everett massachusetts • may 2007 company acquired two metals recycling businesses separately provide scrap metal everett massachusetts tacoma washington facilities acquisitions material company’s financial position results operations combined assets business acquisitions amounted 10 million 1 consolidated total assets august 31 2007 combined revenues amounted 25 million 1 consolidated revenues fiscal 2007 company completed following significant transactions 2006 • september 30 2005 company completed separation termination metals recycling joint ventures hnc • september 30 2005 company acquired greenleaf five store properties leased greenleaf assumed certain greenleaf liabilities greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops • october 31 2005 company purchased substantially assets regional company operates nine metals recycling facilities located georgia alabama focused ferrous nonferrous metals • march 21 2006 company purchased minority interest mrl subsidiary company assumed control mrl operations upon separation termination joint venture hnc mrl operates metals recycling facility rhode island see note 7 business combinations notes consolidated financial statements part ii item 8 report results operations 1 company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning 2006 fiscal year instead date acquisition increases revenues operating income resulted election offset statement income preacquisition interests net tax see note 7 business combinations notes consolidated financial statements part ii item 8 report 2 result hnc joint venture separation termination agreement joint venture segment eliminated results two entities acquired transaction company previous interest remaining joint ventures consolidated mrb beginning fiscal 2006 company determined retroactively adjusting prior period results entities acquired transaction meaningful given company 50 partner involved managing daytoday operations entities prior separation 3 corporate expense consists primarily unallocated corporate expenses services benefit three business segments unallocated expense operating income segment reflect operating income segment would standalone business 4 recycled ferrous metal sales mrb smb autobody sales apb mrb made negotiated rates per ton intended approximate market prices consequently intercompany revenues produce intercompany operating income recognized finished products sold third parties 5 cost goods sold balances disclosed include amounts environmental matters separately stated consolidated statements income see part ii item 8 report revenues consolidated revenues fiscal 2007 increased 718 million 39 26 billion 19 billion fiscal 2006 revenues fiscal 2007 increased company business segments increase primarily result higher volumes business segments due company’s focus increasing throughput added volumes full year operations acquisitions made fiscal 2006 increases market price scrap steel consolidated revenues fiscal 2006 increased 10 billion 117 19 billion 853 million fiscal 2005 revenues increased result acquisitions made mrb apb reporting segments fiscal 2006 increase production smb cost goods sold consolidated cost goods sold increased 651 million 43 22 billion fiscal 2007 compared prior year cost goods sold fiscal 2007 increased business segments primarily resulting increased material prices increases due full year operations acquisitions made fiscal 2006 percentage revenues cost goods sold increased 82 fiscal 2006 85 fiscal 2007 consolidated cost goods sold increased 893 million 141 15 billion fiscal 2006 compared prior year percentage revenues cost goods sold increased 74 fiscal 2005 82 fiscal 2006 mainly result acquisitions occurred fiscal 2006 selling general administrative expense sga expense increased 29 million 19 186 million fiscal 2007 compared prior year 29 million increase fiscal 2006 due higher sga expense incurred reporting segments totaling 39 million combined partially offset 10 million decrease corporate increases reporting segments primarily attributable increase compensation expense 22 million due increased headcount bonuses sharebased compensation expense recognized fiscal 2007 12 million increase related higher allocated information technology costs result implementation maintenance enterprise resource planning “erp” software application including related hardware upgrades support information technology costs net decrease corporate prior year due primarily 15 million charge fiscal 2006 associated establishment reserve related penalties company estimated would imposed doj sec connection investigation company’s past payment practices asia discussed note 11 commitments contingencies notes consolidated financial statements part ii item 8 report net decrease corporate fiscal 2007 included 8 million increase compensation costs resulting increased headcount bonus sharebased compensation expense sga expenses increased 99 million 170 157 million fiscal 2006 compared prior year increases primarily attributable 55 million increase sga expenses businesses acquired fiscal 2006 15 million increase costs associated doj sec investigation discussed note 11 commitments contingencies notes consolidated financial statements part ii item 8 report addition increases 7 million contract labor legal accounting fees increase 7 million compensation costs 3 million increase sharebased compensation expense recognized fiscal 2006 interest expense interest expense 8 million 3 million 1 million fiscal 2007 2006 2005 respectively increase fiscal 2006 2007 reflects higher average interest rates company carrying higher average debt balances fiscal 2007 order complete integrate acquisitions well support increased level working capital operations acquisitions addition 110 million related share repurchases information company’s outstanding debt balances see note 10 longterm debt notes consolidated financial statements part ii item 8 report increase fiscal 2005 fiscal 2006 result higher average interest rates company carrying higher average debt balances income net interest expense income 4 million 60 million 1 million fiscal 2007 2006 2005 respectively fiscal 2006 company recorded pretax gain 57 million arose hnc separation termination agreement based difference excess values businesses acquired carrying value businesses sold detailed discussion hnc joint venture separation termination agreement see note 7 business combinations notes consolidated financial statements part ii item 8 report income tax expense tax rates 361 375 353 fiscal 2007 2006 2005 respectively tax rate fiscal 2006 higher fiscal 2007 primarily accrual recorded fiscal 2006 14 million nondeductible penalties profits disgorgement expensed connection settlement sec doj investigation see item 3 legal proceedings nondeductible expense increased fiscal 2006 tax rate 21 addition fiscal 2006 tax rate higher normal included estimated tax rate 380 nonrecurring 57 million gain arising hnc separation termination see note 7 business combinations notes consolidated financial statements part ii item 8 report higher rate applicable company’s recurring income 361 fiscal 2007 tax rate comprised 350 federal statutory rate 15 effective state rate 15 nondeductible officers’ compensation offset 19 benefit section 199 manufacturing deduction extraterritorial income exclusion benefit export sales financial results segment company operates business across three reportable segments mrb apb smb additional financial information relating business segments contained note 17 segment information notes consolidated financial statements part ii item 8 report metals recycling business 1 price information shown excluding cost freight incurred deliver product customer 2 result hnc joint venture separation termination agreement joint venture segment eliminated results two entities acquired transaction company previous interest remaining joint ventures consolidated mrb beginning fiscal 2006 company determined retroactively adjusting prior period results entities acquired transaction meaningful given company 50 partner involved managing daytoday operations entities prior separation fiscal 2007 compared fiscal 2006 revenues mrb generated revenues 21 billion fiscal 2007 intercompany eliminations increase 682 million 49 fiscal 2006 increase primarily attributable increased sales volumes result focus increasing throughput processing facilities prevailing market conditions whereby scrap metal demand higher supply resulting higher average net selling prices higher sales volumes outbound freight costs included gross sales price increased 58 219 million fiscal 2007 compared fiscal 2006 primarily due increased volumes higher ocean freight rates ferrous revenues increased 550 million 49 17 billion fiscal 2007 compared prior year increase ferrous revenues driven higher average net sales prices increased volumes average net sales price ferrous processing increased 48 per ton 22 fiscal 2006 fiscal 2007 average net sales price ferrous trading increased 53 per ton 23 fiscal 2007 compared fiscal 2006 ferrous processing sales volume increased 10 million tons 30 43 million tons fiscal 2007 compared fiscal 2006 increase primarily result strategy increase volume metal purchases maximize throughput accomplished continued acquisitions metal recyclers increased purchases ferrous materials ferrous trading sales volume remained fairly consistent 12 million tons fiscal 2007 2006 domestic sales volume increased 38 722000 tons fiscal 2007 primarily result regional acquisition made fiscal 2006 nonferrous revenues increased 129 million 48 396 million fiscal 2007 compared period last year increase nonferrous revenues driven higher average net sales prices increased volume average net sales price increased 015 17 102 per pound fiscal 2007 fiscal 2006 increase sales price per pound result improved product mix due regional acquisitions increased asian demand nonferrous metals nonferrous pounds shipped increased 81 million pounds 27 nearly 383 million pounds fiscal 2007 compared prior year increase pounds shipped primarily due improvement recovery nonferrous materials processed new megashredders state art backend sorting systems higher overall volume processed segment operating income operating income mrb 166 million 8 revenues fiscal 2007 compared 128 million 9 revenues fiscal 2006 increase operating income reflects impact higher sales volume improved performance discussed partially offset higher raw material costs increased average 23 fiscal 2006 majority higher material cost recovered higher net sales prices discussed operating income reduced percent revenues offsetting increases average sales prices volume 30 million increase sga expenses compared prior year primarily due 21 million higher compensation costs result increased headcount bonuses sharebased compensation expense 5 million increase allocated erp information technology costs fiscal 2006 compared fiscal 2005 mrb generated revenues 14 billion fiscal 2006 intercompany eliminations increase 827 million 142 fiscal 2005 ferrous revenues increased 643 million 132 fiscal 2005 primarily due acquisitionrelated volume increases partially offset decrease average net selling price ferrous metal fiscal 2006 nonferrous revenues increased 196 million 277 fiscal 2005 primarily result increased sales generated acquired entities increase 031 per pound 55 average nonferrous sales price operating income mrb 128 million 9 revenues fiscal 2006 compared 112 million 19 revenues fiscal 2005 16 million increase operating income directly related increase sales volume result entities acquired fiscal 2006 outlook demand recycled ferrous metal driven world wide steel making capacity recent years steel making capacity increased significantly primarily developing economies middleeast asia due increased capacity demand recycled metal increased time supply metal available recycling kept pace result prices recycled metals increased levels higher experienced previous economic cycles company believes fundamentals remain place fiscal 2008 prices continue remain volatile general level prices consistent fiscal 2007 better take advantage positive markets operates mrb made significant investments past two fiscal years upgrade equipment infrastructure mrb believes investments enable increase capacity process recycled metal increase extraction higher value materials improve overall operating efficiency additional capacity improved efficiencies support mrb’s efforts seek additional sources supply increase throughput processing facilities due strong demand described competition recycled metal increasing mrb expects efforts maintain increase supply recycled material able purchase suppliers could result higher prices inputs nonetheless mrb believes size breadth efficiency operations provide competitive advantage procuring raw material allow continue grow volume material available sale world markets fiscal 2008 mrb also believes access deep water ports provide efficient platform exporting recycled metals customers asia middle east around world mrb utilizes ocean going vessels access markets demand vessels size type required mrb increasing historically change cost shipping reflected price paid customers metals delivered however toward end fiscal 2007 cost shipping began rise significantly mrb believes historical relationship prices recycled metal cost shipping product customers asia elsewhere remain consistent rapid changes shipping costs may result margin pressures fiscal 2008 auto parts business fiscal 2007 compared fiscal 2006 revenues apb generated revenues 266 million fiscal 2007 intercompany eliminations increase 48 million 22 fiscal 2006 increase prior year primarily driven increased sales scrapped vehicles cores higher average sales prices higher sales volume core revenue increased 10 million 35 prior year primarily due 22 increase average core sales per car increase 32000 cars crushed scrap vehicle revenue selfservice business increased 13 million 38 prior year resulting 41 increase average scrap sales price per car increase volume 21000 tons shipped addition fullservice revenue increased 22 million prior year due higher parts sales across several product types result full year revenues greenleaf fullservice business acquired first quarter fiscal 2006 fiscal 2007 apb also benefited improved revenue contribution five stores converted fullservice selfservice compared period last year segment operating income operating income apb 29 million 11 revenues fiscal 2007 compared 28 million 13 revenues fiscal 2006 slight increase operating income fiscal 2007 reflects impact higher sales volume improved performance fullservice stores offset higher raw material costs increased 49 per car 35 fiscal 2006 scrap tons sold increased 40000 tons 14 282000 fiscal 2006 322000 fiscal 2007 increases operating income offset 7 million increase sga expenses compared prior year primarily attributable 6 million increase allocated erp information technology costs 2 million increase compensation expenses fiscal 2006 compared fiscal 2005 apb generated revenues 218 million fiscal 2006 intercompany eliminations increase 110 million 102 fiscal 2005 increase revenues primarily attributable 90 million revenues generated greenleaf acquisition occurred fiscal 2006 operating income apb 28 million 13 revenues fiscal 2006 compared operating income 28 million 26 revenue fiscal 2005 decrease margins primarily attributable apb’s entry fullservice used parts market higher costs associated purchase removal parts sold fullservice distribution model increased demand competition unprocessed metals increased costs purchase cars selfservice distribution model outlook apb operates two distribution channels used auto parts industry first selfservice auto parts primarily focused older endoflife vehicles selfservice revenues driven admissions parts sales well wholesale revenues sale cores scrapped vehicles apb remains committed increasing purchases scrapped vehicles believes increased volume result higher revenues sale cores scrap fiscal 2008 demand apb’s second distribution channel fullservice used auto parts driven primarily professional repair market apb’s strategy increase quantity quality inventory utilizing computer buying models focus acquiring used autos contain high demand parts believes enable increase sales fullservice distribution channel fiscal 2008 steel manufacturing business 1 price information shown excluding cost freight incurred deliver product customer fiscal 2007 compared fiscal 2006 revenues smb generated revenues 425 million fiscal 2007 intercompany eliminations increase 38 million 10 fiscal 2006 increase prior year result higher average net sales prices finished steel products due part strong demand increased sales volume improved product mix sales volume increased 10000 tons 1 713000 tons fiscal 2007 compared prior year average net selling price increased 47 per ton 9 575 per ton fiscal 2007 compared fiscal 2006 resulted increased revenues 34 million segment operating income operating income smb 64 million 15 revenues fiscal 2007 compared 75 million 19 revenues fiscal 2006 decrease operating income reflects impact 20 increase cost scrap metal outpaced 9 increase average sales price per ton increase 17 per ton conversion costs primarily related higher costs raw materials scrap metals 3 million costs associated planned shut larger rolling mill third quarter fiscal 2007 smb acquired scrap metal requirements mrb negotiated rates intended approximate market prices fiscal 2006 compared fiscal 2005 smb generated revenues 387 million fiscal 2006 intercompany eliminations increase 71 million 23 fiscal 2005 increase revenue primarily attributable increase number tons sold 108000 tons 18 increase 16 per ton average net selling price fiscal 2006 fiscal 2005 increase sales volume primarily due increased demand customers capital improvements smb enabled steel mill increase output meet demand average net selling price increased result increased worldwide steel consumption higher raw material costs manufacturers passed form higher prices operating income smb fiscal 2006 75 million 19 revenues compared fiscal 2005 operating income 43 million 14 revenues higher operating margins primarily attributable increase production reduction labor costs raw material costs melt shop conversion costs reflecting efficiencies gained capital equipment improvements outlook smb sells products primarily construction markets located west coast us past years demand markets strong west coast steel manufacturers generally operating full capacity strong demand attracted competition imported steel prices remained high historical standards market steel products worldwide level imports dependent upon differences market prices us attainable markets around world west coast demand steel based upon residential nonresidential construction activity 2007 lower demand caused slowdown housing sector offset continued good demand commercial construction latter closely related economic conditions region high level expected state federal government spending west related highway infrastructure may provide offset weakening commercial construction activity going forward better take advantage positive market environment operates smb made serious capital investments increased capacity improved efficiencies result investments capacity mill increased around 600000 tons annually prior 2005 greater 750000 tons currently 2008 smb believes market demand enable sell incremental product able produce increased demand steel worldwide resulted higher prices raw materials used steel making including scrap metal alloys fluxes ability steel manufacturers pass increased costs function demand markets operate 2007 margins smb declined rise raw material costs greater increase net selling prices 2008 raw material prices expected remain firm ability smb pass costs dependent upon strength market demand level competition foreign imports liquidity capital resources company relies cash provided operating activities primary source liquidity supplemented current cash resources existing credit facilities sources uses cash company cash balances 13 million 25 million 21 million august 31 2007 2006 2005 respectively cash balances intended used working capital expenditures net cash provided operating activities fiscal 2007 179 million included net income 131 million 41 million depreciation amortization expense increase accounts payable 17 million due timing payments decrease inventory 15 million due timing shipments sources cash partially offset 43 million increase accounts receivable due high volume shipments made fourth quarter 15 million payment sec doj settlement net cash provided operating activities 105 million 146 million fiscal 2006 2005 respectively decline cash provided operating activities fiscal 2006 compared fiscal 2005 result slight decrease net income 4 million decrease impact noncash items primarily related noncash gain hnc separation termination agreement 2006 along tax benefits employee stock options net cash used investing activities fiscal 2007 117 million compared 198 million fiscal 2006 72 million fiscal 2005 net cash used investing activities fiscal 2007 included 81 million capital expenditures upgrade company’s equipment infrastructure 45 million acquisitions completed fiscal 2007 increase outflows investing activities fiscal 2006 compared fiscal 2005 primarily related capital expenditure costs modernize upgrade company’s infrastructure equipment along significant acquisitions occurred fiscal 2006 net cash used financing activities fiscal 2007 74 million compared 97 million cash provided financing activities fiscal 2006 net cash used financing activities 65 million fiscal 2005 increase cash used financing activities fiscal 2006 2007 primarily due 110 million share repurchases partially offset 40 million provided net borrowings increase cash financing activities fiscal 2006 compared fiscal 2005 result company’s increased borrowings fiscal 2006 credit facilities company shortterm borrowings consisting primarily unsecured credit line increased march 1 2007 5 million 20 million line credit expires march 1 2008 interest rates outstanding indebtedness unsecured line credit set bank time borrowing credit available agreement uncommitted company 20 million borrowings outstanding line august 31 2007 weighted average interest rate line 598 august 31 2007 amounts outstanding agreement august 31 2006 november 2005 company entered amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto amended july 2007 revised agreement provides fiveyear 450 million revolving credit facility loan maturing july 2012 interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio august 31 2007 2006 company borrowings outstanding credit facility 115 million 95 million respectively two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2007 company compliance covenants representations warranties addition august 31 2007 2006 company 8 million longterm bonded indebtedness matures january 2021 capital expenditures capital expenditures totaled 81 million 87 million 48 million fiscal 2007 2006 2005 respectively increases capital expenditures primarily reflect company’s significant investments modern equipment improve efficiency capabilities businesses enhance company’s competitiveness capital expenditures fiscal 2007 included partial payments installation new megashredders company’s oakland california everett massachusetts portland oregon export facilities major repairs dock portland oregon facility upgrades equipment infrastructure mrb facilities company also expended capital implementation pointofsale system selfservice used auto parts stores conversion five sites acquired greenleaf acquisition company’s selfservice store model upgrade reheat furnace billet craneway projects smb facility designed improve efficiency increase output company anticipates capital expenditures fiscal 2008 approximate expenditures made fiscal 2007 capital projects fiscal 2008 expected include significant enhancements company’s information technology infrastructure investments technology improve recovery nonferrous materials shredding process establishment additional nonferrous collection facilities improvements company’s marine shipping infrastructure investments improve efficiency increase worker safety enhance environmental systems company expects use cash operations fund capital expenditures available lines credit fund acquisitions fiscal 2008 share repurchase program pursuant share repurchase program amended 2001 october 2006 company authorized repurchase 60 million shares class common stock management deems repurchases appropriate management evaluates long shortrange forecasts well anticipated sources uses cash determining course action would best enhance shareholder value prior fiscal 2007 company repurchased 13 million shares program fiscal 2007 company repurchased total 25 million shares program leaving 22 million shares available repurchase pension contributions company maintains defined benefit plan certain nonunion employees fiscal 2006 pension benefits frozen employees covered plan employees participating defined benefit plan employees company receive future retirement benefits defined contribution retirement plans sponsored company makes periodic contributions fund plans within range allowed applicable regulations company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements fiscal 2006 company froze benefit accruals defined benefit plan result made contributions fiscal 2007 anticipates making contributions fiscal 2008 however changes discount rate actual investment returns different expected longterm rate return plan assets could require company make future contributions company believes additional funding requirements would material impact financial condition see note 12 employee benefits notes consolidated financial statements part ii item 8 report discussion company’s retirement benefit plans company expects make contributions various defined contribution plans approximately 9 million fiscal 2008 included amount 4 million contributions company anticipates making multiemployer plans including contribution 2 million multiemployer plan benefiting union employees smb assessment liquidity capital resources historically company’s available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs company believes current cash resources internally generated funds existing credit facilities provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases debt service requirements postretirement obligations future environmental obligations next twelve months longerterm company may seek finance business expansion additional borrowing arrangements additional equity financing offbalance sheet arrangements exception operating leases company party offbalance sheet arrangements reasonably likely current future material effect company’s financial conditions results operations cash flows company enters operating leases new equipment property contractual obligations commitments company certain contractual obligations make future payments following table summarizes future obligations august 31 2007 thousands 1 smb takeorpay natural gas contract currently requires minimum purchase 3435 mmbtu per day tiered pricing whether amount utilized effective april 1 2006 october 31 2007 blended rate 822 per mmbtu blended rate decreases 770 effective november 1 2007 october 31 2008 contract expires may 31 2011 2 smb electricity contract mwl requires minimum purchase electricity rate subject variable pricing whether amount utilized fixed portion contract obligates smb pay 175000 per month eleven months year contract expires september 2011 critical accounting policies estimates company identified critical accounting estimates important company’s portrayal financial condition operating results estimates require difficult subjective judgments including whether estimates required made matters inherently uncertain different estimates reasonably could used changes estimates reasonably likely occur could materially impact financial statements significant estimates underlying accompanying consolidated financial statements include inventory valuation goodwill intangible asset valuation environmental costs contingencies assessment valuation deferred income taxes income tax contingencies pension plan assumptions sharebased compensation assumptions revenue recognition inventories company’s inventories primarily consist ferrous nonferrous unprocessed metals ferrous processed metals used salvaged vehicles finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory apb establishes cost used salvage vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs accounting process utilized company record unprocessed metal used salvage vehicle inventory quantities relies significant estimates respect unprocessed metals inventory company relies perpetual inventory records utilize estimated recoveries yields based historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metals ultimate recoveries yields significantly different estimated value company’s inventory could materially overstated understated assist validating reasonableness estimates company runs periodic tests performs monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts value ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume addition company establishes inventory reserves based upon historical experience adjustments mitigate risk significant adjustments determined reasonable currently reserve established 10 processed ferrous inventory increase reserve 05 would reduce value inventory less 1 million company maintain reserve nonferrous inventory quantities hand yard turn rapidly typically low enough amounts accurately determined goodwill intangible assets assessing recoverability goodwill intangible assets indefinite lives management must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future company may required record impairment charges previously recorded accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” company required assess goodwill impairment least annually using twostep process begins estimation fair value reporting unit first step determines whether impairment occurred estimating fair value reporting units using present value future cash flows approach subject comparison reasonableness market capitalization date valuation second step measures amount impairment tests utilize fair value amounts determined estimated future cash flows developed management selected costs statistics used evaluate goodwill typically related pricing volumes goods sold costs percentage revenues cyclicality inherent company’s industries environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects extremely complex one primary factors make difficult assess cost potential future remediation potential sites wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements developments resolution environmental matter results facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors company considers recognition measurement environmental liabilities include following • current regulations time reserve established course cleanup specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility remediation accrued worker’s compensation costs company selfinsured maximum amount per claim worker’s compensation claims reserve costs claims paid estimated cost incurred reported claims balance sheet date estimated company’s exposure claims protected various stoploss insurance policies reserve established based historical claim experience august 31 2007 2006 company accrued 7 million 4 million respectively estimated cost worker’s compensation claims ultimate development claims significantly different estimated accrual future worker’s compensation claims could materially overstated understated deferred taxes deferred income taxes reflect differences fiscal yearend financial reporting tax basis assets liabilities based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises periodically company reviews deferred tax assets assess whether valuation allowance necessary valuation allowance established reduce deferred tax assets including net operating loss carryforwards extent assets likely unrealized although realization assured management believes likely company’s deferred tax assets realized ultimate realization company’s deferred tax assets significantly different expectations value deferred tax assets could materially overstated pension plans company sponsors defined benefit pension plan certain nonunion employees pension plans significant cost business related obligations expected settled far future accounting defined benefit pension plans results current recognition liabilities net periodic pension cost employees’ expected service periods based terms plans impact company’s investment funding decisions measurement pension obligations recognition liabilities costs require significant assumptions two critical assumptions discount rate expected longterm rate return assets plan may impact company’s financial condition results operations actual results often differ assumptions relating longterm rates return equities fixed income securities economic factors discount rate assumption august 31 2007 60 05 increase decrease discount rate would reduce increase net pension liability approximately 1 million august 31 2007 accumulated comprehensive income would reduced increased amount adjusted taxes net periodic cost fiscal 2007 would reduced increased 161000 weighted average expected return assets assumption august 31 2007 70 expected return assets longterm assumption whose accuracy measured long period based past experience 05 increase decrease assumption would reduce increase net periodic pension cost 70000 company adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” august 31 2007 sfas 158 requires employer recognize funded status defined benefit pension postretirement benefit plans net asset liability statement financial position offsetting amount accumulated comprehensive income recognize changes funded status year changes occur comprehensive income following adoption sfas 158 additional minimum pension liabilities related intangible assets longer recognized detail regarding company’s pension plans refer note 12 employee benefits notes consolidated financial statements part ii item 8 report sharebased compensation effective september 1 2005 company adopted fair value recognition provisions sfas 123 revised 2004 “sharedbased payment” “sfas 123r” requires recognition fair value sharebased compensation net income company elected utilize modified prospective transition method adopting sfas 123r therefore retroactively adjust results prior periods transition method compensation expense based grant date fair value estimated accordance original provisions sfas 123 “sharebased payment” sharebased compensation awards granted prior yet vested september 1 2005 recognized net income periods date adoption sharebased compensation expense sharebased payment awards granted september 1 2005 based grant date fair value estimated accordance provisions sfas 123r company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally fiveyear vesting term stock options restricted stock units “rsus” threeyear performance period performancebased shares company estimated forfeiture rate based historical experience preceding five fiscal years determining appropriate fair value model calculating fair value sharebased payment awards requires input subjective assumptions including expected life sharebased payment awards stock price volatility based historical monthend closing stock prices assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management judgment result factors change company uses different assumptions company’s sharebased compensation expense could materially different future addition company required estimate expected forfeiture rate recognize expense shares expected fully vest company’s actual forfeiture rate materially different estimate sharebased compensation expense could significantly different company recorded current period see note 13 stock incentive plan notes consolidated financial statements part ii item 8 report revenue recognition company recognizes revenue accordance sec staff accounting bulletin 104 “revenue recognition” revenue recognized company contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title scrap metal finished steel products transfers upon shipment based either cost insurance freight “cif” free board “fob” terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account retail sales apb revenues recognized customers pay parts wholesale products shipped customer location company recognizes revenue provisions made returns historically sales returns adjustments impacted ultimate collection revenues recent accounting pronouncements july 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 “accounting income taxes” prescribes recognition threshold measurement attribute financial statement recognition disclosure tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 company required adopt fin 48 first quarter fiscal year 2008 management expect adoption material impact company’s consolidated financial position results operations cash flows september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” sab 108 requires public companies quantify errors using balance sheet income statement approach evaluate whether either approach results quantifying misstatement material relevant quantitative qualitative factors considered adoption sab 108 company august 31 2007 impact consolidated financial position results operations september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value us generally accepted accounting principles “gaap” expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged provided reporting entity yet issued financial statements fiscal year including financial statements interim period within fiscal year company required adopt sfas 157 first quarter fiscal year 2009 management currently evaluating requirements sfas 157 yet determined impact company’s consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” “sfas 159” sfas 159 establishes fair value option entities elect report certain financial assets liabilities fair value changes fair value recognized earnings sfas 159 effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged provided reporting entity also elects apply provisions sfas 157 sfas 159 becomes effective company first quarter fiscal year 2009 management currently evaluating requirements sfas 159 yet concluded fair value option adopted item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion company’s operations three fiscal years ended august 31 2008 following discussion analysis provides information management believes relevant assessment understanding company’s results operations financial condition discussion may contain forwardlooking statements anticipate results based management’s plans subject uncertainty discussion read conjunction consolidated financial statements related notes thereto selected financial data operating statistics contained elsewhere form 10k business company operates three reportable segments mrb apb smb collectively provide end life cycle solution variety products company’s integrated businesses mrb purchases collects processes recycles sells trades brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous metal containing iron domestic export markets mrb processes large pieces scrap metal smaller pieces sorting shearing shredding torching resulting metal processed pieces size density purity required customers meet production needs apb purchases used salvaged vehicles primarily tow companies private parties auto auctions charities city contracts sells serviceable used auto parts vehicles selfservice fullservice auto parts stores remaining portions vehicles primarily autobodies cores nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products smb purchases substantially recycled metal requirements mrb rates approximate west coast export market prices uses electric arc furnace “eaf” minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depots central southern california company’s results operations depend large part demand prices recycled metal global domestic markets steel products western us company’s deep water port facilities west east coasts us hawaii allow company take advantage demand recycled metal steel manufacturers located europe asia mexico mediterranean company’s processing facilities southeastern us also provide access growing automobile steel manufacturing industries region market prices recycled ferrous nonferrous metal fluctuate periodically generally increased past three years however second half fiscal 2008 fourth quarter selling prices future deliveries scrap metal began decline key factors trends affecting industries company operates results operations following key factors trends affect industries company operates worldwide production consumption steel products general economic conditions competition consolidation scrap metal steel industries fragmentation auto parts industry volatility selling prices company’s products purchase prices raw materials including scrap metal following key factors trends specifically affect company’s results operations integration acquired businesses replacement installation capital equipment reliance key pieces equipment cost availability product transportation availability credit ability customers perform contracts supply price raw materials union relationships pension postretirement benefits key factors trends discussed elsewhere annual report executive overview company completed successful year fiscal 2008 achieving record sales levels seventh consecutive year highest net income company’s history fiscal 2008 company continued benefit high selling prices steel scrap metal products increases driven strong worldwide 26 schnitzer steel industries inc form 10k 2008 demand steel recycled scrap metal products resulted selling prices steel scrap metal reaching unprecedented levels increases also driven company’s ongoing focus increasing throughput three operating divisions however second half fiscal 2008 fourth quarter company experienced significant reduction selling prices future deliveries scrap metal decreased faster rate average purchase costs company generated consolidated revenues 36 billion fiscal 2008 increase 10 billion 42 26 billion fiscal 2007 consolidated operating income fiscal 2008 402 million increase 188 million 88 214 million fiscal 2007 net income fiscal 2008 249 million increase 118 million 89 compared prior year net income 131 million diluted net income per share year 861 99 increase fiscal 2007 mrb revenues increased 974 million 47 fiscal 2008 compared fiscal 2007 included 909 million 54 increase ferrous revenues 65 million 16 increase nonferrous revenues increase ferrous revenues driven 68 increase average net selling price processed ferrous 33 increase average net selling price ferrous trading 11 increase processed ferrous sales tons partially offset 63 decrease ferrous trading volumes primarily due company’s focus higher margin processed ferrous operations increase nonferrous revenues driven 15 increase pounds sold primarily result throughput due incremental impact capacity growth fiscal 2007 2008 1 increase average net selling price operating income mrb 357 million 117 revenues fiscal 2008 compared 166 million 79 revenues fiscal 2007 mrb primarily sells products externally export markets purchasing raw materials domestically much fiscal 2008 selling price recycled metal increased faster rate cost purchasing raw materials contributing higher operating income 191 million increase operating income reflected impact higher ferrous nonferrous selling prices higher processed ferrous nonferrous sales volumes partially offset higher raw material costs including net realizable value “nrv” inventory adjustment 49 million fourth quarter lower ferrous trading volumes addition increase operating income offset 19 million increase selling general administrative “sga” expenses compared prior year primarily attributable 9 million increase compensationrelated expenses including annual incentive expense resulting company’s improved financial operating performance fiscal 2008 increased headcount resulting incremental growth experienced fiscal 2007 2008 2 million increase sharebased compensation expense 2 million increase professional service costs apb revenues increased 86 million 32 fiscal 2008 compared fiscal 2007 increase driven 45 million 86 increase scrap vehicle revenue primarily selfservice stores 26 million 58 increase core revenue 13 million 9 increase part sales increase scrap vehicle revenue due 123 increase average scrap selling price per car 16 increase tons shipped increase core revenue primarily due 60 increase average core sales per car 14 increase cars crushed operating income apb 47 million 133 revenues fiscal 2008 compared 29 million 109 revenues fiscal 2007 18 million 61 increase operating income reflected impact higher sales volume prices increased greater rate purchase costs scrapped vehicles partially offset 12 million increase sga expenses compared prior year primarily attributable 5 million increase compensationrelated expenses 2 million increase professional services 2 million increase marketing advertising expense smb revenues increased 178 million 42 fiscal 2008 compared fiscal 2007 result higher average net selling prices finished steel products increased sales volumes average net selling price increased 153 per ton 27 728 per ton fiscal 2008 compared fiscal 2007 resulted increased revenues 109 million sales volumes finished steel products increased 66000 tons 9 776000 tons fiscal 2008 compared prior year resulted increased revenues 48 million increase volumes primarily schnitzer steel industries inc form 10k 2008 27 due reduction imports domestic steel market result declining value us dollar higher overseas prices resulting lower availability finished steel products sale us operating income smb 72 million 120 revenues fiscal 2008 compared 64 million 152 revenues fiscal 2007 increase operating income primarily result higher sales volumes higher average net selling prices partially offset increased costs scrap metal raw materials business acquisitions company intends continue focus growth valuecreating acquisitions pursue acquisition opportunities believes create shareholder value earn aftertax income excess cost capital company’s historically strong balance sheet cash flows operations available borrowing capacity company believes position continue complete reasonably priced acquisitions fitting company’s longterm strategic plans fiscal 2008 company completed following acquisitions • september 2007 company acquired mobile metals recycling business provides additional sources scrap metal everett massachusetts facility • company acquired two metals recycling businesses november 2007 one metals recycling business february 2008 expanded company’s presence southeastern us • february 2008 company acquired remaining 50 equity interest auto parts business located nevada exchange 50 interest land buildings owned business acquired business previously consolidated company’s financial statements company maintained operating control entity • august 2008 company acquired selfservice used auto parts business three locations southern us acquisitions completed fiscal 2008 material individually aggregate company’s financial position results operations fiscal 2007 company completed following acquisitions • december 2006 company acquired metals recycling business provide additional sources scrap metal megashredder everett massachusetts • may 2007 company acquired two metals recycling businesses separately provide scrap metal everett massachusetts tacoma washington facilities acquisitions completed fiscal 2007 material individually aggregate company’s financial position results operations company completed following significant transactions 2006 • september 30 2005 company completed separation termination metals recycling joint ventures hugo neu corporation “hnc” • september 30 2005 company acquired greenleaf auto recyclers llc “greenleaf” five store properties leased greenleaf assumed certain greenleaf liabilities greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops • october 31 2005 company purchased substantially assets regional recycling llc “regional” company operates nine metals recycling facilities located georgia alabama focused ferrous nonferrous metal • march 21 2006 company purchased minority interest metals recycling llc “mrl” operated metal recycling facility rhode island company assumed control mrl’s operations upon separation termination joint venture hnc 28 schnitzer steel industries inc form 10k 2008 see note 7 business combinations notes consolidated financial statements part ii item 8 report also fiscal 2008 company repurchased 695500 shares approximately 2 total shares outstanding total cost 45 million authority granted board directors results operations 1 company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning 2006 fiscal year instead date acquisition increases revenues operating income resulted election schnitzer steel industries inc form 10k 2008 29 offset statement income preacquisition interests net tax see note 7 business combinations notes consolidated financial statements part ii item 8 report 2 corporate expense consists primarily unallocated corporate expenses services benefit three business segments consequence unallocated expense operating income segment reflect operating income segment would standalone business 3 recycled ferrous metal sales mrb smb made rates per ton approximate export market prices addition company autobody sales apb mrb consequently intercompany revenues produce intercompany operating income recognized finished products sold third parties therefore intercompany profit eliminated 4 cost goods sold balances disclosed include amounts environmental charges separately stated consolidated statements income see part ii item 8 report 5 recycled ferrous metal sales joint ventures mrb subsequentely smb made rates per ton approximate west coast export market prices consequently intercompany revenues produce intercompany operating income recognized finished products sold third parties therefore intercompany profit eliminated revenues consolidated revenues fiscal 2008 increased 10 billion compared fiscal 2007 revenues fiscal 2008 increased company business segments primarily result increases market price scrap metal finished steel products higher throughput company’s processing manufacturing facilities incremental impact businesses acquired fiscal 2007 2008 consolidated revenues fiscal 2007 increased 718 million compared fiscal 2006 revenues fiscal 2007 increased company business segments primarily result higher volumes business segments due company’s focus increasing throughput increased purchases ferrous materials increased production result company’s investment megashredders added volumes full year operations acquisitions made fiscal 2006 increases market price scrap metal steel products operating income consolidated operating income increased 188 million compared fiscal 2007 increase operating income primarily attributable improved financial results business segments resulting increases market prices higher sales volumes partially offset increases purchase costs raw materials including nrv inventory adjustment fourth quarter fiscal 2008 consolidated sga percentage revenues operating income increased 27 percentage points fiscal 2008 compared fiscal 2007 mainly result average selling prices increasing faster rate purchase costs raw material consolidated sga increased 52 million compared fiscal 2007 increase consolidated sga fiscal 2008 primarily due 33 million increase compensationrelated expenses including annual incentive compensation expense principally due company’s improved financial operating performance increased headcount resulting incremental impact growth fiscal 2007 fiscal 2008 5 million increase sharebased compensation expense primarily due increased number participants additional year performance share grants company’s 1993 stock incentive plan “the plan” 3 million increase professional service costs 2 million increase marketing advertising costs consolidated operating income increased 38 million fiscal 2007 compared fiscal 2006 increase operating income primarily attributable increases market prices higher sales volumes partially offset increases purchase costs raw materials consolidated sga percentage revenues operating income decreased 11 percentage points fiscal 2007 compared fiscal 2006 consolidated sga expense increased 29 million 19 186 million fiscal 2007 compared fiscal 2006 increase fiscal 2006 due higher sga expense incurred reporting segments totaling 39 million combined partially offset 10 million decrease corporate increases 30 schnitzer steel industries inc form 10k 2008 reporting segments primarily attributable increase compensation expense 22 million due increased headcount annual incentive compensation sharebased compensation expense recognized fiscal 2007 12 million increase related higher allocated information technology costs net decrease corporate due primarily 15 million charge fiscal 2006 associated doj sec investigation company’s past payment practices asia discussed note 11 commitments contingencies notes consolidated financial statements part ii item 8 report net decrease corporate fiscal 2007 also included 8 million increase compensation costs resulting increased headcount annual incentive compensation expense sharebased compensation expense interest expense interest expense 9 million 8 million 3 million fiscal 2008 2007 2006 respectively increase fiscal 2007 2008 reflects higher average debt balances fiscal 2008 used fund capital expenditures acquisitions share repurchases working capital requirements increase fiscal 2006 2007 reflects higher average interest rates company carrying higher average debt balances fiscal 2007 order complete integrate fiscal 2006 acquisitions well support increased level working capital operations acquisitions addition 110 million related share repurchases information company’s outstanding debt balances see note 10 longterm debt notes consolidated financial statements part ii item 8 report income net interest expense income 3 million 4 million 60 million fiscal 2008 2007 2006 respectively fiscal 2006 company recorded pretax gain 57 million arose hnc separation termination agreement based difference excess values businesses acquired carrying value businesses sold detailed discussion hnc joint venture separation termination agreement see note 7 business combinations notes consolidated financial statements part ii item 8 report income tax expense company’s effective tax rate 364 fiscal 2008 comprised 350 federal statutory rate 18 effective state rate 16 nondeductible officers’ compensation partially offset benefit 20 section 199 manufacturing deduction effective tax rate 364 fiscal 2008 higher 361 effective tax rate fiscal 2007 due increased state taxes benefit section 199 deduction fiscal 2008 offset fiscal 2008 elimination extraterritorial income exclusion “eti” benefited fiscal 2007 phasein section 199 deduction phaseout eti mandated federal statute effective tax rate 361 fiscal 2007 lower 375 rate fiscal 2006 primarily fiscal 2006 rate included 21 accrual 14 million nondeductible penalties profits disgorgement expensed connection settlement sec doj investigations fiscal 2006 tax rate also reflected nonrecurring 57 million gain arising hnc separation termination see note 7 business combinations taxed 380 rate higher applicable company’s recurring income financial results segment company operates business across three reportable segments mrb apb smb additional financial information relating business segments contained note 17 segment information notes consolidated financial statements part ii item 8 report schnitzer steel industries inc form 10k 2008 31 metals recycling business 1 price information shown excluding cost freight incurred deliver product customer 2 cost goods sold balances disclosed include amounts environmental charges separately stated consolidated statements income see part ii item 8 report 32 schnitzer steel industries inc form 10k 2008 fiscal 2008 compared fiscal 2007 revenues mrb generated revenues 31 billion fiscal 2008 intercompany eliminations increase 974 million fiscal 2007 increase primarily attributable higher selling prices ferrous nonferrous metal due strong worldwide demand scrap metal higher ferrous processed nonferrous volumes due company’s focus increasing throughput incremental impact capacity growth experienced fiscal 2007 2008 outbound freight costs included cost sales increased 52 333 million fiscal 2008 compared fiscal 2007 primarily due increased volumes higher ocean freight rates ferrous revenues increased 909 million fiscal 2008 compared prior year increase ferrous revenues driven higher average net selling prices increased volumes average net selling price ferrous processing increased 179 per ton 68 fiscal 2007 fiscal 2008 average net selling price ferrous trading increased 91 per ton 33 fiscal 2008 compared fiscal 2007 processed ferrous sales volume increased 461000 tons fiscal 2008 compared prior year increase primarily result strategy increase volume metal purchases maximize throughput accomplished increased purchases ferrous materials increased production result company’s investment megashredders trading ferrous sales volume decreased 768000 tons compared fiscal 2007 primarily due company’s focus higher margin processed ferrous nonferrous operations lower quantities scrap available export baltic sea region nonferrous revenues increased 65 million fiscal 2008 compared period last year increase nonferrous revenues driven primarily increased volumes nonferrous pounds shipped increased 56 million pounds fiscal 2008 compared prior year increase pounds shipped primarily due improved recovery nonferrous materials processed new megashredders state art backend sorting systems higher overall volume processed company’s facilities greater purchases unprocessed materials incremental impact capacity growth experienced fiscal 2007 2008 average net selling price remained relatively consistent fiscal 2008 fiscal 2007 certain nonferrous metals byproduct shredding process quantities available shipment affected volume materials processed company’s shredders segment operating income operating income mrb 357 million 117 revenues fiscal 2008 compared 166 million 79 revenues fiscal 2007 increase operating income operating income percentage revenue reflects impact higher net selling prices ferrous nonferrous metal outpaced increased costs freight raw materials increased processed ferrous nonferrous volumes addition income joint ventures increased 7 million 126 prior year primarily due strong demand scrap metal included cost goods sold 49 million nrv adjustment reduce value inventory august 31 2008 lower cost market resulting significant decline future selling prices scrap metal began second half fiscal 2008 fourth quarter offsetting increases average selling prices volume 19 million increase sga expenses compared prior year primarily due 9 million higher compensationrelated expenses including annual incentive compensation expense resulting company’s improved financial operating performance increased headcount resulting incremental capacity growth experienced fiscal 2007 2008 3 million increase professional outside services 2 million increase sharebased compensation expense fiscal 2007 compared fiscal 2006 mrb generated revenues 21 billion fiscal 2007 intercompany eliminations increase 682 million 49 fiscal 2006 ferrous revenues increased 550 million 49 fiscal 2007 primarily due higher net selling prices increased volumes nonferrous revenues increased 129 million 48 fiscal schnitzer steel industries inc form 10k 2008 33 2006 primarily result increase 015 per pound 17 average nonferrous selling price operating income mrb 166 million 79 revenues fiscal 2007 compared 128 million 9 revenues fiscal 2006 38 million increase operating income directly related higher net selling prices increase sales volume outlook second half fourth fiscal quarter demand ferrous metal began soften future selling prices declined recent challenges credit markets buyers steel scrap metal high inventory levels potential global economic slow accelerated softening demand mrb believes longterm fundamentals supporting prices recycled metals remain positive however given current trends market ferrous nonferrous metal mrb currently believes fiscal 2009 selling prices lower seen 2008 due high level uncertainty regarding economic environment mrb’s past trends sales volumes may indicative expected volumes fiscal 2009 auto parts business 1 cost goods sold balances disclosed include amounts environmental charges separately stated consolidated statements income see part ii item 8 report fiscal 2008 compared fiscal 2007 revenues apb generated revenues 353 million fiscal 2008 intercompany eliminations increase 86 million fiscal 2007 increase prior year primarily driven increased sales volumes scrapped vehicles cores higher average selling prices higher part sales scrap vehicle revenue selfservice business increased 45 million prior year resulting 123 increase average scrap selling price per car increase 43000 tons 16 volume shipped core revenue increased 26 million prior year primarily due 60 increase average core sales per car increase 40000 14 cars crushed addition parts revenue increased 13 million prior year segment operating income operating income apb 47 million 133 revenues fiscal 2008 compared 29 million 109 revenues fiscal 2007 increase operating income operating income percentage revenue fiscal 2008 reflects impact higher sales volumes scrapped vehicles parts cores higher selling prices scrap cores outpaced increased cost purchasing scrapped vehicles increases sales volumes scrapped vehicles parts cores higher selling prices scrap cores partially offset 12 million increase sga expenses compared prior year primarily attributable 5 million increase compensationrelated expenses including performance incentive expense principally result company’s improved financial performance 2 million increase professional service costs 2 million increase marketing advertising expense 34 schnitzer steel industries inc form 10k 2008 fiscal 2007 compared fiscal 2006 apb generated revenues 266 million fiscal 2007 intercompany eliminations increase 48 million 22 fiscal 2006 increase revenues primarily attributable 112 million revenues generated greenleaf acquisition occurred fiscal 2006 operating income apb 29 million 109 revenues fiscal 2007 compared operating income 28 million 130 revenues fiscal 2006 decrease operating income percentage revenue primarily attributable apb’s entry fullservice used parts market higher costs associated purchase removal parts sold fullservice distribution model increased demand competition unprocessed metal increased costs purchase cars selfservice distribution model outlook apb operates two distribution channels used auto parts industry first selfservice auto parts depends heavily wholesale revenues sale scrap cores end fiscal 2008 market recycled metal began significant rapid decline addition rapid decline selling prices recycled metal seen fourth quarter fiscal 2008 resulted reduced flow scrapped vehicles available purchase comparison fourth quarter fiscal 2008 result factors apb currently believes fiscal 2009 selling prices cores scrap lower seen 2008 due high level uncertainty regarding economic environment apb’s past trends sales volumes may indicative expected volumes fiscal 2009 demand apb’s second distribution channel fullservice used auto parts driven primarily professional repair market current industry statistics indicate due higher fuel costs recent weakening us economy total miles driven us begun decline resulting fewer accidents consequence reduced demand collision repair parts steel manufacturing business 1 price information finished steel products shown excluding cost freight incurred deliver product customer fiscal 2008 compared fiscal 2007 revenues smb generated revenues 603 million fiscal 2008 intercompany eliminations increase 179 million fiscal 2007 increase prior year result higher average net selling prices finished steel products increased sales volumes smb able use increased production capacity take advantage schnitzer steel industries inc form 10k 2008 35 lower supply imported steel products increase sales west coast steel markets average net selling price increased 153 per ton 728 per ton fiscal 2008 compared fiscal 2007 contributed increased revenues 109 million increase average finished goods selling prices result significant reduction imported steel caused strong overseas demand weaker us dollar created tight supply steel products domestic customers finished goods sales volume increased 66000 tons fiscal 2008 compared prior year due factors discussed resulted increased revenues 48 million segment operating income operating income smb 72 million 120 revenues fiscal 2008 compared 64 million 152 revenues fiscal 2007 increase operating income due higher selling prices increased volumes partially offset higher costs scrap metal raw materials decrease operating income percentage revenue reflected impact 69 increase cost scrap metal outpaced 27 increase average selling price per ton increase 23 per ton conversion costs primarily related higher costs raw materials scrap metal smb acquired substantially scrap metal requirements mrb rates approximate west coast export market prices fiscal 2007 compared fiscal 2006 smb generated revenues 425 million fiscal 2007 intercompany eliminations increase 38 million fiscal 2006 increase revenue primarily attributable increase 47 per ton average net selling price increase 10000 tons sold fiscal 2007 fiscal 2006 average net selling price increased result increased worldwide steel consumption higher raw material costs manufacturers passed form higher prices increase sales volume primarily due increased demand customers capital improvements smb enabled steel mill increase output meet demand operating income smb fiscal 2007 64 million 152 revenues compared fiscal 2006 operating income 75 million 193 revenues decrease operating income reflects impact 20 increase cost scrap metal outpaced 9 increase average selling price per ton increase 17 per ton conversion costs primarily related higher costs raw materials scrap metal 3 million costs associated planned shut larger rolling mill third quarter fiscal 2007 outlook smb sells products primarily construction markets located west coast us competes domestic foreign steel manufacturers fiscal 2008 west coast construction demand softened weakening us dollar higher selling prices steel products overseas resulted significant reduction imported steel available sale us result market steel products tightened smb able achieve record selling prices record sales volumes beginning fiscal 2009 weakening us economic conditions led contraction construction demand coupled stronger us dollar potential pressure imported steel products smb currently believes current market trends continue fiscal 2009 selling prices lower seen 2008 due high level uncertainty regarding economic environment smb’s past trends sales volumes may indicative expected volumes fiscal 2009 liquidity capital resources company relies cash provided operating activities primary source liquidity supplemented current cash resources existing credit facilities sources uses cash company cash balances 15 million 13 million 25 million august 31 2008 2007 2006 respectively cash balances intended used working capital expenditures net cash provided operating activities fiscal 2008 142 million included net income 249 million add back 51 million noncash depreciation amortization expense 49 million noncash nrv 36 schnitzer steel industries inc form 10k 2008 inventory adjustment 54 million increase accounts payable due timing payments higher material costs 77 million increase accrued liabilities mainly due increase 40 million accrued income taxes 21 million increase compensationrelated liabilities including performance incentive related liabilities principally due company’s improved financial operating performance 14 million increase sharebased compensation due increased number participants additional year performance share grants company’s 1993 stock incentive plan “sip” sources cash partially offset increase inventory 216 million due higher material costs volumes 131 million increase accounts receivable mainly due increased sales timing collections net cash provided operating activities 179 million 105 million fiscal 2007 2006 respectively increase cash provided operating activities fiscal 2007 compared fiscal 2006 primarily related noncash gain hnc separation termination agreement 2006 decrease inventory resulting increased sales fourth quarter fiscal 2007 offset change accounts receivable net cash used investing activities fiscal 2008 128 million compared 117 million fiscal 2007 198 million fiscal 2006 net cash used investing activities fiscal 2008 included 84 million capital expenditures upgrade company’s equipment infrastructure 47 million acquisitions completed fiscal 2008 decrease outflows investing activities fiscal 2007 compared fiscal 2006 primarily related significant acquisitions occurred fiscal 2006 net cash used financing activities fiscal 2008 12 million compared 74 million cash used financing activities fiscal 2007 97 million cash provided financing activities fiscal 2006 decrease cash used financing activities fiscal 2007 2008 increase cash used financing activities fiscal 2006 2007 primarily due higher level share repurchases fiscal 2007 credit facilities company shortterm borrowings consisting uncommitted unsecured credit line wells fargo bank na increased 5 million 25 million march 2008 term credit facility also extended march 2009 interest outstanding indebtedness line credit set bank time borrowing company 25 million borrowings outstanding facility august 31 2008 weighted average interest rate line 269 august 31 2008 july 2007 company amended unsecured committed bank credit agreement bank america na administrative agent lenders party thereto revised agreement provides fiveyear 450 million revolving credit facility loan maturing july 2012 interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 weighted average interest rate line 424 august 31 2008 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio august 31 2008 2007 company borrowings outstanding credit facility 150 million 115 million respectively two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2008 company compliance covenants addition august 31 2008 2007 company 8 million longterm bonded indebtedness matures january 2021 company uses credit facilities fund share repurchases acquisitions capital expenditures working capital requirements schnitzer steel industries inc form 10k 2008 37 capital expenditures capital expenditures totaled 84 million 81 million 87 million fiscal 2008 2007 2006 respectively increases capital expenditures primarily reflect company’s significant investments modern equipment improve efficiency capabilities businesses maximize economies scale capital expenditures fiscal 2008 included significant enhancements company’s information technology infrastructure investments technology improve recovery nonferrous materials shredding process establishment additional nonferrous collection facilities improvements company’s marine shipping infrastructure investments improve efficiency increase worker safety enhance environmental systems addition company completed improvements eaf rolling mills enhanced production capabilities product quality company establishes capital expenditures targets based operational needs opportunities growth outlook markets operates company currently anticipates making 50 million 80 million capital expenditures fiscal 2009 potential capital projects fiscal 2009 expected include material handling processing equipment enhancements company’s information technology infrastructure improvements facilitiesenvironmentalsafety infrastructure continued investments technology improve recovery nonferrous materials shredding process dock replacement company believes investments provide future returns excess cost capital create value shareholders company expects use cash operations fund capital expenditures available lines credit fund acquisitions fiscal 2009 share repurchase program pursuant share repurchase program amended 2001 october 2006 company authorized repurchase 60 million shares class common stock management deems repurchases appropriate management evaluates long shortrange forecasts well anticipated sources uses cash determining course action would best enhance shareholder value prior fiscal 2008 company repurchased 38 million shares program fiscal 2008 company repurchased total 695500 shares program leaving approximately 15 million shares available repurchase pension contributions company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements fiscal 2006 company froze benefit accruals defined benefit plan however due changes market lower expected returns plan assets company made 2 million contribution defined benefit plan fiscal 2008 company anticipate making additional contributions defined benefit plan fiscal 2009 however changes discount rate actual investment returns lower longterm expected return plan assets could result company making future additional contributions company expects make contributions various defined contribution plans approximately 7 million fiscal 2009 addition company anticipates making 4 million contributions multiemployer plans including contribution 2 million multiemployer plan benefiting union employees smb company believes additional funding requirements would material impact financial condition see note 12 employee benefits notes consolidated financial statements part ii item 8 report discussion company’s retirement benefit plans assessment liquidity capital resources historically company’s available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs company generally believes current cash resources internally generated funds existing credit facilities provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases 38 schnitzer steel industries inc form 10k 2008 debt service requirements postretirement obligations future environmental obligations however company may seek finance business expansion additional borrowing arrangements additional equity financing deteriorating general economic conditions may result company utilizing available credit lines curtailing capital operating expenditures delaying restricting acquisitions share repurchases reassessing working capital requirements company determine time necessary obtain additional shortterm liquidity company evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate terms acceptable company however company believes balance sheet august 31 2008 level existing credit facilities position obtain additional sources liquidity required offbalance sheet arrangements exception operating leases company party offbalance sheet arrangements reasonably likely current future material effect company’s financial conditions results operations cash flows company enters operating leases new equipment property see note 11 commitments contingencies notes consolidated financial statements part ii item 8 report additional information company’s operating leases contractual obligations commitments company certain contractual obligations make future payments following table summarizes future obligations august 31 2008 thousands 1 smb takeorpay natural gas contract currently requires minimum purchase per day october 2010 whether amount utilized 2 smb electricity contract mwl requires minimum purchase electricity rate subject variable pricing whether amount utilized fixed portion contract obligates smb pay 128700 per month eleven months year contract expires september 2011 company’s reserve uncertain tax positions 7 million august 31 2008 due uncertainties settling liabilities company unable determine reasonable estimates period cash settlement liabilities result reserve unrecognized tax benefits excluded table see note 14 income taxes notes consolidated financial statements part ii item 8 report additional information schnitzer steel industries inc form 10k 2008 39 critical accounting policies estimates company identified critical accounting estimates important company’s portrayal financial condition operating results estimates require difficult subjective judgments including whether estimates required made matters inherently uncertain different estimates reasonably could used changes estimates reasonably likely occur could materially impact financial statements significant estimates underlying accompanying consolidated financial statements include inventory valuation goodwill intangible asset valuation environmental costs assessment valuation deferred income taxes income tax contingencies pension plan assumptions sharebased compensation assumptions revenue recognition inventories company’s inventories primarily consist ferrous nonferrous unprocessed metal ferrous processed metal used salvaged vehicles finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory apb establishes cost used salvaged vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs company evaluates whether inventory properly valued lower cost market quarterly basis company considers estimated future selling prices determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders based upon mrb’s estimate net realizable value inventory august 31 2008 adjustment 49 million made reduce value inventory lower cost market mrb’s estimate selling prices per ton increased decreased 10 estimate net realizable value adjustment would increase decrease 6 million august 31 2008 accounting process utilized company record unprocessed metal used salvaged vehicle inventory quantities relies significant estimates respect unprocessed metal inventory company relies perpetual inventory records utilize estimated recoveries yields based historical trends periodic tests certain unprocessed metal commodities time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value company’s inventory could materially overstated understated assist validating reasonableness estimates company runs periodic tests performs monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts value ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume goodwill intangible assets assessing recoverability goodwill intangible assets indefinite lives management must make assumptions regarding estimated future cash flows factors determine fair value respective assets estimates related assumptions change future company may required record impairment charges previously recorded accordance statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” company required assess goodwill impairment 40 schnitzer steel industries inc form 10k 2008 least annually using twostep process begins estimation fair value reporting units first step determines whether impairment occurred estimating fair value reporting units using present value future cash flows approach subject comparison reasonableness company’s market capitalization date valuation second step measures amount impairment tests utilize fair value amounts determined estimated future cash flows developed management selected costs statistics used evaluate goodwill typically related pricing volumes goods sold costs percentage revenues cyclicality inherent company’s industries environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors company considers recognition measurement environmental liabilities include following • current regulations time reserve established course cleanup specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies company’s sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility remediation deferred taxes deferred income taxes reflect differences fiscal yearend financial reporting tax basis assets liabilities based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises periodically company reviews deferred tax assets assess whether valuation allowance necessary valuation allowance established reduce deferred tax assets including net operating loss carryforwards extent assets likely unrealized although realization assured management believes morelikelythannot company’s deferred tax assets realized ultimate realization company’s deferred tax assets significantly different expectations value company’s deferred tax assets could materially overstated company established valuation allowance 1 million august 31 2008 state tax credits may expire used pension plans company sponsors defined benefit pension plan certain nonunion employees pension plans significant cost business related obligations expected settled far future accounting defined benefit pension plans results current recognition liabilities net periodic pension cost employees’ expected service periods based terms plans impact company’s investment funding decisions measurement pension obligations recognition liabilities costs require significant schnitzer steel industries inc form 10k 2008 41 assumptions two critical assumptions discount rate expected longterm rate return assets plan may impact company’s financial condition results operations actual results often differ assumptions relating longterm rates return equities fixed income securities economic factors discount rate assumption august 31 2008 577 05 increase decrease discount rate would reduce increase net pension liability approximately 1 million august 31 2008 accumulated comprehensive income would reduced increased amount adjusted taxes net periodic cost fiscal 2008 would reduced increased 158000 weighted average expected return assets assumption august 31 2008 70 expected return assets longterm assumption whose accuracy measured long period based past experience 05 increase decrease assumption would reduce increase net periodic pension cost 70000 sharebased compensation effective september 1 2005 company adopted fair value recognition provisions sfas 123 revised 2004 “sharedbased payment” “sfas 123r” requires recognition fair value sharebased compensation net income sharebased compensation expense sharebased payment awards granted september 1 2005 based grant date fair value estimated accordance provisions sfas 123r company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally threeyear performance period performancebased shares company estimated forfeiture rate based historical experience determining appropriate fair value model calculating fair value sharebased payment awards requires input subjective assumptions including expected life sharebased payment awards stock price volatility based historical monthend closing stock prices assumptions used calculating fair value sharebased payment awards represent management’s best estimates involve inherent uncertainties application management judgment result factors change company uses different assumptions company’s sharebased compensation expense performancebased awards could materially different future company’s actual payout assumption materially different estimate sharebased compensation expense could significantly different company recorded current period payout assumption changed 50 sharebased compensation related performance awards would increase decrease 1 million see note 13 sharebased compensation notes consolidated financial statements part ii item 8 report revenue recognition company recognizes revenue accordance sec staff accounting bulletin 104 “revenue recognition” revenue recognized company contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title scrap metal finished steel products transfers upon shipment based either cost insurance freight free board terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment retail sales apb revenues recognized customers pay parts wholesale products shipped customer location historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized recent accounting pronouncements may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” “sfas 162” sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity us gaap sfas 162 effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 “the meaning ‘present fairly conformity generally accepted accounting principles’” 42 schnitzer steel industries inc form 10k 2008 march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” sfas 161 intended improve financial reporting derivative instruments hedging activities requiring enhanced disclosures enable investors better understand risks impact entity’s financial position financial performance cash flows provisions sfas 161 effective company first quarter fiscal 2009 adoption sfas 161 enhance provide visibility company’s footnote disclosure surrounding derivative instruments hedging activities december 2007 fasb issued sfas 141r “business combinations” “sfas 141r” replaces sfas 141 issued sfas 160 “noncontrolling interests consolidated financial statements” “sfas 160” amendment arb 51 two new standards change accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements respectively sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity two standards effective company first quarter fiscal 2010 sfas 141r applied prospectively sfas 160 requires retrospective application classification presentation provisions requirements sfas 160 shall applied prospectively early adoption prohibited standards management currently evaluating requirements sfas 141r sfas 160 yet determined impact company’s consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” “sfas 159” sfas 159 establishes fair value option entities elect report certain financial assets liabilities fair value changes fair value recognized earnings sfas 159 effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged provided reporting entity also elects apply provisions sfas 157 “fair value measurements” “sfas 157” sfas 159 becomes effective company first quarter fiscal 2009 adoption sfas 159 material impact company’s consolidated financial position results operations cash flows september 2006 fasb issued sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands fair value measurement disclosure sfas 157 effective financial statements issued fiscal years beginning november 15 2007 company required adopt sfas 157 first quarter fiscal 2009 february 2008 fasb issued fasb staff position “fsp” 1571 fsp 1572 fsp 1571 amends sfas 157 remove certain leasing transactions scope fsp 1572 delays effective date sfas 157 nonrecurring nonfinancial assets liabilities beginning company’s first quarter fiscal 2010 adoption sfas 157 material impact company’s consolidated financial position results operations cash flows company currently evaluating requirements sfas 157 relates nonrecurring nonfinancial assets liabilities yet determined impact company’s consolidated financial position results operations cash flows april 2008 fasb issued fasb staff position 1423 “determination useful life intangible assets” “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp 1423 must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 interim periods within fiscal years early adoption prohibited fsp 1423 material impact company’s consolidated financial position results operations cash flows schnitzer steel industries inc form 10k 2008 43 item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion company’s operations three fiscal years ended august 31 2009 following discussion analysis provides information management believes relevant assessment understanding company’s results operations financial condition discussion may contain forwardlooking statements anticipate results based management’s plans subject uncertainty discussion read conjunction consolidated financial statements related notes thereto selected financial data operating statistics contained elsewhere form 10k business company operates three reportable segments mrb apb smb collectively provide end life cycle solution variety products company’s integrated businesses corporate expense consists primarily unallocated expense management administrative services benefit three business segments result unallocated expense operating income loss segment reflect operating income loss segment would standalone business information regarding company’s segments including financial information geographic areas refer note 18 segment information notes consolidated financial statements item 8 report mrb purchases collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron domestic export markets mrb processes large pieces scrap metal smaller pieces sorting shearing shredding torching resulting scrap metal processed pieces size density purity required customers meet production needs apb purchases used salvaged vehicles primarily tow companies private parties auto auctions charities city contracts sells serviceable used auto parts vehicles selfservice fullservice hybrid auto parts stores remaining portions vehicles primarily autobodies cores nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products smb purchases substantially recycled metal requirements mrb rates approximate west coast export market prices uses eaf minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depots central southern california company’s results operations depend large part demand prices recycled metal global domestic markets steel products western us company’s deep water port facilities east west coasts us everett massachusetts oakland california portland oregon tacoma washington access port facilities rhode island hawaii puerto rico allow company meet demand recycled metal steel manufacturers located europe asia central america africa company’s processing facilities southeastern us also provide access automobile steel manufacturing industries region periodically fluctuating volatile supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations three operating segments freight rates availability transportation key factors trends affecting industries company operates results operations following key factors trends affect industries company operates worldwide production consumption steel products general economic conditions competition consolidation scrap metal steel industries fragmentation auto parts industry volatility selling prices company’s products purchase prices raw materials including scrap metal following key factors trends specifically affect company’s results operations integration acquired businesses replacement installation capital schnitzer steel industries inc form 10k 2009 27 equipment reliance key pieces equipment cost availability product transportation availability credit ability customers perform contracts supply price raw materials union relationships pension postretirement benefits key factors trends discussed elsewhere annual report executive overview fiscal 2009 company faced difficult market conditions including unprecedented drop demand recycled metals finished steel products onset weak economic environment worldwide financial crisis resulted rapid steep drop sales volumes sales prices experienced previous fiscal year company’s operating segments resulted charge 52 million reduce inventory net realizable value first quarter face environment company undertook series actions adjust costs production levels meet lower demand included implementation cost containment program included reducing production output lowering purchase costs reducing full time headcount lowering selling general administrative expenses “sga” costs incentive compensation outside services reducing production output match lower demand lowering cost structure accordingly including 8 reduction it’s fulltime workforce company able significantly reduce controllable production sga costs controlling costs reducing inventory levels actively managing cash spreads selling prices recycled metal steel products cost purchasing raw materials well benefiting uptick sales volume fourth quarter company able generate sequentially improving quarterly operating results see graph operating income loss positive operating cash flows year 288 million 146 million increase prior fiscal year initiatives strengthened company’s ability weather current market environment following graph presents operating income loss quarter fiscal 2009 thousands 1 corporate expense intercompany eliminations included consolidated results 28 schnitzer steel industries inc form 10k 2009 company also completed four acquisitions fiscal 2009 expanded mrb operations puerto rico enhanced position west coast auto parts business presence northern california see note 7 business combinations notes consolidated financial statements item 8 report company able make acquisitions additional capital improvements reducing debt net cash 169 million august 31 2008 71 million august 31 2009 refer nongaap financial measures october 2009 company completed acquisition four selfservice used auto parts facilities sale fullservice used auto parts operation lkq corporation selfservice operations located near company’s metals recycling business export facility located portland oregon represent company’s first used auto parts operations pacific northwest company’s acquisition two additional facilities increase number used auto parts facilities company operates dallasfort worth metroplex four expected effective january 2010 acquired facilities operate company’s picknpull brand following items represent summary financial information fiscal 2009 • revenues 19 billion compared record revenues 36 billion prior year • net loss 32 million 114 per share compared record net income 249 million 861 per share prior year • net cash provided operating activities 288 million compared 142 million prior year • cash hand 41 million compared 15 million prior year end • debt net cash 71 million compared 169 million prior year company generated consolidated revenues 19 billion fiscal 2009 reflecting 17 billion decrease fiscal 2008 consolidated operating loss 58 million 460 million decrease consolidated operating income 402 million fiscal 2008 net loss 32 million 281 million decrease net income 249 million fiscal 2008 diluted net loss per share year 114 decrease 975 diluted net income per share 861 fiscal 2008 decreases primarily due worldwide economic crisis reduced demand scrap recycled metal finished steel products throughout period included 2009 operating loss 52 million inventory change discussed offset 53 million reduction sga expenses compared fiscal 2008 decrease sga expenses primarily due lower compensationrelated expenses including incentive compensation reduced expenses resulting cost containment measures reduced headcount noncompensation related costs also included operating loss 2 million gain due settlement agreement resolve disputes arisen hugo neu separation termination agreement see note 11 commitments contingencies notes consolidated financial statements item 8 report income expense 2009 increased 10 million compared period fiscal 2008 primarily due settlement agreement discussed 5 million reduction interest expense mrb generated revenues 15 billion 16 billion decrease fiscal 2008 included 14 billion 52 decrease ferrous revenues 209 million 45 decrease nonferrous revenues decrease ferrous revenues driven 39 decrease average net selling price ferrous 19 decrease ferrous sales volumes ferrous volumes fiscal 2009 decreased due lower demand reduced availability raw materials arising weaker global market conditions decrease nonferrous revenues driven 41 decrease average net sales price 10 decrease pounds sold due lower demand reduced availability raw materials mrb operating income 13 million compared 357 million fiscal 2008 apb generated revenues 266 million 86 million decrease fiscal 2008 decrease prior year driven 49 million decrease scrap vehicle revenue due lower sales volume prices 34 million decrease core revenue due lower sales volumes prices 3 million decrease parts revenues apb operating loss 3 million compared operating income 47 million fiscal 2008 schnitzer steel industries inc form 10k 2009 29 smb generated revenues 263 million 340 million decrease fiscal 2008 decrease prior year reflected lower demand due weaker economic market conditions caused reduction finished steel sales volumes decrease average net selling prices finished steel products sales volumes finished steel products decreased 395000 tons 51 381000 tons fiscal 2009 compared prior year average net selling price decreased 111 per ton 617 per ton fiscal 2009 compared fiscal 2008 due reduced demand smb operating loss 42 million compared operating income 72 million fiscal 2008 company recorded income tax benefit fiscal 2009 result net loss effective tax rate year ended august 31 2009 benefit 407 effective tax rates fiscal 2008 2007 expense 364 361 respectively business acquisitions company intends continue focus growth valuecreating acquisitions pursue acquisition opportunities believes create shareholder value generate returns excess cost capital company’s historically strong balance sheet cash flows operations available borrowing capacity company believes position continue complete reasonably priced acquisitions fitting company’s longterm strategic plans refer part item 1 business report detail acquisitions fiscal 2009 2008 2007 share repurchases fiscal 2009 company repurchased 600000 shares approximately 2 total shares outstanding total cost 30 million authority granted board directors 30 schnitzer steel industries inc form 10k 2009 results operations na applicable nm meaningful schnitzer steel industries inc form 10k 2009 31 1 mrb sells recycled ferrous metal smb rates per ton approximate export prices addition apb sells auto bodies mrb intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses services benefit three business segments consequence unallocated expense operating income segment reflect operating income segment would standalone business 3 joint ventures sell recycled ferrous metal mrb subsequently smb rates per ton approximate west coast export market prices consequently intercompany revenues produce intercompany operating income loss recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 4 intercompany profits losses recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory revenues consolidated revenues fiscal 2009 decreased 17 billion 48 19 billion compared fiscal 2008 revenues fiscal 2009 decreased business segments primarily due worldwide economic crisis reduced demand scrap recycled metal finished steel products throughout period reduced demand resulted lower scrap recycled metal finished steel sales volumes lower average selling prices consolidated revenues fiscal 2008 increased 10 billion compared fiscal 2007 revenues fiscal 2008 increased company business segments primarily result increases market price scrap metal finished steel products higher throughput company’s processing manufacturing facilities incremental impact businesses acquired fiscal 2007 2008 operating income loss consolidated operating income loss decreased 460 million operating loss 58 million fiscal 2009 compared consolidated operating income 402 million fiscal 2008 percentage revenues operating income loss decreased 141 percentage points fiscal 2009 compared fiscal 2008 weaker yearoveryear demand impact declines anticipated future selling prices outpaced decline inventory costs resulted noncash nrv inventory writedowns 52 million comprised 29 million mrb 32 million smb 9 million eliminated consolidation compared 49 million fiscal 2008 decrease operating income loss partially offset 4 million release environmental reserves 3 million gain recognized fiscal 2009 primarily related resolution hylebos waterway litigation see note 11 commitments contingencies notes consolidated financial statements item 8 report additionally decreases cost goods sold sga expenses due company’s implementation cost containment measures included decrease headcount 8 suspension employer contributions defined contribution plans effective march 2009 nonlabor cost reductions fiscal 2009 sga expenses decreased 53 million 2009 185 million compared fiscal 2008 due decreased compensationrelated expenses 45 million reduced expenses resulting cost containment measures reduced headcount noncompensation related costs including professional outside services expense 7 million compared prior year reduction compensationrelated expenses primarily due decrease annual incentive sharebased compensation expense resulting operating losses incurred company 5 million benefit arising nondeductible executive incentive compensation awarded included nondeductible officers’ compensation fiscal 2008 voluntarily irrevocably declined november 2008 decline professional services expense primarily result reduced consulting fees fiscal 2009 compared prior year also included operating loss fiscal 2009 2 million gain related settlement agreement resolve disputes arisen separation termination agreement relating dissolution company’s joint venture hugo neu september 2005 reductions partially offset 4 million increase bad debt expense fiscal 2009 compared prior year resulting bankruptcies adverse financial conditions experienced certain company’s customers affected ability satisfy obligations 32 schnitzer steel industries inc form 10k 2009 consolidated operating income increased 188 million fiscal 2008 compared fiscal 2007 increase operating income primarily attributable improved financial results business segments resulting increases market prices higher sales volumes partially offset increases purchase costs raw materials including nrv inventory adjustment 49 million fourth quarter fiscal 2008 increases consolidated sga expense percentage revenues operating income increased 27 percentage points fiscal 2008 compared fiscal 2007 mainly result average selling prices increasing faster rate purchase costs raw material consolidated sga expense increased 52 million 28 238 million fiscal 2008 compared fiscal 2007 increase consolidated sga expense fiscal 2008 primarily due 33 million increase compensationrelated expenses including annual incentive compensation expense principally due company’s improved financial operating performance increased headcount resulting incremental impact growth fiscal 2007 fiscal 2008 5 million increase sharebased compensation expense primarily due increased number participants additional year performance share grants company’s 1993 stock incentive plan 3 million increase professional service costs 2 million increase marketing advertising costs interest expense interest expense 3 million 9 million 8 million fiscal 2009 2008 2007 respectively decrease fiscal 2008 2009 result lower average interest rates company carrying significantly lower average debt balances period information company’s outstanding debt balances see note 10 longterm debt notes consolidated financial statements item 8 report income net excluding interest expense income 7 million 3 million 4 million fiscal 2009 2008 2007 respectively income increased 4 million fiscal 2009 compared prior year 2009 company recorded pretax gain 5 million primarily arose settlement agreement resolve disputes arisen separation termination agreement relating dissolution company’s joint venture hugo neu september 2005 detailed discussion agreement see note 11 commitments contingencies notes consolidated financial statements item 8 report income tax expense fiscal 2009 company recorded income tax benefit pretax loss income taxes minority interests effective tax rate benefit 407 compared expense 364 fiscal 2008 effective tax rate fiscal 2009 reflects following tax effect loss reversal 5 million nondeductible executive incentive compensation expense lower foreign tax rate permanently reinvested foreign earnings reduction contingent state tax liabilities reduction previouslyclaimed internal revenue code section 199 manufacturing deductions executive incentive compensation treated nondeductible fiscal 2008 voluntarily irrevocably declined fiscal 2009 resulting nontaxable income foreign earnings earned puerto rico metals recycling operation acquired february 2009 treated permanently reinvested puerto rico therefore us tax provided contingent state tax liabilities reduced settlement negotiated one state statute limitations expired two states section 199 expense primarily represents estimated reduction fiscal 2007 section 199 benefits result carry back fiscal 2009 net operating loss earlier year income tax benefit fiscal 2009 also decreased items none individually material including adjustments arising ongoing tax audits effective tax rate 364 fiscal 2008 comparable 361 effective tax rate fiscal 2007 financial results segment company operates business across three reportable segments mrb apb smb additional financial information relating business segments contained note 18 segment information notes consolidated financial statements item 8 report schnitzer steel industries inc form 10k 2009 33 metals recycling business 1 price information shown excluding cost freight incurred deliver product customer 2 average ferrous recycled metal sales price smb higher average price sales volumes prices higher average first quarter sales volumes smb remainder fiscal year relative external sales activity lt long ton 2240 pounds nm meaningful 34 schnitzer steel industries inc form 10k 2009 fiscal 2009 compared fiscal 2008 revenues mrb revenues decreased 16 billion 51 15 billion fiscal 2009 compared prior year decrease primarily attributable lower average net sales prices lower sales volumes caused lower demand reduced availability raw materials due weaker global market conditions fiscal 2009 ferrous revenues decreased 14 billion 52 12 billion fiscal 2009 compared prior year decrease ferrous revenues driven reductions ferrous sales volumes lower average net selling prices ferrous sales volumes decreased 10 million tons 19 42 million tons fiscal 2009 compared fiscal 2008 ferrous export sales volumes decreased 219000 tons 6 34 million tons fiscal 2009 compared fiscal 2008 due reduction trading volumes ferrous domestic sales volumes decreased 789000 tons 51 753000 tons fiscal 2009 compared prior year decreases volume primarily due combination lower demand reduced availability raw materials company also experienced declining prices year average net ferrous sales price decreased 172 per long ton 39 compared prior year due lower demand weaker global market conditions nonferrous revenues decreased 209 million 45 252 million fiscal 2009 compared prior year decrease nonferrous revenues primarily driven decrease average nonferrous net sales price sales volumes caused lower demand weaker global market conditions average net sales price decreased 042 41 061 per pound fiscal 2009 compared prior year primarily due weaker demand addition due combination lower demand reduced availability nonferrous pounds shipped decreased 42 million pounds 10 397 million pounds fiscal 2009 compared fiscal 2008 segment operating income operating income mrb 13 million 08 revenues fiscal 2009 compared 357 million 117 revenues fiscal 2008 decrease operating income operating income percentage revenue reflects impact lower net selling prices ferrous nonferrous metal declined costs raw materials freight decreased processed ferrous nonferrous volumes addition income joint ventures decreased 12 million 95 prior year primarily due weaker demand scrap metal included cost goods sold 29 million nrv adjustment reduce value inventory first quarter fiscal 2009 lower cost market resulting significant decline future selling prices scrap metal began second half fiscal 2008 fourth quarter combined number customer renegotiations deferrals cancellations also occurred first quarter fiscal 2009 offsetting decreases average selling prices volume 16 million decrease sga expenses compared prior year primarily due 12 million lower compensationrelated expenses including annual incentive compensation expense resulting company’s weaker financial operating performance decreased headcount 5 million decrease professional outside services 4 million decrease sharebased compensation expense partially offset increase bad debt 4 million 3 million increase legal reserves due ongoing trade disputes also included operating income loss 4 million release environmental reserves 3 million gain recognized first quarter fiscal 2009 primarily related resolution hylebos waterway litigation fiscal 2008 compared fiscal 2007 revenues mrb generated revenues 31 billion fiscal 2008 intercompany eliminations increase 974 million fiscal 2007 increase primarily attributable higher selling prices ferrous nonferrous metal due strong worldwide demand scrap metal higher ferrous processed nonferrous volumes due company’s focus increasing throughput incremental impact capacity growth experienced fiscal 2007 2008 outbound freight costs included cost sales increased 52 333 million fiscal 2008 compared fiscal 2007 primarily due increased volumes higher ocean freight rates schnitzer steel industries inc form 10k 2009 35 ferrous revenues increased 909 million fiscal 2008 compared prior year increase ferrous revenues driven higher average net selling prices increased volumes average net selling price ferrous processing increased 179 per ton 68 fiscal 2007 fiscal 2008 average net selling price ferrous trading increased 91 per ton 33 fiscal 2008 compared fiscal 2007 processed ferrous sales volume increased 461000 tons fiscal 2008 compared prior year increase primarily result strategy increase volume metal purchases maximize throughput accomplished increased purchases ferrous materials increased production result company’s investment megashredders trading ferrous sales volume decreased 768000 tons compared fiscal 2007 primarily due company’s focus higher margin processed ferrous nonferrous operations lower quantities scrap available export baltic sea region nonferrous revenues increased 65 million fiscal 2008 compared fiscal 2007 increase nonferrous revenues driven primarily increased volumes nonferrous pounds shipped increased 56 million pounds fiscal 2008 compared prior year increase pounds shipped primarily due improved recovery nonferrous materials processed new megashredders state art backend sorting systems higher overall volume processed company’s facilities greater purchases unprocessed materials incremental impact capacity growth experienced fiscal 2007 2008 average net selling price remained relatively consistent fiscal 2008 fiscal 2007 certain nonferrous metals byproduct shredding process quantities available shipment affected volume materials processed company’s shredders segment operating income operating income mrb 357 million 117 revenues fiscal 2008 compared 166 million 79 revenues fiscal 2007 increase operating income operating income percentage revenue reflects impact higher net selling prices ferrous nonferrous metal outpaced increased costs freight raw materials increased processed ferrous nonferrous volumes addition income joint ventures increased 7 million 126 prior year primarily due strong demand scrap metal included cost goods sold 49 million nrv adjustment reduce value inventory august 31 2008 lower cost market resulting significant decline future selling prices scrap metal began second half fiscal 2008 fourth quarter offsetting increases average selling prices volume 19 million increase sga expenses compared prior year primarily due 9 million higher compensationrelated expenses including annual incentive compensation expense resulting company’s improved financial operating performance increased headcount resulting incremental capacity growth experienced fiscal 2007 2008 3 million increase professional outside services 2 million increase sharebased compensation expense outlook despite weakened economic conditions existed fiscal 2009 mrb believes longterm fundamentals supporting demand recycled metals remain positive second half fiscal 2009 demand developing world began improve however outlook export domestic markets fiscal 2010 remains highly uncertain company currently unable provide guidance prices volumes fiscal year whole company believes conditions improve materially time global economic environment improves 36 schnitzer steel industries inc form 10k 2009 auto parts business na applicable nm meaningful fiscal 2009 compared fiscal 2008 revenues apb revenues decreased 86 million 25 266 million fiscal 2009 compared fiscal 2008 driven reduced sales volumes lower average selling prices scrapped vehicles cores resulting impact economic downturn included 49 million decrease scrap vehicle revenue due 126 decrease average selling price scrapped vehicles decrease 49000 tons 13 volumes shipped core revenue decreased 34 million prior year primarily due 101 decrease average selling price per core addition parts revenue decreased 3 million prior year segment operating income loss fiscal 2009 operating loss apb 3 million compared operating income 47 million fiscal 2008 percentage revenues operating loss decreased 143 percentage points fiscal 2009 compared operating income prior year decrease operating income fiscal 2009 reflects impact lower sales volumes prices scrapped vehicles cores impact inventory costs falling rapidly selling prices included operating loss reductions sga expense 9 million fiscal 2009 due 6 million lower compensationrelated expenses including incentive compensation reduced expenses resulting cost containment measures reduced headcount noncompensation related costs compared periods prior year fiscal 2008 compared fiscal 2007 revenues apb generated revenues 353 million fiscal 2008 intercompany eliminations increase 86 million fiscal 2007 increase prior year primarily driven increased sales volumes scrapped vehicles cores higher average selling prices higher part sales scrap vehicle revenue selfservice business increased 45 million prior year resulting 123 increase average scrap selling price per car increase 43000 tons 16 volumes shipped core revenue increased 26 million prior year primarily due 60 increase average core selling price per car increase 40000 14 cars crushed addition parts revenue increased 13 million prior year segment operating income operating income apb 47 million 133 revenues fiscal 2008 compared 29 million 109 revenues fiscal 2007 increase operating income operating income percentage revenue fiscal 2008 reflects impact higher sales volumes scrapped vehicles parts cores higher selling prices scrap cores outpaced increased cost purchasing scrapped vehicles increases sales volumes schnitzer steel industries inc form 10k 2009 37 scrapped vehicles parts cores higher selling prices scrap cores partially offset 12 million increase sga expenses compared prior year primarily attributable 5 million increase compensationrelated expenses including performance incentive expense principally result company’s improved financial performance 2 million increase professional service costs 2 million increase marketing advertising expense outlook general results apb highly dependent upon supply cost scrapped vehicles turn function overall economic conditions us canada availability scrapped vehicles recently improved levels seen fiscal 2009 supply remains difficult obtain periods recent economic downturn result cost acquire adequate supply vehicles declined much core scrap revenues generated processing selling vehicles company believes conditions improve materially time economic environment us canada improves october 2009 company completed acquisition four selfservice used auto parts facilities sale fullservice used auto parts operation lkq corporation selfservice operations located near company’s metals recycling business export facility located portland oregon represent company’s first used auto parts operations pacific northwest company’s acquisition two additional facilities increase number used auto parts facilities company operates dallasfort worth metroplex four expected effective january 2010 acquired facilities operate company’s picknpull brand acquisition six selfservice stores increase number selfservice stores 45 result sale fullservice operation subject performance selfservice operations company expects segment revenue decline operating income improve fullservice operations revenues 116 million operating loss 6 million fiscal 2009 eliminated going forward subject completion purchase accounting first quarter fiscal 2010 company expects loss sale less 15 million primarily reflect writeoff goodwill past apb’s business affected seasonal trends seasonal spikes experienced summer months selfservice business tended offset seasonal spikes experienced winter months fullservice business absence full service business’ offset going forward company expects results apb become seasonal sales increasing third fourth quarters subject prevailing economic conditions steel manufacturing business 1 price information shown netting cost freight incurred deliver product customer nm meaningful 38 schnitzer steel industries inc form 10k 2009 fiscal 2009 compared fiscal 2008 revenues smb revenues decreased 340 million 56 263 million fiscal 2009 compared fiscal 2008 result reduced sales volumes average selling prices finished steel products finished goods sales volumes decreased 395000 tons 51 381000 tons fiscal 2009 compared period last year primarily due reduced demand resulting weakened market conditions average finished goods selling prices fiscal 2009 decreased 111 per ton 15 617 per ton compared prior year result reduced demand segment operating income loss fiscal 2009 operating loss smb 42 million fiscal 2009 compared operating income 72 million fiscal 2008 percentage revenues operating loss decreased 279 percentage points fiscal 2009 compared operating income prior year decrease operating income reflects impact lower sales volumes caused weaker market conditions selling prices declined faster costs lower anticipated future selling prices resulted smb recording noncash nrv inventory writedown 32 million fiscal 2009 addition decrease operating income reflected lower production volumes resulted 15 million production costs could capitalized inventory fiscal 2009 included operating loss reductions sga expense 3 million fiscal 2009 due lower compensationrelated expenses including incentive compensation reduced expenses resulting cost containment measures reduced headcount noncompensation related costs compared periods prior year smb acquired substantially scrap metal requirements mrb rates approximate west coast export market prices fiscal 2008 compared fiscal 2007 revenues smb generated revenues 603 million fiscal 2008 increase 179 million fiscal 2007 increase prior year result higher average net selling prices finished steel products increased sales volumes smb able use increased production capacity take advantage lower supply imported steel products increase sales west coast steel markets average net selling price increased 153 per ton 728 per ton fiscal 2008 compared fiscal 2007 contributed increased revenues 109 million increase average finished goods selling prices result significant reduction imported steel caused strong overseas demand weaker us dollar created tight supply steel products domestic customers finished goods sales volume increased 66000 tons fiscal 2008 compared prior year due factors discussed resulted increased revenues 48 million segment operating income operating income smb 72 million 120 revenues fiscal 2008 compared 64 million 152 revenues fiscal 2007 increase operating income due higher selling prices increased volumes partially offset higher costs scrap metal raw materials decrease operating income percentage revenue reflected impact 69 increase cost scrap metal outpaced 27 increase average selling price per ton increase 23 per ton conversion costs primarily related higher costs raw materials scrap metal smb acquired substantially scrap metal requirements mrb rates approximate west coast export market prices outlook smb sells products primarily construction markets located west coast us competes domestic foreign steel manufacturers economic downturn continues hamper construction spending demand smb’s finished steel products expected remain soft fiscal 2010 sales volumes margins heavily dependent upon timing strength us economic recovery company currently unable provide guidance prices volumes fiscal year whole company believes conditions improve materially time global economic environment improves schnitzer steel industries inc form 10k 2009 39 liquidity capital resources company relies cash provided operating activities primary source liquidity supplemented current cash resources existing credit facilities sources uses cash company cash balances 41 million 15 million 13 million august 31 2009 2008 2007 respectively cash balances intended used working capital expenditures company uses excess cash hand reduce amounts outstanding credit facilities august 31 2009 debt net cash 71 million compared 169 million 131 million august 31 2008 2007 respectively refer nongaap financial measures net cash provided operating activities fiscal 2009 288 million increase 146 million compared fiscal 2008 increase net cash provided operating activities primarily result 199 million decrease inventory due lower purchase costs lower volumes material purchased decrease accounts receivable 190 million resulting cash collections receivables sources cash partially offset uses cash included 79 million decrease accounts payable due reduction price volumes material purchases 46 million increase refundable income taxes 42 million decrease accrued income taxes due tax payments related fiscal 2008 36 million decrease accrued payroll liabilities mainly due payment fiscal 2008 incentive compensation awards net cash provided operating activities 142 million 179 million fiscal 2008 2007 respectively decrease cash provided operating activities fiscal 2008 compared fiscal 2007 primarily related increase inventory due higher material costs volumes increase accounts receivable due increased sales timing collections partially offset increase accrued liabilities related accrued income taxes increased performance incentive related liabilities net cash used investing activities fiscal 2009 150 million compared 128 million fiscal 2008 117 million fiscal 2007 net cash used investing activities fiscal 2009 included 59 million capital expenditures upgrade company’s equipment infrastructure 93 million acquisitions completed fiscal 2009 increase outflows investing activities fiscal 2008 compared fiscal 2007 primarily related capital expenditures significant acquisitions occurred fiscal 2008 net cash used financing activities fiscal 2009 111 million compared 12 million cash used financing activities fiscal 2008 74 million cash used financing activities fiscal 2007 increase cash used financing activities fiscal 2008 2009 primarily due increase debt repayments funded higher levels cash generation decrease fiscal 2007 2008 primarily due lower level share repurchases credit facilities company’s shortterm borrowings consist primarily one year unsecured uncommitted 25 million credit line wells fargo bank na expires march 2010 interest rates outstanding indebtedness unsecured line credit set bank time borrowing company borrowings outstanding facility august 31 2009 compared 25 million august 31 2008 company maintains 450 million revolving credit facility matures july 2012 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 weighted average interest rate line 078 424 fiscal years ended august 31 2009 2008 respectively addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage 40 schnitzer steel industries inc form 10k 2009 ratio august 31 2009 2008 company borrowings outstanding credit facility 100 million 150 million respectively two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2009 company compliance covenants company uses credit facilities fund share repurchases acquisitions capital expenditures working capital requirements addition august 31 2009 2008 company 8 million longterm bonded indebtedness matures january 2021 acquisitions aggregate purchase price paid acquisitions fiscal 2009 96 million includes cash acquired amounts paid 3 million compared 47 million acquisitions prior year fiscal 2009 company continued expand presence regions operates new locations acquisitions valuecreating businesses see “executive overview” business acquisitions” capital expenditures capital expenditures totaled 59 million 84 million 81 million fiscal 2009 2008 2007 respectively fiscal 2009 company continued investment infrastructure improvement projects including general improvements number metals recycling facilities enhancements company’s information technology infrastructure investments technology improve recovery nonferrous materials shredding process investments improve efficiency increase capacity increase worker safety enhance environmental systems company plans invest 50 million 100 million capital expenditures fiscal 2010 15 million expected spent environmental compliance potential capital projects fiscal 2010 expected include material handling processing equipment enhancements company’s information technology infrastructure improvements facilities environmental safety infrastructure continued investments technology improve recovery nonferrous materials shredding process normal equipment replacement maintenance company believes investments create value shareholders company expects use cash operations available lines credit fund capital expenditures acquisitions fiscal 2010 share repurchase program pursuant share repurchase program amended 2001 october 2006 company authorized repurchase 60 million shares class common stock management deems repurchases appropriate management evaluates long shortrange forecasts well anticipated sources uses cash determining course action would best enhance shareholder value prior fiscal 2009 company repurchased approximately 45 million shares program november 2008 company’s board directors approved increase shares authorized repurchase 30 million 90 million fiscal 2009 company repurchased total 600000 shares program result august 31 2009 approximately 39 million shares available repurchase existing authorizations pension contributions company makes contributions defined benefit pension plan several defined contribution plans several multiemployer pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements fiscal 2006 company froze benefit accruals defined benefit plan however recently defined benefit plans experienced deterioration funded status due general decline investment values therefore due changes market lower expected returns plan assets company made 3 million contribution defined benefit plan fiscal 2009 company anticipate making additional schnitzer steel industries inc form 10k 2009 41 contributions defined benefit plan fiscal 2010 however changes discount rate actual investment returns continue remain lower longterm expected return plan assets could result company making future additional contributions effective march fiscal 2009 company suspended employer contributions defined contribution plans resumption contributions based variety factors including company performance overall economic conditions uncertain whether company make contributions plans fiscal 2010 addition fiscal 2010 company anticipates making 3 million contributions multiemployer plans including contribution 2 million multiemployer plan benefiting union employees smb company believes additional funding requirements would material impact financial condition see note 13 employee benefits notes consolidated financial statements item 8 report discussion company’s retirement benefit plans assessment liquidity capital resources historically company’s available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs company generally believes current cash resources internally generated funds existing credit facilities access capital markets provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases debt service requirements postretirement obligations future environmental obligations next 12 months however continued weak general market conditions may result company utilizing available credit lines curtailing capital operating expenditures delaying restricting acquisitions share repurchases reassessing working capital requirements company determine time requires additional shortterm liquidity company evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate terms acceptable company however company believes balance sheet august 31 2009 level existing credit facilities provide additional sources liquidity required offbalance sheet arrangements exception operating leases company party offbalance sheet arrangements reasonably likely current future material effect company’s financial condition results operations cash flows company enters operating leases new equipment property see note 11 commitments contingencies notes consolidated financial statements item 8 report additional information company’s operating leases 42 schnitzer steel industries inc form 10k 2009 contractual obligations commitments company certain contractual obligations make future payments following table summarizes future obligations august 31 2009 thousands 1 smb takeorpay natural gas contract currently requires minimum purchase per day october 2010 whether amount utilized 2 smb electricity contract mwl requires minimum purchase electricity rate subject variable pricing whether amount utilized fixed portion contract obligates smb pay 116 thousand per month eleven months year contract expires september 2011 company’s reserve uncertain tax positions 4 million august 31 2009 see note 15 income taxes notes consolidated financial statements item 8 report additional information critical accounting policies estimates company identified critical accounting estimates important company’s portrayal financial condition operating results estimates require difficult subjective judgments including whether estimates required made matters inherently uncertain different estimates reasonably could used changes estimates reasonably likely occur could materially impact financial statements significant estimates underlying accompanying consolidated financial statements include inventory valuation goodwill intangible asset valuation environmental costs assessment valuation deferred income taxes income tax contingencies sharebased compensation assumptions revenue recognition fair value measurements inventories company’s inventories primarily consist ferrous nonferrous unprocessed metal ferrous processed metal nonferrous recovered joint product used salvaged vehicles finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb establishes cost used salvaged vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb schnitzer steel industries inc form 10k 2009 43 establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs company evaluates whether inventory properly valued lower cost market quarterly basis company considers estimated future selling prices determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders accounting process utilized company record unprocessed metal used salvaged vehicle inventory quantities relies significant estimates respect unprocessed metal inventory company relies weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value company’s inventory could materially overstated understated assist validating reasonableness estimates company runs periodic tests performs monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume goodwill intangible assets company evaluates recoverability goodwill annual basis second quarter fiscal year upon occurrence certain triggering events substantive changes circumstances indicating fair value goodwill may impaired company assesses existence indicators imply potential impairment monthly basis assessment may include following indicators involve significant amount judgment significant reduction company’s expected future cash flows significant sustained decline company’s share price market capitalization otherthan temporary significant adverse change legal factors business climate impairment significant asset group within reporting unit expectation significant portion reporting unit sold otherwise disposed significantly end previously estimated useful life among indicators adverse change factors could potentially significant impact recoverability assets could result material impact company’s consolidated results future cash flows impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ company determined reporting units goodwill allocated equivalent company’s operating segments mrb apb smb components segment similar economic characteristics goodwill impairment test follows two step process first step fair value reporting unit compared carrying value company allocated corporate assets liabilities reporting unit carrying value reporting unit includes assets liabilities related operations reporting unit management must apply judgment determining estimated fair value reporting units estimated fair value less carrying value reporting unit second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied goodwill value impairment loss recognized amount equal excess event divestiture business unit within reporting unit goodwill reporting unit allocated business unit based 44 schnitzer steel industries inc form 10k 2009 fair value business unit divested total fair value reporting unit gain loss divestiture determined remaining goodwill reporting unit assets divested subsequently reevaluated impairment given market prices company’s reporting units readily available company makes various estimates assumptions determining estimated fair values reporting units company uses income approach determine fair value reporting units based present value expected future cash flows utilizing risk adjusted discount rate discount rate represents weighted average cost capital reflective market participant’s view fair value given current market conditions expected rate return capital structure debt costs market volatility peer company comparisons equity risk premium believed adequately reflect overall inherent risk uncertainty involved operations industry reporting units estimate cash flows extend beyond final year discounted cash flow model company employs terminal value technique whereby company uses estimated operating cash flows minus capital expenditures adjusted changes working capital requirements final year model discounts risk adjusted discount rate establish terminal value company includes present value terminal value fair value estimate assess sensitivity projected future cash flows results stress tested based different growth levels economic cycles determination fair value requires management apply significant judgment formulating estimates assumptions estimates assumptions primarily include forecasts future cash flows based management’s best estimate future sales operating costs pricing expectations capital expenditures working capital requirements discount rates growth rates general market conditions result inherent uncertainty associated forming estimates actual results could differ estimates second quarter fiscal 2009 company performed annual testing impairment goodwill part assessment recovery goodwill company conducted extensive valuation analysis using income approach applied discount rates ranging 94 124 reporting units projections used income approach took consideration current projected future business cycles project cash flows based upon historically high prices volumes experienced fiscal 2008 based results first step company’s annual assessment recoverability goodwill fair values reporting units exceeded carrying values indicating goodwill impairment company considered impact changes assumptions underlying estimates fair value would determination impairment fair value reporting units would fall carrying value forecasted cash flow decrease 20 discount rate increase two percentage points although annual impairment testing performed second quarter fiscal 2009 revealed fair value reporting units exceeded carrying value indicating impairment market capitalization company based average trading price company’s stock 15 day period immediately preceding quarter ended february 28 2009 determined carrying value company uncommon especially volatile market observed market prices individual trades company’s shares consequently market capitalization calculated may representative fair value company whole however common industries acquiring entity generally willing pay equity securities give acquiring entity controlling interest opposed investor would pay equity securities represent less controlling interest thus additional value appears result acquiring entity’s ability take advantage many benefits arise control another entity part overall assessment recoverability goodwill company’s fair value determined higher market capitalization reasonable control premium taken account control premium used company considered within range control premiums paid recent acquisitions within steel scrap recycling sectors recent acquisitions sectors since major declines share prices arose current economic cycle schnitzer steel industries inc form 10k 2009 45 october 2 2009 company entered definitive agreement sell company’s fullservice used auto parts operation operated part apb reporting unit company identified divestiture triggering event resulted testing goodwill impairment based company’s valuation analysis performed relation divestiture fullservice operations company determined goodwill related apb impaired august 31 2009 company continue monitor goodwill indefinitelived intangible longlived assets possible future impairment environmental costs company operates industries inherently possess environmental risks manage risks company employs environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors company considers recognition measurement environmental liabilities include following • current regulations time reserve established course remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies company’s sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility remediation deferred taxes deferred income taxes reflect differences fiscal yearend financial reporting tax basis assets liabilities based enacted tax laws statutory tax rates tax credits recognized reduction income tax expense year credit arises periodically company reviews deferred tax assets assess whether valuation allowance necessary valuation allowance established reduce deferred tax assets including net operating loss carryforwards extent assets likely unrealized although realization assured management believes likely company’s deferred tax assets realized ultimate realization company’s deferred tax assets significantly different expectations value company’s deferred tax assets could materially overstated company established valuation allowance less 1 million august 31 2009 state tax credits may expire used sharebased compensation company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally threeyear performance period performancebased shares company estimated forfeiture rate based historical experience determining appropriate fair value model calculating fair value sharebased payment awards requires input subjective assumptions including expected life sharebased payment awards stock price volatility based historical monthend closing stock prices assumptions used calculating fair value sharebased payment awards represent 46 schnitzer steel industries inc form 10k 2009 management’s best estimates involve inherent uncertainties application management judgment result factors change company uses different assumptions company’s sharebased compensation expense performancebased awards could materially different future company’s actual payout assumption materially different estimate sharebased compensation expense could significantly different company recorded current period payout assumption changed 50 sharebased compensation related performance awards would increase decrease 2 million see note 14 sharebased compensation notes consolidated financial statements item 8 report revenue recognition company recognizes revenue accordance sec staff accounting bulletin 104 “revenue recognition” revenue recognized company contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title scrap metal finished steel products transfers upon shipment based shipping terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment retail sales apb revenues recognized customers pay parts wholesale products shipped customer location additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized fair value measurements september 1 2008 company adopted accounting standards defined fair value fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets • level 2 directly indirectly observable market data • level 3 unobservable inputs market data correlation company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available developing fair value measurements company’s financial instrument subject fair value measurement outstanding natural gas contract level 2 steel manufacturing business measured fair value using model derived observable market data model considers various inputs including quoted futures prices commodities b time value c company’s credit risk well relevant economic measures see note 12 derivative financial instruments fair value measurements notes consolidated financial statements item 8 report recent accounting pronouncements december 2007 fasb issued sfas 141r “business combinations” “sfas 141r” replaces sfas 141 issued sfas 160 “noncontrolling interests consolidated financial statements” “sfas 160” amendment arb 51 two new standards change accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements respectively sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity two standards effective company fiscal year beginning september 1 2009 sfas 141r applied prospectively business combinations completed fiscal 2010 beyond schnitzer steel industries inc form 10k 2009 47 company retrospectively apply applicable classification presentation provisions sfas 160 requirements sfas 160 shall applied prospectively early adoption prohibited standards february 2008 fasb issued fasb staff position “fsp” 1572 “effective date fasb statement 157” delays effective date sfas 157 nonrecurring nonfinancial assets liabilities fiscal year beginning september 1 2009 company’s significant nonfinancial assets liabilities could impacted deferral include assets liabilities initially measured fair value business combination goodwill tested annually impairment although believe adoption may impact way determine fair value goodwill indefinitelived intangible assets longlived assets company expect material impact company’s consolidated financial position results operations cash flows april 2008 fasb issued fsp 1423 “determination useful life intangible assets” amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp 1423 must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 interim periods within fiscal years standard effective company fiscal year beginning september 1 2009 early adoption prohibited fsp 1423 expected material impact company’s consolidated financial position results operations cash flows december 2008 fasb issued fsp 132r1 “employers’ disclosures postretirement benefit plan assets” provides guidance employer’s disclosures plan assets defined benefit pension postretirement plan require additional disclosure regarding investment policies strategies fair value major asset category based risks assets inputs valuations techniques used estimate fair value fair value measurement hierarchy levels sfas 157 asset category significant concentration risk information standard effective company fiscal year ending august 31 2010 fsp 132r1 enhance provide visibility company’s footnote disclosures surrounding plan assets company’s defined benefit pension plan april 2009 fasb issued fsp 1574 “determining fair value volume level activity asset liability significantly decreased identifying transactions orderly” fsp 1574 amends sfas 157 provides additional guidance estimating fair value accordance sfas 157 volume level activity asset liability significantly decreased also includes guidance identifying circumstances indicate transaction orderly fair value measurements fsp 1574 required applied prospectively retrospective application prohibited standard effective company fiscal period ending august 31 2009 material impact company’s consolidated financial position results operations cash flows june 2009 fasb issued sfas 168 “the fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162” fasb accounting standards codification become source authoritative us generally accepted accounting principles gaap applied nongovernmental entities rules interpretive releases securities exchange commission sec authority federal securities laws also sources authoritative gaap sec registrants effective date statement codification supersede thenexisting nonsec accounting reporting standards nongrandfathered nonsec accounting literature included codification become nonauthoritative standard became effective company september 15 2009 adoption sfas 168 expected material impact company’s consolidated financial consolidated results operations cash flows 48 schnitzer steel industries inc form 10k 2009 nongaap financial measures debt net cash debt net cash difference sum longterm debt shortterm debt ie total debt ii cash equivalents management believes debt net cash useful measure investors management’s view cash equivalents used among things repay indebtedness netting total debt useful measure company’s leverage management believes nongaap financial measure allows better understanding company’s operating financial performance nongaap financial measure considered addition substitute directly comparable us gaap measure following reconciliation debt net cash thousands schnitzer steel industries inc form 10k 2009 49 item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2010 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business operate three reporting segments mrb apb smb collectively provide endoflife cycle solution variety products integrated businesses use operating income loss measure segment performance corporate expense consists primarily unallocated expense management administrative services benefit three reporting segments result unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would standalone business information regarding reporting segments including financial information geographic areas see note 20 segment information notes consolidated financial statements part ii item 8 report mrb buys collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets mrb processes mixed large pieces scrap metal smaller pieces sorting shearing shredding torching resulting scrap metal pieces size density purity required customers meet production needs apb procures used salvaged vehicles sells serviceable used auto parts vehicles selfservice auto parts stores remaining portions vehicles primarily autobodies cores nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products smb purchases substantially recycled metal mrb rates approximate export market prices shipments west coast us uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depots central southern california results operations depend large part demand prices recycled metal foreign domestic markets steel products western us deep water port facilities east west coasts us everett massachusetts oakland california portland oregon tacoma washington providence rhode island access public deep water port facilities kapolei hawaii salinas puerto rico allow us meet demand recycled metal steel manufacturers located europe asia central america africa processing facilities southeastern us also provide access automobile steel manufacturing industries region key economic factors trends affecting industries operate financial results largely depend supply raw materials us demand recycled metal foreign domestic markets steel products western us fluctuating volatile supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations three reporting segments fiscal 2010 continued experience effects 2009 global economic crisis us economy began show signs gradual recovery increased us steel mill utilization prior year slightly improved availability raw materials better economic conditions overseas markets particularly asia led continuing strong demand exports ferrous nonferrous recycled materials however global economy 24 schnitzer steel industries inc form 10k 2010 still hampered factors including european sovereign debt crisis tightening credit availability china although overall financial performance benefited gradually improving global economy still uncertain nature recovery resulting market volatility led variable quarterly results throughout fiscal 2010 strategic factors continue closely monitor economic situation remain focused core strategies believe meet business objectives • use seven deep water ports access customers directly around world meet demand wherever greatest • growth acquisitions existing new geographic regions create value generate returns excess cost capital • continued investment benefit technologies process improvements increase separation recovery recycled materials shredding process • continued improvement productivity focus cost containment optimization spreads selling prices cost acquiring materials fiscal 2010 acquired lkq corporation four selfservice used auto parts stores located near mrb’s export facility portland oregon two selfservice used auto parts stores increased presence dallasfort worth metroplex also acquired metals recycler montana provide additional source scrap metal tacoma washington export facility sold fullservice used auto parts operation lkq corporation executive overview financial results fiscal 2010 operating results benefited increased average selling prices due continuing strong demand scrap recycled metal products saw us return profitability revenues growing 514 million 23 billion net income attributable ssi 67 million compared loss 32 million fiscal 2009 diluted net income attributable ssi 237 per share fiscal 2010 compared net loss 114 per share fiscal 2009 following items summarize consolidated financial performance fiscal 2010 • revenues 23 billion compared 18 billion prior year • operating income 126 million compared operating loss 51 million prior year • net income continuing operations attributable ssi 81 million 286 per share diluted compared net loss continuing operations attributable ssi 28 million 099 per share diluted prior year • net income attributable ssi 67 million 237 per share diluted compared net loss attributable ssi 32 million 114 per share diluted prior year schnitzer steel industries inc form 10k 2010 25 following items summarize consolidated cash flow balance sheet information fiscal 2010 • net cash provided operating activities 90 million compared 288 million prior year • cash hand 30 million compared 41 million prior yearend • debt net cash 70 million compared 71 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 fiscal 2010 mrb segment generated revenues 20 billion 472 million increase fiscal 2009 included 309 million 25 increase ferrous revenues 161 million 64 increase nonferrous revenues increase ferrous revenues primarily driven 24 increase average net selling price resulting strong demand asian markets lesser extent improved domestic markets scrap metal increase nonferrous revenues driven 36 increase average net selling price 21 increase pounds sold due higher demand increased availability raw materials mrb operating income 118 million compared 13 million fiscal 2009 fiscal 2010 apb segment set records selfservice revenues operating income revenues 241 million operating income 51 million 88 million increase revenues prior year driven 37 million increase scrap vehicle revenue 32 million increase core revenue primarily due higher sales volumes selling prices 15 million increase parts revenues apb operating income 51 million compared 4 million fiscal 2009 fiscal 2010 smb segment generated revenues 285 million 22 million increase fiscal 2009 increase prior year reflected increase sales volumes finished steel products 63 thousand tons 17 444 thousand tons fiscal 2010 however average net selling price decreased 30 per ton 5 587 per ton fiscal 2010 increases sales volume reflected improved still weak demand finished steel products western north america smb operating loss 6 million compared 42 million fiscal 2009 share repurchases fiscal 2010 repurchased 412994 shares class common stock approximately 2 total class b shares outstanding total cost 17 million authority granted board directors 26 schnitzer steel industries inc form 10k 2010 results operations nm meaningful 1 mrb sells recycled ferrous metal smb rates per ton approximate west coast export market prices addition apb sells auto bodies mrb intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses services benefit three business segments consequence unallocated expense operating income segment reflect operating income segment would standalone business 3 joint ventures sell recycled ferrous metal mrb subsequentely smb rates per ton approximate west coast export market prices consequently intercompany revenues produce intercompany operating income loss recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 4 intercompany profits losses recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory schnitzer steel industries inc form 10k 2010 27 revenues fiscal 2010 compared fiscal 2009 consolidated revenues fiscal 2010 increased 514 million 29 23 billion revenues fiscal 2010 increased reporting segments primarily due continuing strong worldwide demand scrap recycled metal led higher average net selling prices sales volumes lesser extent increased western us demand finished steel products fiscal 2009 compared fiscal 2008 consolidated revenues fiscal 2009 decreased 17 billion 49 18 billion revenues fiscal 2009 decreased reporting segments primarily due worldwide economic crisis reduced demand scrap recycled metal finished steel products throughout period reduced demand resulted lower scrap recycled metal finished steel sales volumes lower average selling prices operating income loss fiscal 2010 compared fiscal 2009 consolidated operating income 126 million fiscal 2010 compared consolidated operating loss 51 million fiscal 2009 percentage consolidated revenues consolidated operating income increased 83 percentage points fiscal 2010 compared fiscal 2009 improvement consolidated operating income primarily due higher average net selling prices increased average cost raw materials increased availability raw materials widened operating margins improvement consolidated operating income also benefited decrease consolidated selling general administrative “sga” expense 5 million 159 million fiscal 2010 decrease included 9 million higher bad debt expense recognized prior year 6 million current year benefits recognized legal settlements 6 million environmental legal cost reimbursements including 3 million fourth quarter fiscal 2010 6 million reduced professional service fees decreases partially offset 18 million increase incentive compensation due improvements financial performance reinstatement employer contributions defined contribution plans effective april 2010 2 million increased expense related amortization intangibles fiscal 2009 compared fiscal 2008 consolidated operating loss 51 million fiscal 2009 compared consolidated operating income 403 million fiscal 2008 percentage consolidated revenues consolidated operating income decreased 143 percentage points fiscal 2009 compared fiscal 2008 weaker yearoveryear demand impact declines selling prices outpaced decline purchase prices resulted reduction operating income included noncash net realizable value “nrv” inventory write 52 million fiscal 2009 decrease consolidated operating income loss partially offset 4 million release environmental reserves 3 million gain recognized fiscal 2009 primarily related resolution hylebos waterway litigation additionally decreases consolidated cost goods sold consolidated sga expense due implementation cost containment measures included decrease headcount 8 suspension employer contributions defined contribution plans effective march 2009 nonlabor cost reductions fiscal 2009 consolidated sga expense decreased 51 million 163 million fiscal 2009 compared 214 million fiscal 2008 primarily due decreased compensationrelated expenses 49 million reduced expenses 7 million resulting cost containment measures noncompensation related costs including professional outside services expense reduction compensationrelated expenses primarily due decrease annual incentive sharebased compensation expense resulting operating losses incurred 5 million benefit arising nondeductible executive incentive compensation awarded included nondeductible officers’ compensation fiscal 2008 voluntarily irrevocably declined fiscal 2009 decline professional services expense primarily result reduced consulting fees fiscal 2009 also included consolidated operating loss fiscal 2009 2 million gain related settlement agreement 28 schnitzer steel industries inc form 10k 2010 resolve disputes arisen separation termination agreement relating dissolution joint venture hugo neu september 2005 reductions partially offset 5 million increase bad debt expense fiscal 2009 compared prior year resulting bankruptcies adverse financial conditions experienced certain customers affected ability satisfy obligations interest expense interest expense 2 million 3 million 9 million fiscal 2010 2009 2008 respectively decrease fiscal 2009 fiscal 2010 result lower average interest rates lower outstanding debt information outstanding debt balances see note 11 longterm debt capital lease obligations notes consolidated financial statements part ii item 8 report income net excluding interest expense income net excluding interest expense 2 million 7 million 3 million fiscal 2010 2009 2008 respectively income decreased 5 million fiscal 2010 compared prior year fiscal 2009 included pretax gain 5 million settlement agreement relating dissolution joint venture hugo neu september 2005 income tax expense fiscal 2010 compared fiscal 2009 effective tax rate fiscal 2010 326 provision income compared 423 benefit loss fiscal 2009 level decrease effective rate primarily reflects impact tax credits lower taxable income loss fiscal 2009 compared fiscal 2010 lower state tax rate fiscal 2010 resulting reduction reserve unrecognized tax benefits favorable manufacturing deduction fiscal 2010 included restoration previously disallowed deduction due newly enacted law fiscal 2009 also included reduction reserve unrecognized tax benefits increased effective rate benefit loss fiscal 2009 compared fiscal effective tax rate fiscal 2009 423 benefit loss compared 359 provision income fiscal 2008 increase effective rate primarily reflects net loss fiscal 2009 contingent state tax liabilities reduced settlement negotiated one state statute limitations expired two states nontaxable income caused reversal 5 million nondeductible executive incentive compensation expense treated nondeductible fiscal 2008 voluntarily irrevocably declined fiscal 2009 financial results reporting segment operate business across three reporting segments mrb apb smb additional financial information relating reporting segments contained note 20 segment information notes consolidated financial statements part ii item 8 report schnitzer steel industries inc form 10k 2010 29 metals recycling business 1 price information shown netting cost freight incurred deliver product customer 2 fiscal 2009 average ferrous recycled metal sales price smb significantly higher average foreign sales price compared foreign customers sales smb greater volume first quarter year sales prices higher latter three quarters lt long ton 2240 pounds nm meaningful 30 schnitzer steel industries inc form 10k 2010 fiscal 2010 compared fiscal 2009 revenues mrb revenues increased 472 million 31 20 billion fiscal 2010 increase primarily attributable higher ferrous average net selling prices higher nonferrous sales volumes caused increased demand availability scrap metal ferrous revenues increased 309 million 25 16 billion fiscal 2010 increase ferrous revenues primarily driven higher average net selling prices experienced increasing prices year average net ferrous selling price increased 64 per long ton 24 compared prior year due strong demand asian markets lesser extent improved demand domestic markets provided support domestic foreign selling prices nonferrous revenues increased 161 million 64 413 million fiscal 2010 increase nonferrous revenues driven increases average nonferrous net selling price sales volumes average net selling price increased 022 36 083 per pound fiscal 2010 primarily due stronger demand addition nonferrous volumes sold increased 81 million pounds 21 478 million pounds fiscal 2010 caused increased recovery nonferrous materials shredding process nonferrous collection activity higher demand due stronger global market conditions segment operating income operating income mrb 118 million 60 revenues fiscal 2010 compared 13 million 08 revenues fiscal 2009 increase operating income reflects impact improved worldwide demand scrap recycled metal led higher average net selling prices increased average cost raw materials increased availability raw materials continued benefits improved production operating efficiencies addition income joint ventures increased 2 million prior year primarily due stronger demand scrap metal included fiscal 2010 operating income mrb decrease sga expense 9 million compared prior year primarily due reduction 8 million bad debt expense 6 million current year benefits legal settlements 3 million environmental cost reimbursements offsetting decreases 7 million increase incentive compensation due improvements financial performance 1 million increase expense related amortization intangibles fiscal 2009 compared fiscal 2008 revenues mrb revenues decreased 16 billion 51 15 billion fiscal 2009 decrease primarily attributable lower average net selling prices lower sales volumes caused lower demand reduced availability raw materials due weaker global market conditions fiscal 2009 ferrous revenues decreased 14 billion 52 12 billion fiscal 2009 decrease driven reductions ferrous sales volumes average net selling prices ferrous sales volumes decreased 10 million tons 19 42 million tons fiscal 2009 ferrous foreign sales volumes decreased 219 thousand tons 6 34 million tons fiscal 2009 due reduction trading volumes ferrous domestic sales volumes decreased 789 thousand tons 51 753 thousand tons fiscal 2009 decreases volume primarily due combination lower demand reduced availability raw materials also experienced declining prices year average net ferrous selling price decreased 172 per long ton 39 compared prior year due lower demand weaker global market conditions nonferrous revenues decreased 209 million 45 252 million fiscal 2009 decrease primarily driven decrease average nonferrous net selling price sales volumes caused lower demand weaker global market conditions average net selling price decreased 042 per pound 41 061 per schnitzer steel industries inc form 10k 2010 31 pound fiscal 2009 primarily due weaker demand addition due combination lower demand reduced availability nonferrous pounds shipped decreased 42 million pounds 10 397 million pounds fiscal 2009 segment operating income operating income mrb 13 million 08 revenues fiscal 2009 compared 357 million 117 revenues fiscal 2008 decrease operating income reflects impact lower net selling prices ferrous nonferrous metal declined costs raw materials freight decreased processed ferrous nonferrous volumes resulted noncash nrv inventory write 29 million fiscal 2009 addition income joint ventures decreased 12 million 95 prior year primarily due weaker demand scrap metal weaker yearoveryear demand impact declines selling prices outpaced decline purchase prices combined number customer renegotiations deferrals cancellations first quarter fiscal 2009 resulted reduction operating income offsetting decreases average selling prices volume 16 million decrease mrb’s sga expense compared prior year primarily due 12 million lower compensationrelated expenses including annual incentive compensation expense resulting weaker financial operating performance decreased headcount 5 million decrease professional outside services 4 million decrease sharebased compensation expense partially offset increase bad debt 4 million 3 million increase legal reserves due ongoing trade disputes also included operating income loss 4 million release environmental reserves 3 million gain recognized first quarter fiscal 2009 primarily related resolution hylebos waterway litigation outlook mrb’s results dependent upon worldwide demand scrap metal used production steel products available supply cost raw materials sourced united states despite depressed worldwide economic conditions continue inhibit production industrial producers steel believe longterm fundamentals supporting demand recycled metals remain positive market prices scrap metal subject shortterm movements caused changes economic conditions able provide guidance market prices scrap metal however expect volumes seen fiscal 2010 auto parts business nm meaningful fiscal 2010 compared fiscal 2009 revenues apb’s record selfservice revenues 241 million fiscal 2010 represented 88 million 57 increase fiscal 2009 increase revenues included 37 million increase scrap vehicle revenue 32 million increase 32 schnitzer steel industries inc form 10k 2010 core revenue 15 million increase parts revenue compared fiscal 2009 record revenues driven increase 39 45 selfservice store locations improved production operating efficiencies improvements commodity prices increased sales used auto parts attributable benefits recognized purchasing higher quality vehicles increased volumes purchases scrapped vehicles including additional vehicles purchased pursuant cashforclunkers government stimulus program segment operating income operating income apb 51 million 21 revenues fiscal 2010 compared 4 million 2 revenues fiscal 2009 increase operating income fiscal 2010 reflected impact higher selling prices volumes scrapped vehicles cores parts resulted primarily increases commodity prices increase 39 45 selfservice store locations improved production operating efficiencies included operating income increase sga expense 6 million fiscal 2010 primarily due 4 million increase compensation expenses including increases sharebased incentive compensation due improvements operating results prior year 1 million increase expense related amortization intangibles apb’s results operations include operating results discontinued operations see note 7 business combinations notes consolidated financial statements part ii item 8 report fiscal 2009 compared fiscal 2008 revenues apb revenues decreased 75 million 33 153 million fiscal 2009 driven reduced sales volumes lower average selling prices scrapped vehicles cores resulting impact economic downturn included 46 million decrease scrap vehicle revenue due 126 decrease average selling price scrapped vehicles decrease 49 thousand tons 13 volumes shipped core revenue decreased 31 million prior year primarily due 101 decrease average selling price per core partially offsetting decreases parts revenue increased 2 million prior year segment operating income operating income apb 4 million 2 revenues fiscal 2009 compared 48 million 21 revenues fiscal 2008 decrease operating income fiscal 2009 reflects impact lower sales volumes prices scrapped vehicles cores impact inventory costs falling rapidly selling prices included operating income reductions sga expense 7 million fiscal 2009 due 4 million lower compensationrelated expenses including incentive compensation reduced expenses resulting cost containment measures reduced headcount noncompensation related costs compared periods prior year outlook apb’s results dependent upon supply cost endoflife vehicles well market prices ferrous nonferrous scrap metals turn function overall global economic conditions average ferrous nonferrous selling prices increased fiscal 2010 compared fiscal 2009 due improved worldwide demand metals apb able raise purchase prices vehicles still maintain margins contributed record year terms revenue operating income given current price levels apb expects volumes fiscal 2011 slightly seen fiscal 2010 volumes new stores acquired fiscal 2010 likely offsetting onetime benefits government’s cashforclunkers program schnitzer steel industries inc form 10k 2010 33 steel manufacturing business 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer nm meaningful fiscal 2010 compared fiscal 2009 revenues smb revenues increased 22 million 8 285 million fiscal 2010 result higher sales volumes finished goods sales volumes increased 63 thousand tons 17 444 thousand tons fiscal 2010 increase volume partially offset 30 per ton 5 decrease finished goods average sales price 587 per ton fiscal 2010 increase sales volumes decrease averages sales prices reflected global market conditions well improved still weak western us demand finished steel products segment operating loss operating loss smb 6 million fiscal 2010 compared 42 million fiscal 2009 percentage revenues operating loss decreased 139 percentage points fiscal 2010 improvement reflects impact increased sales volumes current year included operating income increases sga expense 1 million fiscal 2010 resulting increase incentive compensation including sharebased compensation due improvements operating results prior year smb acquired substantially scrap metal requirements mrb rates approximate export market prices shipments west coast us fiscal 2009 compared fiscal 2008 revenues smb revenues decreased 340 million 56 263 million fiscal 2009 result reduced sales volumes average selling prices finished steel products finished goods sales volumes decreased 395 thousand tons 51 381 thousand tons fiscal 2009 primarily due reduced demand resulting weakened market conditions average finished goods selling prices fiscal 2009 decreased 111 per ton 15 617 per ton result reduced demand segment operating income loss operating loss smb 42 million fiscal 2009 compared operating income 72 million fiscal 2008 percentage revenues operating income decreased 279 percentage points fiscal 2009 decrease operating income reflects impact lower sales volumes caused weaker market conditions selling prices declined faster costs lower anticipated future selling prices resulted noncash nrv inventory write 32 million fiscal 2009 included operating loss reductions sga expense 3 million fiscal 2009 due lower compensationrelated expenses including incentive compensation reduced expenses resulting cost containment measures reduced headcount noncompensation related costs 34 schnitzer steel industries inc form 10k 2010 compared periods prior year smb acquired substantially scrap metal requirements mrb rates approximate export market prices shipments west coast us outlook smb’s results dependent upon demand products companies operating construction industry west coast us canada economic downturn continues hamper construction spending demand smb’s finished steel products expected remain soft fiscal 2011 sales volumes margins heavily dependent upon timing strength us economic recovery currently unable provide guidance prices volumes fiscal year whole liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand existing credit facilities sources uses cash balances 30 million 41 million august 31 2010 2009 respectively cash balances intended used primarily working capital expenditures use excess cash hand reduce amounts outstanding credit facilities august 31 2010 debt net cash 70 million compared 71 million august 31 2009 see nongaap financial measures operating activities net cash provided operating activities fiscal 2010 89 million compared 288 million fiscal 2009 142 million fiscal 2008 cash provided operating activities fiscal 2010 included income tax refunds 49 million increase accrued payroll liabilities 12 million due increased incentive compensation increase 8 million accounts payable due timing payments uses cash included 109 million increase inventory excluding 35 million inventory sold part divestiture fullservice auto parts operation due higher purchase costs higher volumes material hand yearend increase accounts receivable 12 million due timing collections cash provided operating activities fiscal 2009 included 199 million decrease inventory due lower purchase costs lower volumes material purchased decrease accounts receivable 190 million resulting cash collections receivables sources cash partially offset uses cash included 79 million decrease accounts payable due reduction price volumes material purchases 46 million increase refundable income taxes 42 million decrease accrued income taxes due tax payments related fiscal 2008 36 million decrease accrued payroll liabilities mainly due payment fiscal 2008 incentive compensation awards cash provided operating activities fiscal 2008 included 54 million increase accounts payable due timing payments higher material costs 38 million increase accrued income taxes 21 million increase compensationrelated liabilities including performance incentive related liabilities principally due improved financial operating performance sources cash partially offset increase inventory 216 million due higher material costs volumes 135 million increase accounts receivable mainly due increased sales timing collections investing activities net cash used investing activities fiscal 2010 64 million compared 150 million fiscal 2009 128 million fiscal 2008 schnitzer steel industries inc form 10k 2010 35 cash used investing activities fiscal 2010 included 64 million capital expenditures upgrade equipment infrastructure 41 million completed acquisitions partially offset 41 million proceeds sale fullservice auto parts business assets cash used investing activities fiscal 2009 included 93 million completed acquisitions 59 million capital expenditures upgrade equipment infrastructure cash used investing activities fiscal 2008 included 84 million capital expenditures upgrade equipment infrastructure 47 million completed acquisitions financing activities net cash used financing activities fiscal 2010 36 million compared 111 million fiscal 2009 12 million fiscal 2008 cash used financing activities 2010 primarily due 11 million reduction longterm debt 17 million repurchases outstanding shares class common stock cash used financing activities fiscal 2009 primarily due 76 million debt repayments funded higher levels cash generation 30 million repurchases outstanding shares class common stock cash used financing activities fiscal 2008 primarily due 45 million repurchases outstanding shares class common stock financed 40 million increase debt credit facilities shortterm borrowings consist primarily one year unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2011 interest rates outstanding indebtedness unsecured line credit set bank time borrowing borrowings outstanding credit line august 31 2010 august 31 2009 maintain 450 million revolving credit facility matures july 2012 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness amended agreement based option either london interbank offered rate plus spread 050 100 amount spread based pricing grid tied leverage ratio greater prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied leverage ratio august 31 2010 2009 borrowings outstanding credit facility 90 million 100 million respectively weighted average interest rate line 079 078 august 31 2010 2009 respectively two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2010 compliance covenants use credit facilities fund share repurchases acquisitions capital expenditures working capital requirements addition august 31 2010 2009 8 million longterm indebtedness form bonds maturing january 2021 acquisitions aggregate purchase price paid acquisitions fiscal 2010 41 million compared 96 million fiscal 2009 included cash acquired amounts paid 3 million fiscal 2010 continued expand presence regions operate new locations acquisition valuecreating businesses see note 7 business combinations notes consolidated financial statements part ii item 8 report additional information business acquisitions 36 schnitzer steel industries inc form 10k 2010 capital expenditures capital expenditures totaled 64 million 59 million 84 million fiscal 2010 2009 2008 respectively fiscal 2010 continued investment general improvements number metals recycling facilities including investments technology improve recovery nonferrous materials shredding process investments improve efficiency increase capacity increase worker safety enhance environmental systems plan invest 135 million capital expenditures fiscal 2011 expected spent continued investments technology improve recovery nonferrous materials shredding process material handling processing equipment enhancements information technology infrastructure improvements facilities environmental safety infrastructure normal equipment replacement maintenance believe investments create value shareholders expect use cash operations available lines credit fund capital expenditures fiscal 2011 environmental compliance commitment sustainable recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate consistent commitment invested 13 million 9 million 10 million capital expenditures environmental projects fiscal 2010 2009 2008 respectively plan invest 18 million capital expenditures environmental projects fiscal 2011 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations environmental programs also require us incur costs remediate conditions existing sites monitor previously remediated sites incurred 2 million 2 million 3 million environmental expenditures either expensed reduced recorded reserves fiscal 2010 2009 2008 respectively expect incur similar amounts expenditures going forward identified epa prp owns operates formerly owned operated sites adjacent portland harbor superfund site determination total investigation costs remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps presently possible estimate costs likely incur connection site although costs could significant material future cash flows recording material liabilities related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amount borrowing capacity could otherwise used investment capital expenditures acquisitions epa indicated expects issue record decision discuss remedial alternatives site sometime 2012 see contingencies environmental note 12 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant share repurchase program amended 2001 2006 authorized repurchase 60 million shares class common stock management deems repurchases appropriate november 2008 board directors approved increase shares authorized repurchase 30 million 90 million evaluate long shortrange forecasts well anticipated sources uses cash determining course action would best enhance shareholder value prior fiscal 2010 repurchased approximately 51 million shares program fiscal 2010 repurchased total 412994 shares class common stock program result august 31 2010 approximately 35 million shares available repurchase existing authorizations pension contributions make contributions defined benefit pension plan several defined contribution plans several multiemployer defined benefit pension plans contributions vary depending plan based upon plan provisions actuarial valuations negotiated labor agreements fiscal 2006 froze benefit accruals schnitzer steel industries inc form 10k 2010 37 defined benefit plan fiscal 2010 made 2 million contribution defined benefit plan due reduction funding status result reduction single discount rate assumptions used determining pension obligations anticipate making additional contributions defined benefit plan fiscal 2011 may elect required addition fiscal 2011 anticipate making 4 million contributions multiemployer plans participate including contributions totaling 2 million multiemployer plan benefiting union employees smb believe additional funding requirements material impact financial condition see note 15 employee benefits notes consolidated financial statements part ii item 8 report discussion retirement benefit plans effective march 2009 suspended employer contributions defined contribution plans resumed contributions plans april 2010 expect make contributions 3 million defined contribution plans fiscal 2011 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate financing acquisitions capital expenditures working capital joint ventures stock repurchases debt service requirements postretirement obligations future environmental obligations next 12 months however continued weak general market conditions may result utilizing available credit lines curtailing capital operating expenditures delaying restricting acquisitions share repurchases reassessing working capital requirements determine time require additional shortterm liquidity evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms however believe balance sheet august 31 2010 expected cash flow operations existing credit facilities provide additional sources liquidity required offbalance sheet arrangements exception operating leases letters credit party offbalance sheet arrangements reasonably likely current future material effect financial condition results operations cash flows enter operating leases new equipment property see note 12 commitments contingencies notes consolidated financial statements part ii item 8 report additional information operating leases 38 schnitzer steel industries inc form 10k 2010 contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2010 thousands 1 smb takeorpay natural gas contract currently requires minimum purchase per day october 2010 whether amount utilized 2 smb electricity contract mwl requires minimum purchase electricity rate subject variable pricing whether amount utilized fixed portion contract obligates smb pay 141 thousand per month eleven months year contract expires september 2011 reserve uncertain tax positions 2 million 4 million august 31 2010 2009 respectively see note 17 income taxes notes consolidated financial statements part ii item 8 report additional information critical accounting policies estimates identified certain critical accounting estimates important portrayal financial condition operating results estimates require difficult subjective judgments including whether estimates required made matters inherently uncertain different estimates reasonably could used changes estimates reasonably likely occur could materially impact financial statements significant estimates underlying accompanying consolidated financial statements include inventory valuation goodwill intangible asset valuation environmental costs accounting business combinations revenue recognition inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb establishes cost used salvaged vehicle inventory based average price paid vehicle capitalizing vehicle cost inventory smb establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs evaluate whether inventory properly valued lower cost market quarterly basis consider estimated future selling prices schnitzer steel industries inc form 10k 2010 39 determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders accounting process use record unprocessed metal used salvaged vehicle inventory quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates run periodic tests perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume goodwill intangible assets evaluate goodwill intangibles indefinite life annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill indefinite lived intangible assets may impaired impairment goodwill tested reporting segment level reporting segments goodwill allocated equivalent operating segments components respective segments similar economic characteristics goodwill impairment test follows two step process first step fair value reporting segment compared carrying value carrying value reporting segment exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting segment allocated assets liabilities reporting segment determine implied goodwill value allocation similar purchase price allocation carrying amount reporting segment’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess event divestiture business unit within reporting segment goodwill reporting segment allocated business unit based fair value unit divested total fair value reporting segment gain loss determined remaining goodwill reporting segment assets divested subsequently reevaluated impairment estimate fair value reporting segments using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” estimate cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount wacc establish terminal value include present value terminal value fair value estimate given market prices reporting segments readily available make various estimates assumptions determining estimated fair values reporting segments price would received sell reporting segment whole orderly transaction market participants forecasts future cash flows based best estimate future sales operating costs pricing expectations general market conditions addition test indefinitelived intangibles impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed intangible asset carrying value longer considered recoverable record impairment 40 schnitzer steel industries inc form 10k 2010 environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly stay updated environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors consider recognition measurement environmental liabilities include • current regulations time reserve established course remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2010 included 1 million related third party investigation costs portland harbor superfund site although future costs portland harbor superfund site could material financial position results operations cash flows possible estimate additional costs might incur connection ongoing investigations remediation determination total investigation costs remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps presently possible estimate costs likely incur connection site therefore amounts accrued see contingencies environmental note 12 commitments contingencies notes consolidated financial statements part ii item 8 report business combinations september 1 2009 adopted revised accounting standard business combinations requires us recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired addition following adoption standard acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products schnitzer steel industries inc form 10k 2010 41 transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally recognize revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipment historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheet remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three years ended august 31 2011 2010 2009 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products operate three reporting segments mrb apb smb collectively provide endoflife cycle solution variety products integrated businesses use operating income loss measure segment performance corporate expense consists primarily unallocated expense management administrative services benefit three reporting segments result unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would standalone business information regarding reporting segments including financial information geographic areas see note 20 segment information notes consolidated financial statements part ii item 8 report mrb buys collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets mrb processes mixed large pieces scrap metal smaller pieces crushing sorting shearing shredding torching resulting scrap metal pieces size density purity required customers meet production needs apb procures used salvaged vehicles sells serviceable used auto parts vehicles selfservice auto parts stores remaining portions vehicles primarily autobodies core parts nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products mrb sole supplier smb’s scrap metal requirements smb purchases rates approximate export market prices shipments west coast us smb uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets deep water port facilities east west coasts us everett massachusetts oakland california portland oregon tacoma washington providence rhode island access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand ferrous scrap metal shipping bulk cargoes steel manufacturers located europe asia central america africa exports nonferrous processed scrap metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail meet regional domestic demand particular processing facilities southeastern us also provide efficient access automobile steel manufacturing industries region key economic factors trends affecting industries operate financial results largely depend supply raw materials us demand recycled metal foreign domestic markets finished steel products western us fluctuating volatile supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations three reporting segments fiscal 2011 us economy began show signs gradual recovery evidenced increased us steel mill utilization prior year slightly improved availability raw materials continued growth positive economic conditions overseas markets particularly asia led continuing strong demand exports ferrous nonferrous recycled materials 21 schnitzer steel industries inc form 10k 2011 strategic factors continue closely monitor economic situation remain focused following core strategies meet business objectives • use seven deep water ports access customers directly around world meet demand wherever greatest • growth acquisitions existing new geographic regions generate attractive returns • continued investment benefit technologies process improvements increase separation recovery recycled materials shredding process • continued improvement productivity focus increasing efficiency optimization spreads selling prices cost acquiring materials addition highly value strategic synergies within integrated operations apb key supplier mrb opportunistically look enhance geographic proximity two businesses fiscal 2011 acquired substantially assets two metals recycling businesses canada total nine metal collection processing facilities marked mrb’s first expansion canada apb three facilities western canada able supply new mrb facilities addition shipping tacoma wa facility also acquired substantially assets used auto parts business three stores seattle wa expanding apb’s presence northwestern us mrb significant presence tacoma wa benefit synergies enhanced access supply executive overview financial results fiscal 2011 operating results benefited continuing strong demand export markets well recovering domestic demand scrap recycled metal products incremental revenues acquisitions increased demand led higher average net selling prices increased availability raw materials resulted revenues growing 12 billion 35 billion net income attributable ssi 118 million compared 67 million fiscal 2010 diluted net income attributable ssi 423 per share fiscal 2011 compared 237 per share fiscal 2010 fiscal 2011 continued expand presence regions operate new locations acquisition ten businesses aggregate purchase price paid acquisitions fiscal 2011 314 million compared 41 million fiscal 2010 following items summarize consolidated financial performance fiscal 2011 • revenues 35 billion compared 23 billion prior year • operating income 186 million compared 126 million prior year • income continuing operations attributable ssi 118 million 424 per share diluted compared 81 million 286 per share diluted prior year • net income attributable ssi 118 million 423 per share diluted compared 67 million 237 per share diluted prior year 22 schnitzer steel industries inc form 10k 2011 following items summarize consolidated cash flow balance sheet information fiscal 2011 • net cash provided operating activities 140 million compared 89 million prior year • debt net cash 354 million compared 70 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 primarily result acquisitions fiscal 2011 mrb segment generated revenues 31 billion 11 billion increase fiscal 2010 included 867 million 56 increase ferrous revenues 207 million 50 increase nonferrous revenues due increased demand export domestic markets together increased availability raw materials contributed higher average net selling prices sales volumes increase ferrous revenues driven 27 increase average net selling price 26 increase long tons sold increase nonferrous revenues driven 28 increase average net selling price 19 increase pounds sold mrb operating income 165 million compared 118 million fiscal 2010 fiscal 2011 apb segment generated revenues 320 million 79 million increase fiscal 2010 increase fiscal 2010 primarily driven 41 million increase scrap vehicle revenue 28 million increase core revenue mainly due higher selling prices sales volumes 5 million increase parts revenues apb operating income 64 million compared 51 million fiscal 2010 fiscal 2011 smb segment generated revenues 317 million 32 million increase fiscal 2010 increase fiscal 2010 reflected increase average net selling price finished steel products 110 per ton 19 697 per ton partly offset decrease sales volumes finished steel products 5 thousand tons 1 439 thousand tons fiscal 2011 increases average net selling price reflected improved still weak demand finished steel products western north america smb operating income 3 million compared operating loss 6 million fiscal 2010 23 schnitzer steel industries inc form 10k 2011 results operations nm meaningful 1 mrb sells recycled ferrous metal smb rates per ton approximate west coast export market prices addition apb sells auto bodies mrb intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses services benefit three business segments consequence unallocated expense operating income segment reflect operating income segment would standalone business 3 joint ventures sell recycled ferrous metal mrb subsequently smb rates per ton approximate west coast export market prices consequently intercompany revenues produce intercompany operating income loss recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 4 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 24 schnitzer steel industries inc form 10k 2011 revenues fiscal 2011 compared fiscal 2010 revenues fiscal 2011 increased reporting segments primarily due higher average net selling prices higher sales volumes resulting stronger worldwide demand export markets well recovering domestic demand scrap recycled metal increased availability raw materials including improved recovery enhanced processing technologies incremental revenues third party sales generated fiscal 2011 acquisitions 93 million fiscal 2010 compared fiscal 2009 revenues fiscal 2010 increased reporting segments primarily due continuing strong worldwide demand scrap recycled metal led higher average net selling prices sales volumes lesser extent increased western us demand finished steel products operating income loss fiscal 2011 compared fiscal 2010 increase operating income primarily due higher average net selling prices higher sales volumes result continuing strong export market conditions increased availability raw materials increased yield higher production enhanced shredding sorting technologies incremental operating income acquisitions operating income reflected increase 46 million consolidated selling general administrative “sga” expense fiscal 2011 primarily due 18 million increase compensation expenses mainly related increased headcount recent acquisitions 12 million increase professional third party services including transaction costs associated acquisitions completed fiscal 2011 fiscal 2011 sga expense reduced 6 million favorable customer contract settlements compared reduction 3 million fiscal 2010 addition sga expense lower fiscal 2010 included 9 million benefits favorable legal settlements environmental cost reimbursements fiscal 2010 compared fiscal 2009 percentage revenues operating income increased 83 percentage points fiscal 2010 compared fiscal 2009 improvement operating income primarily due higher average net selling prices increased average cost raw materials increased availability raw materials improved operating margins improvement consolidated operating income also benefited decrease consolidated sga expense 5 million 159 million fiscal 2010 decrease included 9 million higher bad debt expense recognized prior year 6 million fiscal 2010 benefits recognized favorable customer contract legal settlements 6 million environmental legal cost reimbursements including 3 million fourth quarter fiscal 2010 6 million reduced professional service fees decreases partially offset 18 million increase incentive compensation due improvements financial performance reinstatement employer contributions defined contribution plans effective april 2010 2 million increased expense related amortization intangibles interest expense interest expense 8 million 2 million 3 million fiscal 2011 2010 2009 respectively increase fiscal 2010 fiscal 2011 result higher outstanding debt higher average interest rates amended bank credit facility information outstanding debt balances see note 10 longterm debt capital lease obligations notes consolidated financial statements part ii item 8 report income net excluding interest expense income net excluding interest expense 3 million 2 million 7 million fiscal 2011 2010 2009 respectively income decreased fiscal 2010 compared prior year fiscal 2009 included pretax gain settlement agreement relating dissolution one joint ventures september 2005 income tax expense benefit income tax expense benefit 57 million 41 million 20 million fiscal 2011 2010 2009 respectively fiscal 2011 compared fiscal 2010 effective tax rate fiscal 2011 316 compared 326 fiscal 2010 effective tax rate differed us federal statutory rate 35 primarily due lower tax rate foreign income domestic production activities deductions fiscal 2011 effective tax rate also benefited certain adjustments recorded period including recognition research development credits reduction reserve unrecognized state income tax benefits addition fourth 25 schnitzer steel industries inc form 10k 2011 quarter fiscal 2011 recorded adjustment correct error originated prior period pertaining deferred tax liabilities related investment subsidiary correction error resulted reduction income tax expense increase net income 3 million year ended august 31 2011 see note 17 income taxes notes consolidated financial statements part ii item 8 report discussion correction fiscal 2010 compared fiscal 2009 effective tax rate fiscal 2010 326 provision income compared 423 benefit loss fiscal 2009 level decrease effective rate primarily reflects impact tax credits lower taxable income loss fiscal 2009 compared fiscal 2010 lower state tax rate fiscal 2010 resulting reduction reserve unrecognized tax benefits favorable manufacturing deduction fiscal 2010 included restoration previously disallowed deduction due newly enacted law fiscal 2009 also included reduction reserve unrecognized tax benefits increased effective rate benefit loss 26 schnitzer steel industries inc form 10k 2011 financial results reporting segment operate business across three reporting segments mrb apb smb additional financial information relating reporting segments contained note 20 segment information notes consolidated financial statements part ii item 8 report metals recycling business lt long ton 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 fiscal 2009 average ferrous recycled metal sales price smb significantly higher average foreign sales price compared foreign customers sales smb greater volume first quarter fiscal year sales prices higher latter three quarters fiscal 2011 compared fiscal 2010 revenues increase revenues primarily attributable higher average net selling prices higher sales volumes caused increased demand availability raw materials incremental volume acquisitions increase ferrous revenues primarily driven higher average net selling prices higher sales volumes average net ferrous selling price increased 88 per long ton fiscal 2011 primarily due stronger demand export markets 27 schnitzer steel industries inc form 10k 2011 well gradually recovering domestic demand drove increases foreign domestic selling prices ferrous sales volumes increased 11 million long tons driven increased availability raw materials focus maximizing throughput accomplished increased purchases raw materials increased production result investments technology continuous improvement programs incremental volume acquisitions increase nonferrous revenues driven increases average nonferrous net selling price sales volumes average net selling price increased 023 per pound fiscal 2011 primarily due stronger demand higher commodity prices addition nonferrous volumes sold increased 90 million pounds fiscal 2011 reflecting stronger global market conditions improved recovery nonferrous materials processed enhanced shredding sorting technologies nonferrous collection activity incremental volume acquisitions segment operating income increase operating income fiscal 2011 primarily due higher average net selling prices higher sales volumes ferrous nonferrous scrap metal result continuing strong export market conditions increased availability raw materials increased yield higher production enhanced shredding sorting technologies incremental operating income acquisitions able increase spread selling prices purchase prices operating income percentage revenues decreased 60 fiscal 2010 54 fiscal 2011 primarily due escalation selling prices included fiscal 2011 operating income mrb increase sga expense 26 million compared prior year primarily due 10 million increase compensation expense result increased headcount new acquisitions 6 million increase expenses professional third party services primarily related transaction costs associated acquisitions fiscal 2011 sga expense reduced 6 million favorable customer contract settlements represented 3 million increase prior year addition sga expense lower fiscal 2010 included 3 million benefits environmental expense reimbursements fiscal 2010 compared fiscal 2009 revenues increase revenues primarily attributable higher ferrous average net selling prices higher nonferrous sales volumes caused increased demand availability scrap metal ferrous revenues increased 309 million 25 16 billion fiscal 2010 increase ferrous revenues primarily driven higher average net selling prices experienced increasing prices year average net ferrous selling price increased 64 per long ton 24 compared prior year due strong demand asian markets lesser extent improved demand domestic markets provided support domestic foreign selling prices nonferrous revenues increased 161 million 64 413 million fiscal 2010 increase nonferrous revenues driven increases average nonferrous net selling price sales volumes average net selling price increased 022 36 083 per pound fiscal 2010 primarily due stronger demand addition nonferrous volumes sold increased 81 million pounds 21 478 million pounds fiscal 2010 caused increased recovery nonferrous materials shredding process nonferrous collection activity higher demand due stronger global market conditions segment operating income increase operating income reflected impact improved worldwide demand scrap recycled metal led higher average net selling prices increased average cost raw materials increased availability raw materials continued benefits improved production operating efficiencies addition income joint ventures increased 2 million prior year primarily due stronger demand scrap metal included fiscal 2010 operating income mrb decrease sga expense 9 million compared prior year primarily due reduction 8 million bad debt expense 6 million current year benefits legal settlements 3 million environmental cost reimbursements offsetting decreases 7 million increase incentive compensation due improvements financial performance 1 million increase expense related amortization intangibles 28 schnitzer steel industries inc form 10k 2011 auto parts business fiscal 2011 compared fiscal 2010 revenues increase revenues included 41 million increase scrap vehicle revenue 28 million increase core revenue 5 million increase parts revenue compared fiscal 2010 increase revenues driven higher commodity prices increased car volumes enhancement production operating efficiencies increase number selfservice store locations fiscal 2011 apb benefit cashforclunkers government stimulus program increased sales volumes prior year segment operating income increase operating income fiscal 2011 reflected impact higher prices increased volumes scrap core sales improved production operating efficiencies decrease operating income percentage revenues 212 fiscal 2010 200 fiscal 2011 reflected increase car purchasing costs outpaced increase selling prices increase sga expense 10 million fiscal 2011 primarily due 4 million increase compensation expense result additional headcount acquisitions fiscal 2010 compared fiscal 2009 revenues increase revenues included 37 million increase scrap vehicle revenue 32 million increase core revenue 15 million increase parts revenue compared fiscal 2009 increases revenues driven increase 39 45 selfservice store locations improved production operating efficiencies improvements commodity prices increased sales used auto parts attributable benefits recognized purchasing higher quality vehicles increased volumes purchases scrapped vehicles including additional vehicles purchased pursuant cashforclunkers government stimulus program segment operating income increase operating income fiscal 2010 reflected impact higher selling prices volumes scrapped vehicles cores parts resulted primarily increases commodity prices increase 39 45 selfservice store locations improved production operating efficiencies included operating income increase sga expense 6 million fiscal 2010 primarily due 4 million increase compensation expenses including increases sharebased incentive compensation due improvements operating results prior year 1 million increase expense related amortization intangibles apb’s results operations include operating results discontinued operations see note 7 discontinued operations notes consolidated financial statements part ii item 8 report 29 schnitzer steel industries inc form 10k 2011 steel manufacturing business nm meaningful 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2011 compared fiscal 2010 revenues smb revenues increased primarily result increased average selling prices finished steel products reflecting ability pass higher purchase prices scrap raw materials end customers increase average selling prices finished steel products driven increased scrap metal purchase prices global markets result improved worldwide demand partially offset decrease volume finished steel products sold fiscal 2011 due continuing weak demand west coast markets result slow economic growth hampers construction spending recovery segment operating income loss increase operating income reflected impact increased average selling prices outpaced increase scrap raw material purchase costs smb acquired scrap metal requirements mrb rates approximated export market prices shipments west coast us fiscal 2010 compared fiscal 2009 revenues smb revenues increased result higher sales volumes finished goods sales volumes increased 63 thousand tons 17 444 thousand tons fiscal 2010 increase volume partially offset 30 per ton 5 decrease finished goods average sales price 587 per ton fiscal 2010 increase sales volumes decrease averages sales prices reflected global market conditions well improved still weak western us demand finished steel products segment operating loss percentage revenues operating loss decreased 139 percentage points fiscal 2010 improvement reflects impact increased sales volumes current year included operating loss increases sga expense 1 million fiscal 2010 resulting increase incentive compensation including sharebased compensation due improvements operating results prior year smb acquired substantially scrap metal requirements mrb rates approximated export market prices shipments west coast us liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 49 million 30 million august 31 2011 2010 respectively cash balances intended used primarily working capital expenditures use excess cash hand reduce amounts outstanding credit facilities august 31 2011 debt net cash 354 million compared 70 million august 31 2010 see nongaap financial measures increase debt net cash primarily due acquisitions cash balances august 31 2011 2010 include amount 11 million 16 million respectively 30 schnitzer steel industries inc form 10k 2011 indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2011 140 million compared 89 million fiscal 2010 288 million fiscal 2009 cash provided operating activities fiscal 2011 included increase 45 million accounts payable due higher volumes material purchases timing payments increase accrued income taxes 22 million due improved results uses cash included increase accounts receivable 92 million due higher sales timing collections 45 million increase inventory due higher purchase costs higher volumes material hand yearend cash provided operating activities fiscal 2010 included income tax refunds 49 million increase accrued payroll liabilities 12 million due increased incentive compensation increase 8 million accounts payable due timing payments uses cash included 109 million increase inventory excluding 35 million inventory sold part divestiture fullservice auto parts operation due higher purchase costs higher volumes material hand yearend increase accounts receivable 12 million due timing collections cash provided operating activities fiscal 2009 included 199 million decrease inventory due lower purchase costs lower volumes material purchased decrease accounts receivable 190 million resulting cash collections receivables sources cash partially offset uses cash included 79 million decrease accounts payable due reduction price volumes material purchases 46 million increase refundable income taxes 42 million decrease accrued income taxes due tax payments related fiscal 2008 36 million decrease accrued payroll liabilities mainly due payment fiscal 2008 incentive compensation awards investing activities net cash used investing activities fiscal 2011 400 million compared 64 million fiscal 2010 150 million fiscal 2009 cash used investing activities fiscal 2011 included 294 million completed acquisitions 105 million capital expenditures upgrade equipment infrastructure cash used investing activities fiscal 2010 included 64 million capital expenditures upgrade equipment infrastructure 41 million completed acquisitions partially offset 41 million proceeds sale fullservice auto parts business assets cash used investing activities fiscal 2009 included 93 million completed acquisitions 59 million capital expenditures upgrade equipment infrastructure financing activities net cash provided financing activities fiscal 2011 280 million compared net cash used financing activities 36 million fiscal 2010 111 million fiscal 2009 cash provided financing activities 2011 primarily due 303 million additional net debt borrowings refer nongaap financial measures mainly used fund acquisitions partly offset 10 million repurchases outstanding shares class common stock cash used financing activities 2010 primarily due 11 million net debt repayments refer nongaap financial measures 17 million repurchases outstanding shares class common stock cash used financing activities fiscal 2009 primarily due 76 million net debt repayments refer nongaap financial measures funded higher levels cash generation 30 million repurchases outstanding shares class common stock 31 schnitzer steel industries inc form 10k 2011 credit facilities following summary outstanding balances availability credit facilities longterm debt thousands february 2011 amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto increase amount available 650 million 450 million including 30 million canadian dollar availability final maturity also extended february 2016 interest rates outstanding indebtedness amended agreement based option either london interbank offered rate canadian equivalent plus spread 175 275 amount spread based pricing grid tied leverage ratio base rate plus spread 0 1 addition annual commitment fees payable unused portion credit facility rates 025 045 also based pricing grid tied leverage ratio borrowings outstanding credit facility 393 million 90 million august 31 2011 2010 respectively increased borrowings primarily used finance acquisitions weighted average interest rate amounts outstanding facility 248 079 august 31 2011 2010 respectively also unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2012 interest rates set bank time borrowing borrowings outstanding facility august 31 2011 2010 two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2011 compliance covenants use credit facilities fund acquisitions capital expenditures share repurchases working capital requirements addition august 31 2011 2010 8 million longterm taxexempt bonds mature january 2021 acquisitions fiscal 2011 continued expand presence regions operate new locations acquisition businesses aggregate purchase price paid acquisitions fiscal 2011 314 million comprising 293 million cash 19 million shares subsidiary 2 million contingent consideration compared 41 million fiscal 2010 96 million fiscal 2009 included cash acquired amounts paid 3 million see note 6 business combinations notes consolidated financial statements part ii item 8 report additional information business acquisitions capital expenditures capital expenditures totaled 105 million 64 million 59 million fiscal 2011 2010 2009 respectively fiscal 2011 continued investments replacement existing equipment infrastructure investments technology improve recovery separation nonferrous materials shredding process investments improve efficiency increase capacity improve worker safety enhance environmental systems plan invest 125 million capital expenditures fiscal 2012 expected spent continued investments technology improve recovery separation nonferrous materials shredding process material handling processing equipment enhancements information technology infrastructure improvements facilities’ environmental safety infrastructure normal equipment replacement believe investments create value shareholders expect use cash generated operations available lines credit fund capital expenditures fiscal 2012 environmental compliance commitment sustainable recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 14 million 13 million 9 million environmental projects fiscal 2011 2010 2009 respectively plan invest additional 14 million capital expenditures environmental projects fiscal 2012 32 schnitzer steel industries inc form 10k 2011 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified epa prp owns operates formerly owned operated sites part adjacent portland harbor superfund site determination total investigation costs remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps presently possible estimate costs likely incur connection site although costs could significant material future cash flows material liabilities recorded future related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amounts available borrowing could otherwise used investment capital expenditures acquisitions epa indicated expects issue record decision sometime 2013 discuss remedial alternatives site see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant share repurchase program amended authorized repurchase 9 million shares class common stock management deems repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program prior fiscal 2011 repurchased approximately 55 million shares program fiscal 2011 repurchased 254332 shares class common stock program openmarket transactions cost 10 million leaving approximately 32 million shares available repurchase existing authorizations redeemable noncontrolling interest march 2011 issued common stock noncontrolling interest holder one subsidiaries redeemable option holder upon occurrence event solely within company’s control terms agreement related acquisition noncontrolling interest owner right require company purchase 20 interest company’s subsidiary fair value noncontrolling interest becomes redeemable within 60 days later third anniversary date acquisition ii date certain principals minority shareholder longer employed company conditions redemption noncontrolling interest met august 31 2011 interest redeemed company would required purchase interest fair value date redemption august 31 2011 fair value redeemable noncontrolling interest 19 million see note 12 redeemable noncontrolling interest notes consolidated financial statements part ii item 8 report assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs acquisitions capital expenditures working capital joint ventures share repurchases debt service requirements environmental obligations however event market conditions deteriorate may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements exception operating leases letters credit party offbalance sheet arrangements reasonably likely current future material effect financial condition results operations cash flows enter operating leases new equipment property see note 11 commitments contingencies notes consolidated financial statements part ii item 8 report additional information operating leases 33 schnitzer steel industries inc form 10k 2011 contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2011 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2021 2 interest payments longterm debt based interest rates effect august 31 2011 contractual interest rates variable actual cash payments may differ estimates provided 3 contractual obligations consist pension funding obligations accrued liabilities reserves uncertain tax positions critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related inventory goodwill valuation environmental costs accounting business combinations revenue recognition redeemable noncontrolling interest inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume 34 schnitzer steel industries inc form 10k 2011 goodwill evaluate goodwill impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ company determined reporting units goodwill allocated equivalent company’s operating segments mrb apb smb components segment similar economic characteristics goodwill impairment test follows two step process first step fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess event divestiture business unit within reporting unit goodwill reporting unit allocated business unit based estimated fair value unit divested total estimated fair value reporting unit gain loss determined remaining goodwill reporting unit assets divested subsequently reevaluated impairment given market prices reporting units readily available determining fair value involves use significant estimates assumptions matters inherently uncertain estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” forecasts future cash flows based best estimate future sales operating costs pricing expectations general market conditions estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount wacc establish terminal value addition compare aggregated estimated fair value reporting units market capitalization including consideration control premium control premium represents estimated amount investor would pay obtain controlling interest believe reconciliation consistent market participant perspective based impairment test performed second quarter fiscal year 2011 estimated fair value reporting units substantially exceeded carrying values environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors consider recognition measurement environmental liabilities include • current regulations time reserve established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2011 included 1 million related third party investigation costs portland harbor superfund site although future costs portland harbor superfund site could material financial 35 schnitzer steel industries inc form 10k 2011 position results operations liquidity cash flows possible estimate additional costs might incur connection ongoing investigations remediation determination total investigation costs remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps therefore additional amounts accrued see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipment historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three years ended august 31 2012 2011 2010 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products operate three reporting segments metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” collectively provide endoflife cycle solution variety products integrated businesses use operating income loss measure segment performance restructuring charges allocated segment operating income loss include information measurement segments’ performance corporate expense consists primarily unallocated expense management administrative services benefit three reporting segments result unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business information regarding reporting segments including financial information geographic areas see note 21 segment information notes consolidated financial statements part ii item 8 report mrb buys collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets mrb processes mixed large pieces scrap metal smaller pieces crushing sorting shearing shredding torching resulting scrap metal pieces size density metal content required customers meet production needs apb procures used salvaged vehicles sells serviceable used auto parts vehicles selfservice auto parts stores remaining portions vehicles primarily autobodies major parts containing ferrous nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products mrb sole supplier smb’s scrap metal requirements smb purchases rates approximate export market prices shipments west coast us smb uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california portland oregon tacoma washington access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand ferrous recycled metal shipping bulk cargoes steel manufacturers located europe asia central america africa exports nonferrous processed recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us demand recycled metal foreign domestic markets finished steel products western us fluctuating volatile supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations three reporting segments fiscal 2012 markets significantly impacted european sovereign debt crisis escalated fall 2011 led slowdown economic activity globally macroeconomic uncertainty resulted deteriorating market conditions global steel manufacturers volatile pricing swings overall downward trend commodity prices export selling prices recycled materials persistently low economic growth us contributed increasing market pressure scrap flows mrb apb domestic supply markets margin compression addition relatively stronger us dollar value increased competitive pressure mrb’s export activity 23 schnitzer steel industries inc form 10k 2012 strategic factors continue closely monitor economic conditions remain focused following core strategies meet business objectives • use seven deep water ports access customers directly around world meet demand wherever greatest • growth acquisitions existing new geographic regions generate attractive returns • continued investment benefit technologies process improvements increase separation recovery recycled materials shredding process • increased internal synergies continuous improvement initiatives integrate operations streamline corporate functions reduce organizational layers drive significant cost savings highly value strategic synergies within integrated operations apb key supplier mrb opportunistically look enhance geographic proximity operations within two businesses fiscal 2011 acquired substantially assets two metals recycling businesses canada total twelve metals collection processing facilities marked mrb’s first expansion canada fiscal 2012 acquired substantially assets additional metals recycling business canada apb three facilities western canada able supply new mrb facilities addition shipping tacoma wa metals recycling facility also fiscal 2011 acquired substantially assets used auto parts business three stores seattle wa expanding apb’s presence northwestern us mrb export facility tacoma wa benefits synergies enhanced access supply mrb apb also significant presence northern california fiscal 2012 implemented enhancements synergies businesses integrating certain operational processes executive overview financial results generated revenues 33 billion fiscal 2012 decrease 3 35 billion consolidated revenues prior year decrease primarily due lower volumes ferrous sales result soft global demand recycled metal constrained supply raw materials operating income fiscal 2012 decreased 132 million 71 54 million including restructuring charges 5 million compared prior year due deterioration market conditions caused mainly escalation european sovereign debt crisis fall 2011 led slowdown economic activity resulted weakening global demand periods volatile prices overall downward trend export selling prices recycled metals combined constrained supply raw materials adverse effect average inventory costing cost goods sold periods sharp declines selling prices occurred fiscal 2012 led compression operating margins contrasted prior fiscal year benefited stronger market environment rising prices recycled metals net income attributable ssi decreased 91 million 77 27 million compared prior year diluted net income attributable ssi 099 per share fiscal 2012 including adverse effect 012 per share related restructuring charges compared diluted net income attributable ssi 423 per share fiscal 2011 following items summarize consolidated financial performance fiscal 2012 24 schnitzer steel industries inc form 10k 2012 • revenues 33 billion compared 35 billion prior year • operating income 54 million compared 186 million prior year • adjusted net income attributable ssi 31 million 111 per diluted share excluding restructuring charges net taxes 3 million 012 per diluted share compared 118 million 423 per diluted share prior year see reconciliation adjusted net income attributable ssi nongaap financial measures end item 7 following items summarize consolidated cash flow balance sheet information fiscal 2012 • net cash provided operating activities 245 million compared 140 million prior year • debt net cash 245 million compared 354 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • dividends 11 million compared 2 million prior year • repurchases outstanding shares class common stock 33 million compared 10 million prior year following items highlight financial results operating segments year ended august 31 2012 • mrb revenues operating income 29 billion 64 million respectively compared 31 billion 165 million year ended august 31 2011 respectively • apb revenues operating income 317 million 33 million respectively compared 320 million 64 million year ended august 31 2011 respectively • smb revenues operating loss 333 million 2 million respectively compared 317 million operating income 3 million year ended august 31 2011 respectively 25 schnitzer steel industries inc form 10k 2012 results operations nm meaningful 1 mrb sells recycled ferrous metal smb rates per ton approximate west coast us export market prices addition apb sells ferrous nonferrous material mrb intercompany revenues costs goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses services benefit three business segments consequence unallocated expense operating income segment reflect operating income segment would report standalone business 3 joint ventures sell recycled ferrous metal mrb subsequently smb rates per ton approximate west coast us export market prices consequently intercompany revenues produce intercompany operating income loss recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 4 restructuring charges consist expense severance contract termination exit costs management include measurement performance operating segments 5 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 26 schnitzer steel industries inc form 10k 2012 revenues fiscal 2012 compared fiscal 2011 consolidated revenues fiscal 2012 decreased primarily due lower sales volumes ferrous scrap metal result soft global demand constrained supply raw materials fiscal 2011 compared fiscal 2010 consolidated revenues fiscal 2011 increased reporting segments primarily due higher average net selling prices higher sales volumes resulting stronger worldwide demand export markets well recovering domestic demand scrap recycled metal increased availability raw materials including improved recovery enhanced processing technologies incremental revenues third party sales generated fiscal 2011 acquisitions 93 million operating income fiscal 2012 compared fiscal 2011 consolidated operating income decreased primarily due market deterioration began first quarter fiscal 2012 caused mainly escalation european sovereign debt crisis together slowing economic growth resulted weakening global demand periods volatile prices overall downward trend export selling prices recycled metals combined constrained supply raw materials adverse effect average inventory costing cost goods sold periods sharp declines selling prices occurred fiscal 2012 led compression operating margins contrasted prior fiscal year benefited stronger market environment rising prices recycled metals included consolidated operating income fiscal 2012 selling general administrative “sga” expense 205 million approximated prior fiscal year levels included sga expense decrease incentive compensation expenses 15 million resulting lower financial performance offset higher costs primarily associated incremental operating expenses related fiscal 2011 acquisitions 8 million absence fiscal year 2012 6 million favorable customer contract settlements recorded fiscal 2011 consolidated operating income fiscal 2012 included restructuring charges 5 million consisting severance contract termination exit costs connection initiatives designed extract greater synergies significant acquisitions technology investments made recent years achieve integration mrb apb realign organization support future growth decrease operating expenses streamlining functions reducing organizational layers initiatives expected lower annual operating costs 25 million comprising approximately 18 million selling general administrative expense 7 million cost goods sold substantially complete end fiscal 2013 expect total pretax charges pursuant restructuring initiatives approximately 12 million approximately half remaining 7 million total restructuring charges expected incurred first quarter fiscal 2013 balance expected incurred end fiscal 2013 expect vast majority restructuring charges require us make cash payments following summary restructuring charges incurred fourth quarter fiscal 2012 major type cost total charges expected incurred pursuant restructuring initiatives thousands include restructuring charges measurement performance operating segments fiscal 2011 compared fiscal 2010 increase consolidated operating income primarily due higher average net selling prices higher sales volumes result continuing strong export market conditions increased availability raw materials increased yield higher production enhanced shredding sorting technologies incremental operating income acquisitions consolidated operating income reflected increase 47 million consolidated selling general administrative “sga” expense fiscal 2011 primarily due 18 million increase compensation expenses mainly related increased headcount 27 schnitzer steel industries inc form 10k 2012 acquisitions 12 million increase professional third party services including transaction costs associated acquisitions completed fiscal 2011 fiscal 2011 sga expense reduced 6 million favorable customer contract settlements compared reduction 3 million fiscal 2010 addition sga expense lower fiscal 2010 included 9 million benefits favorable legal settlements environmental cost reimbursements interest expense interest expense 12 million 8 million 2 million fiscal 2012 2011 2010 respectively increase fiscal 2011 fiscal 2012 due increased average borrowings primarily related acquisitions fiscal 2011 higher average interest rates bank credit facilities compared prior year increase fiscal 2010 fiscal 2011 result higher outstanding debt due acquisitions higher average interest rates bank credit facilities information outstanding debt balances see note 10 longterm debt notes consolidated financial statements part ii item 8 report income net income net 1 million 3 million 2 million fiscal 2012 2011 2010 respectively income net decreased fiscal 2012 primarily due 3 million transaction gains recognized prior year relating foreign currency forward contracts connection acquisition business canada income tax expense income tax expense 14 million 57 million 41 million fiscal 2012 2011 2010 respectively fiscal 2012 compared fiscal 2011 effective tax rate fiscal 2012 327 compared 316 fiscal 2011 fiscal 2012 effective tax rate differed us federal statutory rate 35 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates fiscal 2011 effective tax rate benefited certain adjustments recorded period including recognition research development credits reduction reserve unrecognized state income tax benefits correction prior period error resulted increase net income 3 million fiscal 2011 compared fiscal 2010 effective tax rate fiscal 2011 316 compared 326 fiscal 2010 effective tax rate differed us federal statutory rate 35 primarily due lower tax rate foreign income domestic production activities deductions fiscal 2011 effective tax rate also benefited certain adjustments recorded period including recognition research development credits reduction reserve unrecognized state income tax benefits addition fourth quarter fiscal 2011 recorded adjustment correct error originated prior period pertaining deferred tax liabilities related investment subsidiary correction error resulted reduction income tax expense increase net income 3 million year ended august 31 2011 see note 18 income taxes notes consolidated financial statements part ii item 8 report discussion 28 schnitzer steel industries inc form 10k 2012 financial results reporting segment operate business across three reporting segments mrb apb smb additional financial information relating reporting segments contained note 21 segment information notes consolidated financial statements part ii item 8 report metals recycling business lt long ton 2240 pounds 1 price information shown netting cost freight incurred deliver product customer fiscal 2012 compared fiscal 2011 revenues decrease ferrous revenues primarily due lower sales volumes due soft global demand constrained supply raw materials ferrous sales volumes decreased 214 thousand long tons 4 5115 thousand long tons compared prior year despite sharp temporary periods pricing declines occurred first third quarters fiscal 2012 average net selling prices decreased 1 per long ton less 1 415 per long ton compared prior year decrease export prices substantially offset increase domestic prices decrease nonferrous revenues driven decrease average net selling prices result weak market conditions fiscal 2012 average net selling prices decreased 012 per pound 11 094 per pound compared prior year partially offset increase nonferrous sales volumes 60 million pounds 11 including higher nonferrous sales 29 schnitzer steel industries inc form 10k 2012 activity impact improved recovery nonferrous materials processed enhanced processing technologies segment operating income operating income fiscal 2012 decreased 101 million 61 compared prior year primarily result significant market deterioration began first quarter fiscal 2012 caused mainly escalation european sovereign debt crisis resulted weakening global demand volatile pricing trends fiscal 2012 global selling prices recycled metals experienced periods sharp declines selling prices subsequently recovered certain extent lows overall selling price environment remained downward trend due softening global demand combined constrained supply raw materials adverse effect average inventory costing cost goods sold periods sharp declines selling prices occurred fiscal 2012 led compression operating margins contrasted prior fiscal year benefited stronger market environment rising prices recycled metals addition operating income fiscal 2012 reflected increase sga expense 6 million 6 compared prior year primarily due absence benefit 6 million favorable customer contract settlements recognized fiscal 2011 increase 6 million operating expenses fiscal 2011 acquisitions partially offset reduction incentive compensation expenses 5 million resulting lower financial performance fiscal 2012 decrease expense related environmental liabilities 3 million compared prior year fiscal 2011 compared fiscal 2010 revenues increase revenues primarily attributable higher average net selling prices higher sales volumes caused increased demand availability raw materials incremental volume acquisitions increase ferrous revenues primarily driven higher average net selling prices higher sales volumes average net ferrous selling price increased 88 per long ton fiscal 2011 primarily due stronger demand export markets well gradually recovering domestic demand drove increases foreign domestic selling prices ferrous sales volumes increased 11 million long tons driven increased availability raw materials focus maximizing throughput accomplished increased purchases raw materials increased production result investments technology continuous improvement programs incremental volume acquisitions increase nonferrous revenues driven increases average nonferrous net selling price sales volumes average net selling price increased 023 per pound fiscal 2011 primarily due stronger demand higher commodity prices addition nonferrous volumes sold increased 90 million pounds fiscal 2011 reflecting stronger global market conditions improved recovery nonferrous materials processed enhanced shredding sorting technologies nonferrous collection activity incremental volume acquisitions segment operating income increase operating income fiscal 2011 primarily due higher average net selling prices higher sales volumes ferrous nonferrous scrap metal result continuing strong export market conditions increased availability raw materials increased yield higher production enhanced shredding sorting technologies incremental operating income acquisitions able increase spread selling prices purchase prices operating income percentage revenues decreased 60 fiscal 2010 54 fiscal 2011 primarily due escalation selling prices included fiscal 2011 operating income mrb increase sga expense 27 million compared prior year primarily due 10 million increase compensation expense result increased headcount new acquisitions 6 million increase expenses professional third party services primarily related transaction costs associated acquisitions fiscal 2011 sga expense reduced 6 million favorable customer contract settlements represented 3 million increase prior year addition sga expense lower fiscal 2010 included 3 million benefits environmental expense reimbursements 30 schnitzer steel industries inc form 10k 2012 auto parts business fiscal 2012 compared fiscal 2011 revenues decrease revenues 3 million 1 driven lower average commodity prices decreased car volumes adversely impacted sales ferrous nonferrous material compared prior year segment operating income operating income fiscal 2012 decreased 31 million 48 due compression operating margins caused primarily slightly higher average vehicle purchases costs coupled decrease average selling prices ferrous nonferrous material compared prior year compression operating margins exacerbated market volatility overall decreasing commodity price environment periods temporary sharp declines commodity prices due softening global demand led purchase prices endoflife vehicles decreasing slower pace average net selling prices periods causing adverse effect average inventory costing cost goods sold addition operating income fiscal 2012 reflected higher sga expenses 2 million 4 primarily due operating expenses related fiscal 2011 acquisitions increased legal expenses higher advertising costs partially offset increased operational efficiencies reduction incentive compensation expenses resulting lower financial performance fiscal 2012 fiscal 2011 compared fiscal 2010 revenues increase revenues 79 million 33 driven higher commodity prices increased car volumes enhancement production operating efficiencies increase number selfservice store locations fiscal 2011 apb benefit cashforclunkers government stimulus program increased sales volumes prior year segment operating income increase operating income fiscal 2011 reflected impact higher commodity prices increased volumes ferrous nonferrous material sales improved production operating efficiencies decrease operating income percentage revenues 212 fiscal 2010 200 fiscal 2011 reflected increase car purchasing costs outpaced increase selling prices increase sga expense 10 million fiscal 2011 primarily due 4 million increase compensation expense result additional headcount acquisitions 31 schnitzer steel industries inc form 10k 2012 steel manufacturing business st short ton 2000 pounds nm meaningful 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2012 compared fiscal 2011 revenues smb revenues increased result higher average selling prices finished steel products higher volumes finished steel product sold compared prior year rise average selling price finished steel products compared prior year primarily driven impact selling prices increased average purchase costs raw materials changes product mix towards highervalued products segment operating income loss smb generated operating loss fiscal 2012 2 million compared operating income 3 million prior year continuing weak market environment us west coast markets result slow economic growth hampered recovery construction spending decrease operating results compared prior year primarily due higher average raw material purchase prices adverse impact unscheduled production downtime fiscal 2011 compared fiscal 2010 revenues smb revenues increased primarily result increased average selling prices finished steel products reflecting ability pass higher purchase prices scrap raw materials end customers increase average selling prices finished steel products driven increased scrap metal purchase prices global markets result improved worldwide demand partially offset decrease volume finished steel products sold fiscal 2011 due continuing weak demand west coast markets result slow economic growth hampers construction spending recovery segment operating income loss increase operating income reflected impact increased average selling prices outpaced increase scrap raw material purchase costs smb acquired scrap metal requirements mrb rates approximated export market prices shipments west coast us liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 90 million 49 million august 31 2012 2011 respectively cash balances intended used primarily working capital expenditures acquisitions dividends share repurchases also use excess cash hand reduce amounts outstanding credit facilities august 31 2012 debt net cash 245 million compared 354 million august 31 2011 refer nongaap financial measures decrease 109 million 32 schnitzer steel industries inc form 10k 2012 primarily result use cash generated operating activities repay debt cash balances august 31 2012 2011 includes 13 million 11 million respectively indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2012 245 million compared 140 million fiscal 2011 89 million fiscal 2010 cash provided operating activities fiscal 2012 included decrease inventories 94 million due lower volumes material purchases decrease 82 million accounts receivable due lower sales volumes timing collections uses cash included decrease accounts payable 26 million due lower levels material purchases timing payments decrease accrued income taxes 20 million due lower financial results compared prior fiscal year cash provided operating activities fiscal 2011 included increase 45 million accounts payable due higher volumes material purchases timing payments increase accrued income taxes 23 million due improved financial results uses cash included increase accounts receivable 92 million due higher sales timing collections 45 million increase inventory due higher purchase costs higher volumes material hand yearend cash provided operating activities fiscal 2010 included income tax refunds 49 million increase accrued payroll liabilities 12 million due increased incentive compensation increase 8 million accounts payable due timing payments uses cash included 109 million increase inventory excluding 35 million inventory sold part divestiture fullservice auto parts operation due higher purchase costs higher volumes material hand yearend increase accounts receivable 12 million due timing collections investing activities net cash used investing activities fiscal 2012 84 million compared 400 million fiscal 2011 64 million fiscal 2010 cash used investing activities fiscal 2012 included 79 million capital expenditures primarily expand facilities upgrade equipment infrastructure cash used investing activities fiscal 2011 included 294 million completed acquisitions 105 million capital expenditures upgrade equipment infrastructure cash used investing activities fiscal 2010 included 64 million capital expenditures upgrade equipment infrastructure 41 million completed acquisitions partially offset 41 million proceeds sale fullservice auto parts business assets financing activities net cash used financing activities fiscal 2012 120 million compared net cash provided financing activities 280 million fiscal 2011 net cash used financing activities 36 million fiscal 2010 cash used financing activities 2012 included 69 million net repayments debt refer nongaap financial measures using cash generated operations 33 million repurchase outstanding shares class common stock 11 million cash dividends cash provided financing activities 2011 primarily due 303 million additional net debt borrowings refer nongaap financial measures mainly used fund acquisitions partly offset 10 million repurchases outstanding shares class common stock cash used financing activities fiscal 2010 primarily due 11 million net debt repayments refer nongaap financial measures 17 million repurchases outstanding shares class common stock 33 schnitzer steel industries inc form 10k 2012 credit facilities following summary outstanding balances availability credit facilities longterm debt thousands 1 remaining availability net 5 million outstanding standby letters credit april 2012 entered amendment unsecured committed bank credit agreement “credit agreement” bank america na administrative agent lenders party thereto amendment among things increased aggregate commitment size us revolving loans 50 million credit agreement provides revolving loans 670 million c30 million ii reduced applicable margin rates loans outstanding credit agreement bear interest based option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 iii reduced rates applicable commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied leverage ratio iv extended maturity date revolving loans credit agreement february 2016 april 2017 except modified amendment described terms credit agreement remained borrowings outstanding credit facility 325 million 393 million august 31 2012 2011 respectively weighted average interest rate amounts outstanding facility 206 248 august 31 2012 2011 respectively also unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2013 interest rates set bank time borrowing borrowings outstanding facility august 31 2012 2011 two bank credit agreements contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2012 compliance covenants use credit facilities fund working capital requirements acquisitions capital expenditures dividends share repurchases addition august 31 2012 2011 8 million longterm taxexempt bonds outstanding mature january 2021 acquisitions continue expand presence regions operate new locations acquisition businesses fiscal 2012 closed one acquisition compared 10 acquisitions fiscal 2011 three acquisitions fiscal 2010 aggregate purchase price 316 million 41 million respectively see note 6 business combinations notes consolidated financial statements part ii item 8 report additional information business acquisitions capital expenditures capital expenditures totaled 79 million 105 million 64 million fiscal 2012 2011 2010 respectively capital expenditures fiscal 2012 included investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia expected begin operations fiscal 2013 addition made investments technology improve recovery separation nonferrous materials shredding process investments infrastructure improve efficiency increase capacity improve worker safety enhance environmental systems replace equipment currently plan invest 80 million capital expenditures similar projects fiscal 2013 including completion new shredder processing equipment canada believe investments create value shareholders expect use cash generated operations available lines credit fund capital expenditures fiscal 2013 34 schnitzer steel industries inc form 10k 2012 dividends board directors declared dividend third fourth quarters fiscal 2012 01875 per common share represented increase annual cash dividend 075 per share prior annual dividend 007 per share total dividend paid fiscal 2012 041 per share compared 007 per share fiscal 2011 2010 environmental compliance commitment sustainable recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 13 million 14 million 13 million environmental projects fiscal 2012 2011 2010 respectively plan invest 12 million capital expenditures environmental projects fiscal 2013 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “the site” group prps conducting investigation study identify characterize contamination site develop alternative approaches remediation contamination march 30 2012 group submitted epa draft feasibility study “draft fs” based approximately ten years work 100 million costs classified investigationrelated draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs reviewed may subject revisions prior approval epa final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa expect issue final rod selecting remedy site least 2014 determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe reasonably possible estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations future cash flows liquidity material liabilities recorded future related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amounts available borrowing could otherwise used investment capital expenditures acquisitions dividends share repurchases see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant share repurchase program amended existing authorization repurchase 21 million shares class common stock 9 million share repurchase program management deems repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program prior fiscal 2012 repurchased approximately 58 million shares program fiscal 2012 repurchased 11 million shares class common stock program openmarket transactions cost 33 million redeemable noncontrolling interest march 2011 issued common stock one subsidiaries noncontrolling interest holder subsidiary redeemable option holder upon occurrence event solely within control terms agreement related acquisition noncontrolling interest holder right require us purchase interest subsidiary fair value noncontrolling interest becomes redeemable within 60 days later third anniversary date acquisition ii date certain principals minority shareholder longer employed company conditions redemption noncontrolling interest met august 31 2012 interest redeemed would required purchase interest fair value date redemption august 31 2012 fair value redeemable noncontrolling interest 22 million see note 13 redeemable noncontrolling interest notes consolidated financial statements part ii item 8 report 35 schnitzer steel industries inc form 10k 2012 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs acquisitions capital expenditures working capital share repurchases dividends joint ventures debt service requirements environmental obligations however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2012 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2021 2 interest payments longterm debt based interest rates effect august 31 2012 contractual interest rates variable actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities reserves uncertain tax positions redeemable noncontrolling interest potential future obligation exercise date future fair value known solely within control see note 13 redeemable noncontrolling interest notes consolidated statements part ii item 8 report maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2012 18 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported 36 schnitzer steel industries inc form 10k 2012 critical accounting estimates include related goodwill environmental costs inventories accounting business combinations revenue recognition redeemable noncontrolling interest goodwill evaluate goodwill impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ company determined reporting units goodwill allocated equivalent company’s operating segments components segment similar economic characteristics goodwill impairment test follows twostep process first step fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates appropriate discount rates third quarter fiscal 2012 identified combination recent significant decline company’s market capitalization carrying value net assets persistent uncertainty around global macroeconomic conditions impact fiscal 2012 operating results current challenging market conditions industry triggering event requiring interim impairment test goodwill apb reporting unit calculated fair value using income approach substantially exceeded carrying value mrb reporting unit goodwill 465 million may 31 2012 calculated fair value exceeded carrying value approximately 11 projections used income approach mrb took consideration current weak market conditions including challenging macroeconomic indicators markets operate customers based cyclical nature industry projections assumed gradual recovery operating margins multiyear period eventually returning levels profitability range average historical levels marketbased wacc used income approach mrb 117 assuming components fair value estimate held constant increase wacc rate excess 1 could result failure step 1 impairment test mrb reporting unit also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount investor would pay obtain controlling interest implied control premium resulting difference market capitalization based average trading price company’s class common stock twoweek period ending may 31 2012 higher aggregated estimated fair value reporting units historical range premiums observed normal market conditions transactions within steel making scrap processing industries comparable sectors believe implied control premium reflected recent impact stock price current depressed market conditions industry weak macroeconomic indicators cyclical nature business additional triggering events fourth quarter fiscal 2012 requiring impairment test goodwill result inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact assumptions future revenue growth rates pace extent operating margins’ recovery marketbased wacc rate factors may result changes estimates future cash flows although believe assumptions used testing reporting units’ goodwill impairment reasonable reasonably possible market economic conditions deteriorate including additional declines lack longterm recovery market conditions current levels lack recovery share price current levels increase marketbased wacc rate among factors could significantly impact impairment analysis increase 37 schnitzer steel industries inc form 10k 2012 likelihood future goodwill impairment charges incurred could material results operations financial position environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors consider recognition measurement environmental liabilities include • current regulations time reserve established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2012 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquiditytherefore additional amounts accrued see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree 38 schnitzer steel industries inc form 10k 2012 acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipment historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three years ended august 31 2013 2012 2011 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products operate three reporting segments metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” collectively provide endoflife cycle solution variety products integrated businesses use operating income loss measure segment performance restructuring charges allocated segment operating income loss include information measurement segments’ performance corporate expense consists primarily unallocated expense management administrative services benefit three reporting segments result unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business information regarding reporting segments including financial information geographic areas see note 21 segment information notes consolidated financial statements part ii item 8 report mrb buys collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets mrb processes mixed large pieces scrap metal smaller pieces crushing sorting shearing shredding torching resulting scrap metal pieces size density metal content required customers meet production needs apb procures used salvaged vehicles sells serviceable used auto parts vehicles selfservice auto parts stores remaining portions vehicles primarily autobodies major parts containing ferrous nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products mrb sole supplier smb’s scrap metal requirements smb purchases rates approximate export market prices shipments west coast us smb uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california portland oregon tacoma washington access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal shipping bulk cargoes steel manufacturers located europe asia central america africa exports nonferrous processed recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us fluctuating volatile supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations three reporting segments fiscal 2012 throughout fiscal 2013 markets significantly impacted slowdown economic activity globally macroeconomic uncertainty resulted deteriorating market conditions global steel manufacturers volatile pricing swings overall downward trend commodity prices export selling prices recycled materials persistently low economic growth us contributed constrained scrap flows mrb apb domestic supply markets combined 24 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc increased scrap recycling capacity certain regional markets led continued margin compression addition relatively stronger us dollar value increased competitive pressure mrb’s export activity strategic factors continue closely monitor economic conditions remain focused following core strategies meet business objectives • use seven deep water ports access customers directly around world meet demand wherever greatest • synergistic growth continuous improvement cost reduction initiatives integrate operations drive significant cost savings efficiencies • growth acquisitions greenfield development existing new geographic regions generate attractive returns • continued investment benefit technologies process improvements increase separation recovery recycled materials shredding process strategy focused enhancing inherent synergies within integrated operations continuing grow operations core regions significant market presence competitively advantageous port access apb key supplier mrb opportunistically look enhance geographic proximity operations within two businesses fiscal 2011 acquired substantially assets two metals recycling businesses canada total twelve metals collection processing facilities marked mrb’s first expansion canada fiscal 2012 acquired substantially assets additional metals recycling business canada fiscal 2013 acquired substantially assets used auto parts business four stores british columbia expanding apb’s existing presence western canada apb’s facilities western canada able provide crushed autobodies mrb’s new franchise western canada addition shipping tacoma washington facility also fiscal 2013 acquired substantially assets two auto parts businesses three stores massachusetts rhode island establishing new apb presence northeastern us near mrb’s operations mrb apb also integrated presence northwestern us northern california near mrb’s export facilities tacoma washington oakland california benefit synergies enhanced access supply fiscal 2013 continued implement enhancements synergies businesses integrating certain operational processes executive overview financial results generated consolidated revenues 26 billion fiscal 2013 decrease 22 33 billion consolidated revenues prior year decrease due lower sales volumes lower average net selling prices ferrous metal primarily result weak economic conditions negatively impacted demand recycled metal lower price environment adversely impacted supply raw materials compared prior year generated operating loss 328 million fiscal 2013 included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million compared operating income 54 million prior year adjusted operating income fiscal 2013 excluding goodwill asset impairments restructuring charges 14 million decrease 45 million 76 compared adjusted operating income fiscal 2012 see reconciliation adjusted consolidated operating income nongaap financial measures end item 7 operating results fiscal 2013 negatively impacted reduction sales volumes compared prior year constrained supply raw materials domestic markets coupled pronounced softening demand scrap metal export markets compared us caused purchase prices raw materials decrease less export selling prices contributing compression operating margins fiscal 2013 furthermore declining selling price environment average inventory costs decrease quickly purchase costs raw materials resulting adverse effect cost goods sold compared prior year consolidated operating results fiscal 2013 also included 5 million operating losses including transaction integration startup costs related store locations acquired opened apb fiscal 2013 decreases offset increase operating income smb 9 million compared prior year primarily result slightly improved demand leading higher sales volumes increased utilization levels addition consolidated selling general administrative “sga” expense decreased 12 million 6 compared prior year primarily result restructuring initiatives operating efficiencies announced fourth quarter fiscal 2012 implemented fiscal 2013 25 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc fourth quarter fiscal 2013 identified combination continued challenging market conditions constrained supply raw materials company’s recent financial performance lack recovery market capitalization triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 321 million mrb reporting unit addition fourth quarter fiscal 2013 recorded impairment charges 13 million various assets fiscal 2013 made progress growth strategy integration nine stores acquired fiscal 2013 opening two greenfield store locations apb mrb new shredder processing equipment surrey british columbia became operational nonferrous processing facility puerto rico neared completion became operational september 2013 addition march 2013 acquired redeemable noncontrolling interest one mrb’s canadian subsidiaries consideration 25 million net loss attributable ssi fiscal 2013 281 million 1056 per diluted share compared net income attributable ssi 27 million 099 per diluted share prior year adjusted net loss attributable ssi excluding goodwill asset impairments restructuring charges valuation allowance recorded deferred tax assets 2 million 007 per diluted share fiscal 2013 compared adjusted net income attributable ssi 31 million 112 per diluted share prior year see reconciliation adjusted net income loss attributable ssi nongaap financial measures end item 7 following items summarize consolidated financial performance fiscal 2013 • revenues 26 billion compared 33 billion prior year • operating loss 328 million compared operating income 54 million prior year • adjusted operating income 14 million reduction 45 million 76 compared prior year see reconciliation adjusted consolidated operating income nongaap financial measures end item 7 • net loss attributable ssi 281 million 1056 per diluted share compared net income 27 million 099 per diluted share prior year • adjusted net loss attributable ssi 2 million 007 per diluted share compared adjusted net income attributable ssi 31 million 112 per diluted share prior year see reconciliation adjusted net income loss attributable ssi nongaap financial measures end item 7 following items summarize consolidated cash flow balance sheet information fiscal 2013 • net cash provided operating activities 39 million compared 245 million prior year • debt net cash 368 million compared 245 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • dividends paid 20 million compared 11 million prior year following items highlight financial results operating segments year ended august 31 2013 • mrb revenues 22 billion operating loss 312 million compared revenues 29 billion operating income 64 million year ended august 31 2012 respectively adjusted operating income mrb 23 million fiscal 2013 see reconciliation adjusted mrb operating income loss nongaap financial measures end item 7 • apb revenues operating income 313 million 25 million respectively compared 317 million 33 million year ended august 31 2012 respectively • smb revenues operating income 352 million 7 million respectively compared 333 million operating loss 2 million year ended august 31 2012 respectively 26 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc results operations nm meaningful 1 mrb sells recycled ferrous metal smb rates per ton approximate west coast us export market prices addition apb sells ferrous nonferrous material mrb intercompany revenues costs goods sold eliminated consolidation 27 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc 2 corporate expense consists primarily unallocated expenses services benefit three business segments consequence unallocated expense operating income loss segment reflect operating income loss segment would report standalone business 3 joint ventures sell recycled ferrous metal mrb subsequently smb rates per ton approximate west coast us export market prices consequently intercompany revenues produce intercompany operating income loss recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 4 restructuring charges consist expense severance contract termination exit costs management include measurement performance operating segments 5 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory revenues fiscal 2013 compared fiscal 2012 consolidated revenues fiscal 2013 decreased due lower sales volumes lower average net selling prices recycled ferrous metal fiscal 2013 demand recycled scrap metal continued soften due primarily weak global macroeconomic conditions led decline selling prices compared prior year selling prices recycled ferrous metal declined sharply beginning fiscal 2013 experiencing slight increase second quarter steadily declined throughout remainder fiscal 2013 addition lower price environment adversely impacted supply raw materials compared prior year contributed lower sales volumes fiscal 2012 compared fiscal 2011 consolidated revenues fiscal 2012 decreased primarily due lower sales volumes ferrous scrap metal result soft global demand constrained supply raw materials operating income loss fiscal 2013 compared fiscal 2012 consolidated operating loss fiscal 2013 328 million included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million compared consolidated operating income 54 million prior year adjusted consolidated operating income fiscal 2013 excluding goodwill impairment charge asset impairment charges restructuring charges 14 million decrease 45 million 76 compared adjusted consolidated operating income 59 million fiscal 2012 see reconciliation adjusted consolidated operating income nongaap financial measures end item 7 operating results fiscal 2013 negatively impacted reduction sales volumes compared prior year benefited higher sales volumes higher average net selling prices resulting less margin compression compared fiscal 2013 constrained supply raw materials domestic markets coupled pronounced softening demand scrap metal export markets compared us caused purchase prices raw materials decrease less export selling prices contributing compression operating margins fiscal 2013 furthermore declining selling price environment average inventory costs decrease quickly purchase costs raw materials resulting adverse effect cost goods sold compression operating margins compared prior year consolidated operating results fiscal 2013 also included 5 million operating losses apb including transaction integration startup costs related eleven store locations acquired opened fiscal 2013 decreases offset increase operating income smb 9 million compared prior year primarily result slightly improved demand leading higher sales volumes increased utilization levels operating results fiscal 2013 benefited reduction selling general administrative “sga” expense 12 million 6 prior year primarily result restructuring initiatives operating efficiencies announced fourth quarter fiscal 2012 implemented fiscal 2013 decrease compared prior year driven primarily reduction 5 million employee compensation expense 4 million professional outside services reduction consolidated sga expense achieved despite incremental expense attributable eleven store locations acquired opened apb fiscal 2013 fourth quarter fiscal 2013 identified combination continued challenging market conditions constrained supply raw materials company’s recent financial performance lack recovery market capitalization triggering event requiring interim impairment test goodwill allocated reporting units apb reporting unit calculated fair value using income approach substantially exceeded carrying value mrb reporting unit first step impairment test showed reporting unit’s fair value less carrying amount indicating potential impairment based second step impairment test recorded noncash goodwill impairment charge 321 million mrb 28 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc fourth quarter fiscal 2013 also recorded impairment charges 13 million various assets mrb including impairment contractual receivable 8 million result debtor’s inability repay amount owed accordance terms agreements entered extraction scrap metal demolition activities impairments 5 million combination assets held sale joint venture investment longlived assets consolidated operating income fiscal 2013 also included restructuring charges 8 million compared 5 million fiscal 2012 consisting severance contract termination exit costs connection initiatives designed extract greater synergies significant acquisitions technology investments made recent years achieve integration mrb apb realign organization support future growth decrease operating expenses streamlining functions reducing organizational layers initiatives completed end fiscal 2013 achieved reduction operating costs approximately 25 million annualized basis comprising approximately 18 million selling general administrative expense 7 million cost goods sold total pretax charges pursuant restructuring initiatives approximately 13 million vast majority restructuring charges required us make cash payments following summary restructuring charges incurred fiscal 2013 2012 major type cost total charges expected incurred pursuant restructuring initiatives thousands plan initiate implement additional restructuring initiatives fiscal 2014 reduce annual operating expenses approximately 30 million approximately 70 reduction expected benefit fiscal 2014 results full annual benefit expected achieved fiscal 2015 reduction operating expenses primarily occur mrb expected result combination organizational changes reduce management layers productivity improvements procurement savings operational efficiencies expect incur restructuring charges 3 million connection initiatives fiscal 2014 include restructuring charges measurement performance operating segments fiscal 2012 compared fiscal 2011 consolidated operating income decreased primarily due market deterioration began first quarter fiscal 2012 caused mainly escalation european sovereign debt crisis together slowing economic growth resulted weakening global demand periods volatile prices overall downward trend export selling prices recycled metals combined constrained supply raw materials adverse effect average inventory costing cost goods sold periods sharp declines selling prices occurred fiscal 2012 led compression operating margins contrasted prior fiscal year benefited stronger market environment rising prices recycled metals included consolidated operating income fiscal 2012 selling general administrative “sga” expense 205 million approximated prior fiscal year levels included sga expense decrease incentive compensation expenses 15 million resulting lower financial performance offset higher costs primarily associated incremental operating expenses related fiscal 2011 acquisitions 8 million absence fiscal year 2012 6 million favorable customer contract settlements recorded fiscal 2011 addition consolidated operating income fiscal 2012 included restructuring charges 5 million consisting severance contract termination exit costs interest expense interest expense 10 million 12 million 8 million fiscal 2013 2012 2011 respectively decrease interest expense fiscal 2013 fiscal 2012 primarily due decreased average borrowings lower average interest rates bank credit facilities compared prior year period increase fiscal 2011 fiscal 2012 due increased average borrowings primarily related acquisitions fiscal 2011 higher average interest rates bank credit facilities compared prior year information outstanding debt balances see note 9 longterm debt notes consolidated financial statements part ii item 8 report 29 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc income net income net less 1 million 1 million 3 million fiscal 2013 2012 2011 respectively decrease fiscal 2011 fiscal 2012 primarily due 3 million transaction gains recognized fiscal 2011 relating foreign currency forward contracts connection acquisition business canada income tax expense benefit income tax expense benefit 57 million 14 million 57 million fiscal 2013 2012 2011 respectively fiscal 2013 compared fiscal 2012 effective tax rate fiscal 2013 benefit 17 compared expense 327 fiscal 2012 fiscal 2013 effective tax rate differed us federal statutory rate 35 primarily due recognition expense 29 million record valuation allowance deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 impairment charge goodwill net operating losses subsidiary realization foreign subsidiary’s deferred tax assets dependent upon us generating consistent trend profitability objectively forecast sufficient taxable income foreign tax jurisdiction future years obtain benefit reversal net deductible temporary differences utilization net operating losses believe likely realize benefits deferred tax assets net valuation allowances august 31 2013 fiscal 2012 compared fiscal 2011 effective tax rate fiscal 2012 327 compared 316 fiscal 2011 fiscal 2012 effective tax rate differed us federal statutory rate 35 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates fiscal 2011 effective tax rate benefited certain adjustments recorded period including recognition research development credits reduction reserve unrecognized state income tax benefits correction prior period error resulted increase net income 3 million see note 18 income taxes notes consolidated financial statements part ii item 8 report discussion 30 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc financial results reporting segment operate business across three reporting segments mrb apb smb additional financial information relating reporting segments contained note 21 segment information notes consolidated financial statements part ii item 8 report metals recycling business lt long ton 2240 pounds 1 price information shown netting cost freight incurred deliver product customer fiscal 2013 compared fiscal 2012 revenues decrease 27 ferrous revenues due lower sales volumes lower average net selling prices ferrous metal fiscal 2013 demand recycled ferrous metal continued soften due primarily weak global macroeconomic conditions led decline selling prices compared prior year selling prices recycled ferrous metal declined sharply beginning fiscal 2013 experiencing slight increase second quarter steadily declined throughout remainder fiscal 2013 addition lower price environment adversely impacted supply flow raw materials compared prior year contributed lower sales volumes decrease nonferrous revenues primarily due lower sales volumes result reduced volumes processed scrap metal offset beneficial impact improved recovery nonferrous materials processed enhanced processing technologies 31 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc segment operating income loss operating loss fiscal 2013 312 million compared operating income 64 million prior year adjusted operating income fiscal 2013 excluding goodwill impairment charge 321 million asset impairment charges 13 million 23 million decrease 41 million 65 compared adjusted operating income fiscal 2012 see reconciliation adjusted mrb operating income nongaap financial measures end item 7 operating results fiscal 2013 negatively impacted reduction sales volumes compared prior year benefited higher sales volumes higher average net selling prices resulting less margin compression compared fiscal 2013 constrained supply raw materials domestic markets coupled pronounced softening demand scrap metal export markets compared us caused purchase prices raw materials decrease less export selling prices contributing compression operating margins fiscal 2013 furthermore declining selling price environment average inventory costs decrease quickly purchase costs raw materials resulting adverse effect cost goods sold compression operating margins compared prior year sga expense decreased 13 million 12 prior year primarily result restructuring initiatives operating efficiencies announced fourth quarter fiscal 2012 implemented fiscal 2013 decrease compared prior year driven primarily reduction 5 million employee compensation expense 3 million professional outside services fourth quarter fiscal 2013 identified triggering event requiring interim impairment test goodwill allocated mrb reporting unit first step impairment test showed reporting unit’s fair value less carrying amount indicating potential impairment based second step impairment test recorded noncash goodwill impairment charge 321 million mrb addition recorded impairment charges totaling 13 million assets including impairment contractual receivable 8 million result debtor’s inability repay amount owed accordance terms agreement entered extraction scrap metal demolition activities impairments 5 million combination assets held sale joint venture investment longlived assets fiscal 2012 compared fiscal 2011 revenues decrease ferrous revenues primarily due lower sales volumes due soft global demand constrained supply raw materials ferrous sales volumes decreased 214 thousand long tons 4 5115 thousand long tons compared prior year despite sharp temporary periods pricing declines occurred first third quarters fiscal 2012 average net selling prices decreased 1 per long ton less 1 415 per long ton compared prior year decrease export prices substantially offset increase domestic prices decrease nonferrous revenues driven decrease average net selling prices result weak market conditions fiscal 2012 average net selling prices decreased 012 per pound 11 094 per pound compared prior year partially offset increase nonferrous sales volumes 60 million pounds 11 including higher nonferrous sales activity impact improved recovery nonferrous materials processed enhanced processing technologies segment operating income operating income fiscal 2012 decreased 101 million 61 compared prior year primarily result significant market deterioration began first quarter fiscal 2012 caused mainly escalation european sovereign debt crisis resulted weakening global demand volatile pricing trends fiscal 2012 global selling prices recycled metals experienced periods sharp declines selling prices subsequently recovered certain extent lows overall selling price environment remained downward trend due softening global demand combined constrained supply raw materials adverse effect average inventory costing cost goods sold periods sharp declines selling prices occurred fiscal 2012 led compression operating margins contrasted prior fiscal year benefited stronger market environment rising prices recycled metals addition operating income fiscal 2012 reflected increase sga expense 6 million 6 compared prior year primarily due absence benefit 6 million favorable customer contract settlements recognized fiscal 2011 increase 6 million operating expenses fiscal 2011 acquisitions partially offset reduction incentive compensation expenses 5 million resulting lower financial performance fiscal 2012 decrease expense related environmental liabilities 3 million compared prior year 32 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc auto parts business fiscal 2013 compared fiscal 2012 revenues decrease revenues 4 million 1 driven primarily lower average commodity prices partially offset higher sales volumes primarily generated eleven new store locations acquired opened fiscal 2013 segment operating income operating income fiscal 2013 decreased 9 million 26 compared prior year compression operating margins primarily related car purchase costs decreasing slower rate ferrous nonferrous selling prices due supply constraints endoflife vehicles operating income fiscal 2013 included 5 million operating losses including transaction integration startup costs related eleven store locations acquired opened year sga expense remained consistent prior year positive impact restructuring initiatives operational efficiencies implemented fiscal 2013 decreased legal expenses offset incremental expenses related eleven store locations acquired opened fiscal 2013 fiscal 2012 compared fiscal 2011 revenues decrease revenues 3 million 1 driven lower average commodity prices decreased car volumes adversely impacted sales ferrous nonferrous material compared prior year segment operating income operating income fiscal 2012 decreased 31 million 48 due compression operating margins caused primarily slightly higher average vehicle purchases costs coupled decrease average selling prices ferrous nonferrous material compared prior year compression operating margins exacerbated market volatility overall decreasing commodity price environment periods temporary sharp declines commodity prices due softening global demand led purchase prices endoflife vehicles decreasing slower pace average net selling prices periods causing adverse effect average inventory costing cost goods sold addition operating income fiscal 2012 reflected higher sga expenses 2 million 4 primarily due operating expenses related fiscal 2011 acquisitions increased legal expenses higher advertising costs partially offset increased operational efficiencies reduction incentive compensation expenses resulting lower financial performance fiscal 2012 33 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc steel manufacturing business st short ton 2000 pounds nm meaningful 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2013 compared fiscal 2012 revenues increased 6 compared prior year primarily due higher volumes finished steel products result slightly higher demand west coast markets mainly driven improved nonresidential construction partially offset lower average sales prices result impact reduced costs raw materials segment operating income loss operating income fiscal 2013 7 million improvement 9 million compared operating loss 2 million prior year improved results primarily due slightly higher demand leading higher sales volumes increased utilization levels coupled improved operational efficiencies fiscal 2012 compared fiscal 2011 revenues smb revenues increased result higher average selling prices finished steel products higher volumes finished steel product sold compared prior year rise average selling price finished steel products compared prior year primarily driven impact selling prices increased average purchase costs raw materials changes product mix towards highervalued products segment operating income loss smb generated operating loss fiscal 2012 2 million compared operating income 3 million prior year continuing weak market environment us west coast markets result slow economic growth hampered recovery construction spending decrease operating results compared prior year primarily due higher average raw material purchase prices adverse impact unscheduled production downtime liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 13 million 90 million august 31 2013 2012 respectively cash balances intended used primarily working capital expenditures acquisitions dividends share repurchases also use excess cash hand reduce amounts outstanding credit facilities august 31 2013 debt net cash 368 million compared 245 million august 31 2012 refer nongaap financial measures increase 123 million primarily result higher working capital acquisitions purchase redeemable noncontrolling interest one 34 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc mrb’s canadian subsidiaries third quarter fiscal 2013 cash balances august 31 2013 2012 include 7 million 13 million respectively indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2013 39 million compared 245 million fiscal 2012 140 million fiscal 2011 cash provided operating activities fiscal 2013 included decrease inventories 47 million due lower volumes material purchases uses cash included increase 79 million accounts receivable due timing shipments collections decrease accounts payable 11 million due lower levels material purchases timing payments cash provided operating activities fiscal 2012 included decrease inventories 94 million due lower volumes material purchases decrease 82 million accounts receivable due lower sales volumes timing collections uses cash included decrease accounts payable 26 million due lower levels material purchases timing payments decrease accrued income taxes 20 million due lower financial results compared prior fiscal year cash provided operating activities fiscal 2011 included increase 45 million accounts payable due higher volumes material purchases timing payments increase accrued income taxes 23 million due improved financial results uses cash included increase accounts receivable 92 million due higher sales timing collections 45 million increase inventory due higher purchase costs higher volumes material hand yearend investing activities net cash used investing activities fiscal 2013 137 million compared 84 million fiscal 2012 400 million fiscal 2011 cash used investing activities fiscal 2013 included 90 million capital expenditures including investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia commenced shredding operations third quarter fiscal 2013 construction new nonferrous processing facility puerto rico commenced operations september 2013 cash used investing activities also included 25 million acquisitions 25 million purchase redeemable noncontrolling interest cash used investing activities fiscal 2012 included 79 million capital expenditures primarily expand facilities upgrade equipment infrastructure cash used investing activities fiscal 2011 included 294 million completed acquisitions 105 million capital expenditures upgrade equipment infrastructure financing activities net cash provided financing activities fiscal 2013 21 million compared net cash used financing activities 120 million fiscal 2012 net cash provided financing activities 280 million fiscal 2011 cash provided financing activities 2013 included 43 million net borrowings debt refer nongaap financial measures mainly used support higher working capital requirements acquisitions purchase redeemable noncontrolling interest uses cash included 20 million cash dividends cash used financing activities 2012 included 69 million net repayments debt refer nongaap financial measures using cash generated operations 33 million repurchase outstanding shares class common stock 11 million cash dividends cash provided financing activities 2011 primarily due 303 million additional net debt borrowings refer nongaap financial measures mainly used fund acquisitions partly offset 10 million repurchases outstanding shares class common stock 35 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc credit facilities following summary outstanding balances availability credit facilities longterm debt thousands 1 remaining availability net 6 million outstanding standby letters credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied leverage ratio borrowings outstanding credit facility 360 million 325 million august 31 2013 2012 respectively weighted average interest rate amounts outstanding facility 198 206 august 31 2013 2012 respectively also unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2014 interest rates set bank time borrowing 9 million borrowings outstanding facility august 31 2013 borrowings outstanding august 31 2012 two bank credit agreements contain various representations warranties events default financial covenants could limit restrict ability create liens raise additional capital enter transactions affiliates acquire dispose businesses guarantee debt consolidate merge financial covenants include maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2013 compliance covenants expect remain compliance future however event sustained deterioration market conditions could material adverse impact results operations cash flows financial position assurances continue remain compliance financial covenants maintain compliance financial covenants unable obtain amendment waiver lenders breach either covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreements use credit facilities fund working capital requirements acquisitions capital expenditures dividends share repurchases addition august 31 2013 2012 8 million longterm taxexempt bonds outstanding mature january 2021 dividends total dividend paid fiscal 2013 075 per common share compared 041 per common share fiscal 2012 007 per common share fiscal 2011 acquisitions fiscal 2013 expanded presence regions operate new locations acquisition four used auto parts facilities richmond surrey british columbia near mrb operations surrey british columbia two used auto parts facilities located kansas missouri two used auto parts facilities located massachusetts near mrb operations one used auto parts facility located rhode island near mrb operations acquired facilities operate apb’s picknpull brand aggregate consideration paid acquisitions 26 million see note 6 business combinations notes consolidated financial statements part ii item 8 report additional information business acquisitions 36 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc capital expenditures capital expenditures totaled 90 million 79 million 105 million fiscal 2013 2012 2011 respectively capital expenditures fiscal 2013 included investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia began operations third quarter fiscal 2013 construction new nonferrous processing facility puerto rico commenced operations september 2013 addition made investments infrastructure improve efficiency increase capacity improve worker safety enhance environmental systems replace equipment currently plan invest 60 million capital expenditures fiscal 2014 using cash generated operations available lines credit environmental compliance commitment sustainable recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 5 million 13 million 14 million environmental projects fiscal 2013 2012 2011 respectively plan invest 11 million capital expenditures environmental projects fiscal 2014 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “the site” group prps conducting investigation study identify characterize contamination site develop alternative approaches remediation contamination march 30 2012 group submitted epa draft feasibility study “draft fs” based approximately ten years work 100 million costs classified investigationrelated draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs reviewed likely subject revisions could significant prior approval epa draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa expect issue final rod selecting remedy site least 2015 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe reasonably possible estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations future cash flows liquidity material liabilities recorded future related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amounts available borrowing could otherwise used investment capital expenditures acquisitions dividends share repurchases see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant share repurchase program amended existing authorization repurchase 21 million shares class common stock 9 million share repurchase program deem repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program prior fiscal 2013 repurchased approximately 69 million shares program repurchase class common stock fiscal 2013 redeemable noncontrolling interest march 2011 issued common stock one subsidiaries noncontrolling interest holder subsidiary redeemable option holder upon occurrence event solely within control march 8 2013 purchased outstanding noncontrolling interest subsidiary 25 million noncontrolling interest adjusted fair market value end second quarter fiscal 2013 difference adjusted carrying 37 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc value fair value noncontrolling interest recorded reduction retained earnings time see note 13 redeemable noncontrolling interest notes consolidated financial statements part ii item 8 report assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs acquisitions capital expenditures working capital share repurchases dividends joint ventures debt service requirements environmental obligations however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2013 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2021 2 interest payments longterm debt based interest rates effect august 31 2013 contractual interest rates amount debt outstanding variable actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2013 18 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill environmental costs inventories accounting business combinations revenue recognition 38 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc goodwill evaluate goodwill impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ determined reporting units goodwill allocated equivalent operating segments components segment meet criteria aggregation testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform twostep quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates synergistic benefits available market participants performed annual impairment test second quarter fiscal 2013 proceeding directly twostep quantitative impairment test apb reporting unit calculated fair value using income approach substantially exceeded carrying value mrb reporting unit calculated fair value exceeded carrying value approximately 15 also used market approach based earnings multiple data reconciliation market capitalization estimate aggregate fair value reporting units including consideration control premium corroborate reporting units’ valuations result annual impairment test goodwill allocated reporting units deemed impaired fourth quarter fiscal 2013 identified combination continued challenging market conditions constrained supply raw materials company’s recent financial performance lack recovery market capitalization triggering event requiring interim impairment test goodwill allocated reporting units apb reporting unit calculated fair value using income approach substantially exceeded carrying value mrb reporting unit goodwill 469 million july 31 2013 first step impairment test showed reporting unit’s fair value less carrying amount indicating potential impairment projections used income approach mrb took consideration continued weak market conditions cyclical nature industry projections assumed gradual recovery operating margins volumes multiyear period marketbased wacc used income approach mrb 132 compared 114 used mrb’s annual impairment test performed second quarter fiscal 2013 higher wacc result increase riskfree market interest rate inclusion additional company risk premium 1 reflect increased uncertainty connection extent pace improvements market conditions future company performance terminal year growth rate used discounted cash flow model 2 based second step impairment test concluded implied fair value goodwill mrb reporting unit less carrying amount resulting impairment goodwill 321 million also used market approach based earnings multiple data market capitalization corroborate reporting units’ valuations fourth quarter fiscal 2013 reconciled market capitalization estimate aggregate fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest implied control premium resulting difference market capitalization based average trading price class common stock twoweek period ended july 31 2013 higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing industries 39 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc result inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates reporting units’ fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions current levels trend weaker anticipated financial performance including pace extent operating margin volume recovery decline share price current levels increase marketbased wacc among factors could significantly impact impairment analysis may result goodwill impairment charges incurred could material adverse effect financial condition results operations environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop reserves accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made factors consider recognition measurement environmental liabilities include • current regulations time reserve established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2013 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquiditytherefore additional amounts accrued see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value 40 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipment historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2014 2013 2012 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one north america’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products operate three reporting segments metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” collectively provide endoflife cycle solution variety products integrated businesses use operating income loss measure segment performance restructuring charges exitrelated costs allocated segment operating income loss include information measurement segments’ performance corporate expense consists primarily unallocated expense management administrative services benefit three reporting segments result unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business information regarding reporting segments including financial information geographic areas see note 21 segment information notes consolidated financial statements part ii item 8 report mrb buys collects processes recycles sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets mrb processes mixed large pieces scrap metal smaller pieces crushing sorting shearing shredding torching resulting scrap metal pieces size density metal content required customers meet production needs apb procures used salvaged vehicles sells serviceable used auto parts vehicles selfservice auto parts stores remaining portions vehicles primarily autobodies major parts containing ferrous nonferrous materials sold metal recyclers including mrb geographically feasible smb operates steel minimill produces wide range finished steel products smb’s scrap metal requirements sourced mrb smb purchases rates approximate export market prices shipments west coast us smb uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california portland oregon tacoma washington access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal shipping bulk cargoes steel manufacturers located asia europe africa middle east “eame” central america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us canada changes supply demand conditions affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us canada significant impact results operations three reporting segments weak export demand limited availability raw materials contributed lower sales volumes recycled metals recent years beginning early fiscal 2012 markets impacted slowdown economic activity globally macroeconomic uncertainty resulted deteriorating market conditions global steel manufacturers volatile pricing swings overall downward trend commodity prices export selling prices recycled materials persistently low economic growth us contributed constrained scrap flows mrb apb domestic supply markets combined increased 24 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc scrap recycling capacity competition certain regional markets led margin compression addition relatively stronger us dollar value increased competitive pressure mrb’s export activity strategic factors continue closely monitor economic conditions remain focused following core strategies meet business objectives • use seven deep water ports groundbased transportation directly access customers around world meet demand wherever greatest • synergistic growth continuous productivity improvement cost reduction initiatives integrate operations drive significant cost savings efficiencies • growth acquisitions greenfield development existing new geographic regions generate attractive returns • continued investment benefit technologies process improvements increase separation recovery recycled materials shredding process strategy focused enhancing inherent synergies within integrated operations continuing improve productivity grow operations core regions significant market presence competitively advantageous port access apb key supplier mrb opportunistically look enhance geographic proximity operations within two businesses mrb apb historically integrated presence northwestern us northern california near mrb’s export facilities tacoma washington portland oregon oakland california benefit synergies enhanced access supply early fiscal 2014 completed multiyear strategic investments western canada enabled mrb apb’s synergistic expansion british columbia alberta seven metals collection processing facilities including new shredder well eight auto parts stores apb’s facilities western canada provide crushed autobodies mrb’s new franchise western canada addition shipping tacoma washington facility fiscal 2014 opened first greenfield auto parts store johnston rhode island combined three stores massachusetts rhode island acquired fiscal 2013 expands apbs presence northeastern us enables new source supply mrb’s northeastern regional operations include 13 metals recycling processing facilities fiscal 2014 continued implement enhancements synergies businesses integrating certain operational processes executive overview financial results generated consolidated revenues 25 billion fiscal 2014 decrease 3 26 billion consolidated revenues prior year overall consolidated revenues decreased primarily due lower average net selling prices ferrous nonferrous metal reduced sales volumes export ferrous metal result continued weak economic conditions globally adversely impacted export demand recycled metal partially offset higher volumes domestic sales recycled ferrous metal nonferrous metal finished steel products consolidated operating income 20 million fiscal 2014 included restructuring charges exitrelated costs 7 million asset impairment charges 1 million compared consolidated operating loss 328 million prior year included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million adjusted consolidated operating income fiscal 2014 excluding restructuring exitrelated costs asset impairment charges 29 million increase 15 million 103 compared adjusted consolidated operating income 14 million fiscal 2013 excluding goodwill impairment asset impairment restructuring charges see reconciliation adjusted operating income loss nongaap financial measures end item 7 export selling prices recycled ferrous metal subject downward pressure fiscal 2014 leading overall lower average export selling prices compared prior year significant benefits productivity initiatives primarily impacting mrb largely offset continued challenging ferrous nonferrous market conditions impact prolonged constrained supply conditions raw materials domestic markets consolidated operating results fiscal 2014 also benefited increase operating income smb 12 million primarily result improved demand finished steel products leading higher sales volumes benefits productivity improvements fiscal 2014 achieved 29 million cost savings related restructuring productivity initiatives announced initiated first quarter expanded second quarter fiscal 2014 reduce annual operating expenses approximately 40 million full annual benefit expected achieved fiscal 2015 reduction expenses 25 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc combination headcount reductions implementation operational efficiencies reduced lease costs productivity improvements plan initiate implement additional productivity initiatives apb fiscal 2015 improve profitability combination revenue drivers cost reduction initiatives targeted annual improvement approximately 7 million approximately 50 amount expected benefit second half fiscal 2015 full annual run rate achieved fiscal 2016 net income continuing operations attributable ssi fiscal 2014 5 million 019 per diluted share compared net loss attributable ssi 281 million 1056 per diluted share prior year adjusted net income continuing operations attributable ssi excluding restructuring charges exitrelated costs asset impairments 12 million 044 per diluted share fiscal 2014 compared adjusted net loss continuing operations attributable ssi 2 million 007 per diluted share prior year see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 following items summarize consolidated financial performance fiscal 2014 • revenues 25 billion compared 26 billion prior year • operating income 20 million compared operating loss 328 million prior year • adjusted operating income 29 million increase 15 million 103 compared prior year see reconciliation adjusted consolidated operating income loss nongaap financial measures end item 7 • net income continuing operations attributable ssi 5 million 019 per diluted share compared net loss 281 million 1056 per diluted share prior year • adjusted net income continuing operations attributable ssi 12 million 044 per diluted share compared adjusted net loss 2 million 007 per diluted share prior year see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 • net income attributable ssi 6 million 022 per diluted share compared net loss 281 million 1056 per diluted share prior year following items summarize consolidated cash flow balance sheet information fiscal 2014 • net cash provided operating activities 141 million compared 39 million prior year • debt net cash 294 million compared 368 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • dividends paid 20 million compared 20 million prior year following items highlight financial results operating segments year ended august 31 2014 • mrb revenues 21 billion operating income 30 million compared revenues 22 billion operating loss 312 million year ended august 31 2013 adjusted operating income mrb 31 million fiscal 2014 compared 23 million fiscal 2013 see reconciliation adjusted mrb operating income loss nongaap financial measures end item 7 • apb revenues 328 million operating income 21 million compared revenues 313 million operating income 25 million year ended august 31 2013 • smb revenues 389 million operating income 19 million compared revenues 352 million operating income 7 million year ended august 31 2013 26 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc results operations nm meaningful 1 mrb sells recycled ferrous metal smb rates per ton approximate west coast us export market prices addition apb sells ferrous nonferrous material mrb prices approximate local market rates intercompany revenues costs goods sold eliminated consolidation 27 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc 2 corporate expense consists primarily unallocated expenses services benefit three reporting segments consequence unallocated expense operating income loss segment reflect operating income loss segment would report standalone business 3 joint ventures sell recycled metal mrb prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties 4 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance operating segments exitrelated costs consist asset impairments related site closures 5 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory revenues fiscal 2014 compared fiscal 2013 consolidated revenues fiscal 2014 decreased primarily due lower average net selling prices ferrous nonferrous metal reduced sales volumes export ferrous metal result continued weak economic conditions globally negatively impacted export demand recycled metal partially offset higher volumes domestic sales recycled ferrous metal nonferrous metal finished steel products export selling prices recycled ferrous metal declined sharply shipments middle fiscal 2014 result weaker global demand impact severe winter weather conditions domestic markets partially offset modest recovery export selling prices shipments near end fiscal year lower sales volumes primarily due combination weaker export demand competition available raw materials continued adversely impact supply primarily metals recycling business fiscal 2013 compared fiscal 2012 consolidated revenues fiscal 2013 decreased due lower sales volumes lower average net selling prices recycled ferrous metal fiscal 2013 demand recycled scrap metal continued soften due primarily weak global macroeconomic conditions led decline selling prices compared fiscal 2012 selling prices recycled ferrous metal declined sharply beginning fiscal 2013 experiencing slight increase second quarter steadily declined throughout remainder fiscal 2013 addition lower price environment adversely impacted supply raw materials compared fiscal 2012 contributed lower sales volumes operating income loss fiscal 2014 compared fiscal 2013 consolidated operating income fiscal 2014 20 million included restructuring charges exitrelated costs 7 million asset impairment charges 1 million compared consolidated operating loss 328 million prior year included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million adjusted consolidated operating income fiscal 2014 29 million increase 15 million 103 compared adjusted consolidated operating income 14 million fiscal 2013 see reconciliation adjusted operating income loss nongaap financial measures end item 7 export selling prices recycled ferrous metal subject downward pressure fiscal 2014 leading overall lower average export selling prices compared prior year benefits productivity initiatives primarily impacting mrb largely offset continued challenging ferrous nonferrous market conditions impact prolonged constrained supply conditions raw materials domestic markets consolidated operating results fiscal 2014 also benefited increase operating income smb 12 million primarily result improved demand finished steel products leading higher sales volumes benefits productivity improvements apb impact purchase costs endoflife vehicles decreasing slower rate commodity selling prices fiscal 2014 continued compress operating margins leading decrease operating income 3 million compared prior year operating results fiscal 2014 included reduction 2 million selling general administrative sga expense restructuring costsaving initiatives primarily benefited mrb whose sga expense declined 10 million mainly headcount reductions lower professional outside services partially offset higher incentive compensation sharebased compensation expense compared prior year sga expense associated new store locations acquired opened apb last two fiscal years 28 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc fourth quarter fiscal 2013 interim impairment test goodwill allocated reporting units resulted noncash goodwill impairment charge 321 million mrb reporting unit addition fourth quarter fiscal 2013 recorded impairment charges 13 million various assets fiscal 2014 recorded asset impairment charges 1 million combination assets held sale longlived assets first quarter fiscal 2014 elected change annual goodwill impairment testing date february 28 july 1 year recently performed assessment goodwill carried mrb apb reporting units july 1 2014 reporting units calculated fair value exceeded carrying value thus indicating goodwill balances impaired july 1 2014 see discussion critical accounting policies section end part ii item 7 report consolidated operating income fiscal 2014 also included restructuring charges exitrelated costs 7 million consisting severance contract termination restructuring costs exitrelated impairments compared restructuring charges 8 million fiscal 2013 charges include restructuring initiatives two separate plans announced fourth quarter fiscal 2012 “q4’12 plan” first quarter fiscal 2014 “q1’14 plan” respectively q412 plan initiatives completed end fiscal 2013 achieved reduction operating costs approximately 25 million annualized basis comprising approximately 18 million sga expense 7 million cost goods sold first quarter fiscal 2014 initiated q1’14 plan began implementing restructuring productivity initiatives reduce annual operating expenses approximately 30 million subsequently increased 40 million later fiscal year achieved approximately 29 million benefit fiscal 2014 full annual benefit expected achieved fiscal 2015 majority reduction operating expenses expected occur mrb results combination headcount reductions implementation operational efficiencies reduced lease costs productivity improvements expect incur restructuring charges approximately 6 million connection q114 plan substantially incurred fiscal 2014 remaining charges expected incurred end fiscal 2017 vast majority charges require us make cash payments addition restructuring charges recorded connection initiatives fiscal 2014 incurred exitrelated costs 1 million consisting asset impairments related site closures restructuring charges exitrelated costs fiscal years ended august 31 2014 2013 2012 comprised following thousands include restructuring charges exitrelated costs measurement performance operating segments see note 12 restructuring charges exitrelated costs notes consolidated financial statements part ii item 8 report fiscal 2013 compared fiscal 2012 consolidated operating loss fiscal 2013 328 million included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million compared consolidated operating income 54 million fiscal 2012 adjusted consolidated operating income fiscal 2013 excluding goodwill impairment charge asset impairment charges restructuring charges 14 million decrease 45 million 76 compared adjusted consolidated operating income 59 million fiscal 2012 see reconciliation adjusted consolidated operating 29 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc income loss nongaap financial measures end item 7 operating results fiscal 2013 negatively impacted reduction sales volumes compared fiscal 2012 benefited higher sales volumes higher average net selling prices resulting less margin compression compared fiscal 2013 constrained supply raw materials domestic markets coupled pronounced softening demand scrap metal export markets compared us caused purchase prices raw materials decrease less export selling prices contributing compression operating margins fiscal 2013 furthermore declining selling price environment average inventory costs decrease quickly purchase costs raw materials resulting adverse effect cost goods sold compression operating margins compared fiscal 2012 consolidated operating results fiscal 2013 also included 5 million operating losses apb including transaction integration startup costs related eleven store locations acquired opened fiscal 2013 decreases offset increase operating income smb 9 million compared fiscal 2012 primarily result slightly improved demand leading higher sales volumes increased utilization levels operating results fiscal 2013 benefited reduction sga expense 12 million 6 fiscal 2012 primarily result restructuring initiatives operating efficiencies announced fourth quarter fiscal 2012 implemented fiscal 2013 decrease compared fiscal 2012 driven primarily reduction 5 million employee compensation expense 4 million professional outside services reduction consolidated sga expense achieved despite incremental expense attributable eleven store locations acquired opened apb fiscal 2013 fourth quarter fiscal 2013 identified combination continued challenging market conditions constrained supply raw materials recent financial performance lack recovery market capitalization triggering event requiring interim impairment test goodwill allocated reporting units apb reporting unit calculated fair value using income approach substantially exceeded carrying value mrb reporting unit first step impairment test showed reporting unit’s fair value less carrying amount indicating potential impairment based second step impairment test recorded noncash goodwill impairment charge 321 million mrb see critical accounting policies estimates part ii item 7 report fourth quarter fiscal 2013 also recorded impairment charges 13 million various assets mrb including impairment contractual receivable 8 million result debtor’s inability repay amount owed agreements entered extraction scrap metal demolition activities also identified impairments 5 million combination assets held sale joint venture investment longlived assets interest expense interest expense 11 million 10 million 12 million fiscal 2014 2013 2012 respectively decrease fiscal 2012 fiscal 2013 primarily due decreased average borrowings lower average interest rates bank credit facilities compared prior year period information outstanding debt balances see note 9 longterm debt notes consolidated financial statements part ii item 8 report income tax expense benefit income tax expense benefit 2 million 57 million 14 million fiscal 2014 2013 2012 respectively effective tax rate fiscal 2014 expense 19 lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization foreign subsidiaries deferred tax assets dependent upon generating sufficient taxable income foreign tax jurisdiction future years benefit reversal net deductible temporary differences utilization net operating losses effective tax rate fiscal 2013 benefit 17 differed us federal statutory rate 35 primarily due recognition expense 29 million record valuation allowance deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 goodwill impairment charge net operating losses subsidiary 30 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc fiscal 2012 effective tax rate expense 33 differed us federal statutory rate 35 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed august 31 2014 believe likely realize benefits deferred tax assets net valuation allowances see note 18 income taxes notes consolidated financial statements part ii item 8 report discussion discontinued operations fiscal 2010 disposed component business qualified separate classification discontinued operation fiscal 2014 released certain environmental liabilities arose directly related operations component prior disposal resulting recognition 1 million gain discontinued operations net tax 003 per diluted share consolidated statement operations 31 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc financial results reporting segment operate business across three reporting segments mrb apb smb additional financial information relating reporting segments contained note 21 segment information notes consolidated financial statements part ii item 8 report metals recycling business lt long ton 2240 pounds 1 price information shown netting cost freight incurred deliver product customer fiscal 2014 compared fiscal 2013 revenues 6 decrease ferrous revenues primarily due lower average net selling prices reduced sales volumes export ferrous metal result continued weak economic conditions globally adversely impacted export demand recycled metal partially offset higher sales volumes domestic sales recycled ferrous metal export selling prices recycled ferrous metal declined sharply shipments middle fiscal 2014 result weaker global demand impact severe winter weather conditions domestic markets partially offset slight recovery export selling prices shipments near end fiscal year combination weaker export demand competition available raw materials continued adversely impact supply contributed lower ferrous sales volumes decrease nonferrous revenues primarily due lower average selling prices result continued weak economic conditions offset beneficial impact sales volumes improved recovery nonferrous materials processed enhanced processing technologies 32 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc segment operating income loss operating income fiscal 2014 30 million compared operating loss 312 million prior year adjusted operating income fiscal 2014 excluding asset impairment charges 1 million 31 million increase 9 million 38 compared adjusted operating income fiscal 2013 see reconciliation adjusted mrb operating income loss nongaap financial measures end item 7 export selling prices recycled ferrous metal subject downward pressure fiscal 2014 leading overall lower average export selling prices compared prior year benefits productivity improvements impacting cost goods sold mrb largely offset continued challenging ferrous nonferrous market conditions impact prolonged constrained supply conditions raw materials leading modest improvement adjusted operating results operating results fiscal 2014 benefited restructuring costsaving initiatives mrb leading reduction sga expenses 10 million decrease compared prior year driven primarily reduction 4 million employee compensation expense headcount reduction 3 million professional outside services costs fiscal 2014 recorded asset impairment charges mrb 1 million assets held sale fiscal 2013 compared fiscal 2012 revenues decrease 27 ferrous revenues due lower sales volumes lower average net selling prices ferrous metal fiscal 2013 demand recycled ferrous metal continued soften due primarily weak global macroeconomic conditions led decline selling prices compared fiscal 2012 selling prices recycled ferrous metal declined sharply beginning fiscal 2013 experiencing slight increase second quarter steadily declined throughout remainder fiscal 2013 addition lower price environment adversely impacted supply flow raw materials compared fiscal 2012 contributed lower sales volumes decrease nonferrous revenues primarily due lower sales volumes result reduced volumes processed scrap metal offset beneficial impact improved recovery nonferrous materials processed enhanced processing technologies segment operating income loss operating loss fiscal 2013 312 million compared operating income 64 million fiscal 2012 adjusted operating income fiscal 2013 excluding goodwill impairment charge 321 million asset impairment charges 13 million 23 million decrease 41 million 65 compared adjusted operating income fiscal 2012 see reconciliation adjusted mrb operating income loss nongaap financial measures end item 7 operating results fiscal 2013 negatively impacted reduction sales volumes compared fiscal 2012 benefited higher sales volumes higher average net selling prices resulting less margin compression compared fiscal 2013 constrained supply raw materials domestic markets coupled pronounced softening demand scrap metal export markets compared us caused purchase prices raw materials decrease less export selling prices contributing compression operating margins fiscal 2013 furthermore declining selling price environment average inventory costs decrease quickly purchase costs raw materials resulting adverse effect cost goods sold compression operating margins compared fiscal 2012 sga expense decreased 13 million 12 prior year primarily result restructuring initiatives operating efficiencies announced fourth quarter fiscal 2012 implemented fiscal 2013 decrease compared fiscal 2012 driven primarily reduction 5 million employee compensation expense 3 million professional outside services fourth quarter fiscal 2013 identified triggering event requiring interim impairment test goodwill allocated mrb reporting unit first step impairment test showed reporting unit’s fair value less carrying amount indicating potential impairment based second step impairment test recorded noncash goodwill impairment charge 321 million mrb addition recorded impairment charges totaling 13 million assets including impairment contractual receivable 8 million result debtor’s inability repay amount owed accordance terms agreement entered extraction scrap metal demolition activities impairments 5 million combination assets held sale joint venture investment longlived assets 33 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc auto parts business fiscal 2014 compared fiscal 2013 revenues increase revenues 14 million 5 primarily due additional volumes stores acquired opened fiscal 2013 fiscal 2014 partially offset adverse effects lower commodity selling prices result weaker global demand segment operating income operating income fiscal 2014 decreased 3 million 13 compared prior year benefits operating margins higher volumes achieved fiscal 2014 offset compression operating margins primarily due lower ferrous nonferrous commodity selling prices increased sga expense 3 million mainly due addition new stores fiscal 2013 2014 fiscal 2013 compared fiscal 2012 revenues decrease revenues 4 million 1 driven primarily lower average commodity prices partially offset higher sales volumes primarily generated eleven new store locations acquired opened fiscal 2013 segment operating income operating income fiscal 2013 decreased 9 million 26 compared fiscal 2012 compression operating margins primarily related car purchase costs decreasing slower rate ferrous nonferrous selling prices due supply constraints endoflife vehicles operating income fiscal 2013 included 5 million operating losses including transaction integration startup costs related eleven store locations acquired opened year sga expense remained consistent fiscal 2012 positive impact restructuring initiatives operational efficiencies implemented fiscal 2013 decreased legal expenses offset incremental expenses related eleven store locations acquired opened fiscal 2013 steel manufacturing business st short ton 2000 pounds 34 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc nm meaningful 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2014 compared fiscal 2013 revenues increased 36 million 10 compared prior year primarily due increased sales volumes finished steel products result higher demand west coast markets mainly driven improved nonresidential construction benefits partially offset slightly lower average sales prices result impact reduced costs raw materials segment operating income operating income fiscal 2014 19 million improvement 12 million compared 7 million prior year significantly improved results primarily due higher sales volumes impact raw material cost goods sold decreasing faster rate average sales price finished steel products benefits operational efficiencies productivity improvements coupled increased rolling mill utilization levels improved results partially offset recognition bad debt expense 1 million fiscal 2014 fiscal 2013 compared fiscal 2012 revenues increased 6 compared fiscal 2012 primarily due higher volumes finished steel products result slightly higher demand west coast markets mainly driven improved nonresidential construction partially offset lower average sales prices result impact reduced costs raw materials segment operating income loss operating income fiscal 2013 7 million improvement 9 million compared operating loss 2 million fiscal 2012 improved results primarily due slightly higher demand leading higher sales volumes increased utilization levels coupled improved operational efficiencies liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 26 million 13 million august 31 2014 2013 respectively cash balances intended used primarily working capital expenditures acquisitions dividends share repurchases also use excess cash hand reduce amounts outstanding credit facilities august 31 2014 debt net cash 294 million compared 368 million august 31 2013 refer nongaap financial measures decrease 75 million primarily result positive cash flows generated operating activities cash balances august 31 2014 2013 include 4 million 7 million respectively indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2014 141 million compared 39 million fiscal 2013 245 million fiscal 2012 cash provided operating activities fiscal 2014 included decrease inventories 36 million due timing shipments uses cash included increase 16 million accounts receivable due timing shipments collections cash provided operating activities fiscal 2013 included decrease inventories 47 million due lower volumes material purchases uses cash included increase 79 million accounts receivable due timing shipments collections decrease accounts payable 11 million due lower levels material purchases timing payments cash provided operating activities fiscal 2012 included decrease inventories 94 million due lower volumes material purchases decrease 82 million accounts receivable due lower sales volumes timing collections uses cash included decrease accounts payable 26 million due lower levels material purchases timing payments decrease accrued income taxes 20 million due lower financial results compared prior fiscal year 35 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc investing activities net cash used investing activities fiscal 2014 41 million compared 112 million fiscal 2013 84 million fiscal 2012 cash used investing activities fiscal 2014 included 39 million capital expenditures upgrade equipment infrastructure cash used investing activities fiscal 2013 included 90 million capital expenditures including investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia commenced shredding operations third quarter fiscal 2013 construction new nonferrous processing facility puerto rico commenced operations first quarter fiscal 2014 cash used investing activities also included 25 million acquisitions cash used investing activities fiscal 2012 included 79 million capital expenditures primarily expand facilities upgrade equipment infrastructure financing activities net cash used financing activities fiscal 2014 88 million compared 4 million fiscal 2013 120 million fiscal 2012 cash used financing activities fiscal 2014 included 20 million cash dividends 64 million net repayments debt refer nongaap financial measures cash used financing activities fiscal 2013 included 20 million cash dividends 25 million purchase redeemable noncontrolling interest third quarter fiscal 2013 sources cash included 43 million net borrowings debt refer nongaap financial measures mainly used support higher working capital requirements acquisitions cash used financing activities 2012 included 69 million net repayments debt refer nongaap financial measures using cash generated operations 33 million repurchase outstanding shares class common stock 11 million cash dividends credit facilities following summary outstanding balances availability credit facilities longterm debt thousands 1 remaining availability net 5 million outstanding standby letters credit august 31 2014 unsecured committed bank credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied leverage ratio borrowings outstanding credit facility 305 million 360 million august 31 2014 2013 respectively weighted average interest rate amounts outstanding facility 191 198 august 31 2014 2013 respectively also unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2015 interest rates set bank time borrowing borrowings outstanding facility august 31 2014 9 million borrowings outstanding august 31 2013 36 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc use credit facilities fund working capital requirements acquisitions capital expenditures dividends share repurchases two bank credit agreements contain various representations warranties events default financial covenants could limit restrict ability create liens raise additional capital enter transactions affiliates acquire dispose businesses guarantee debt consolidate merge financial covenants include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures divided consolidated fixed charges consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness refer forms 8k dated february 14 2011 april 16 2012 include attachments copies unsecured committed bank credit agreement amended detailed methodology calculating financial covenants august 31 2014 compliance financial covenants consolidated fixed charge coverage ratio required less 150 1 253 1 august 31 2014 consolidated leverage ratio required 055 1 030 1 august 31 2014 expect remain compliance covenants assurances able event sustained deterioration current market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach either covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreements case would required evaluate available alternatives take appropriate steps obtain alternative funds assurance alternative funds sought could obtained would adequate acceptable terms addition august 31 2014 2013 8 million longterm taxexempt bonds outstanding mature january 2021 capital expenditures capital expenditures totaled 39 million 90 million 79 million fiscal 2014 2013 2012 respectively capital expenditures fiscal 2014 included completion investment construction new nonferrous processing facility puerto rico commenced operations september 2013 addition made investments infrastructure improve efficiency increase capacity improve worker safety enhance environmental systems replace equipment fiscal 2013 capital expenditures included investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia began operations third quarter fiscal 2013 substantial portion construction new nonferrous processing facility puerto rico currently plan invest approximately 40 million capital expenditures upgrades fiscal 2015 similar upgrades fiscal 2014 exclusive capital expenditures growth projects using cash generated operations available lines credit environmental compliance commitment sustainable recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 8 million 5 million 13 million environmental projects fiscal 2014 2013 2012 respectively plan invest 12 million capital expenditures environmental projects fiscal 2015 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “the site” group prps conducting investigation study identify characterize contamination site develop alternative approaches remediation contamination march 30 2012 group submitted epa draft feasibility study “draft fs” based approximately ten years work 100 million costs classified investigationrelated draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs revised epa revisions may significant could materially impact scope cost remediation draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa 37 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc expect issue final rod selecting remedy site least 2017 commence remediation activities 2024 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe reasonably possible estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations future cash flows liquidity material liabilities recorded future related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amounts available borrowing could otherwise used investment capital expenditures acquisitions dividends share repurchases see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant amended share repurchase program existing authorization repurchase 21 million shares class common stock deem repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program prior fiscal 2014 repurchased approximately 69 million shares 9 million shares authorized repurchase program repurchase class common stock fiscal 2014 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs acquisitions capital expenditures working capital share repurchases dividends joint ventures debt service requirements environmental obligations however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2014 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2028 2 interest payments longterm debt based interest rates effect august 31 2014 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities 38 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2014 16 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill environmental costs inventories accounting business combinations revenue recognition goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ determined reporting units goodwill allocated equivalent operating segments components segment meet criteria aggregation goodwill balances allocated mrb apb smb goodwill testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform twostep quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants fourth quarter fiscal 2013 identified triggering event requiring interim impairment test goodwill allocated reporting units result test recorded partial goodwill impairment charge 321 million mrb reporting unit first quarter fiscal 2014 changed annual goodwill impairment testing date february 28 july 1 year believe new testing date preferable allows us better align annual goodwill impairment testing procedures yearend financial reporting well annual budgeting cycle allows us visibility fourth quarter 39 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc operating results typically significant annual performance change accounting principle delay accelerate cause us avoid impairment charge performed fiscal 2014 annual goodwill impairment test july 1 2014 proceeding directly first step quantitative impairment test mrb reporting unit goodwill 147 million july 1 2014 calculated fair value exceeded carrying value approximately 13 projections used income approach mrb took consideration challenging market conditions recycled metals including continued constrained supply scrap metal level competition domestic markets generally weak macroeconomic indicators markets customers based cyclical nature industry projections assumed recovery operating margins multiyear period eventually returning levels profitability range average historical levels marketbased wacc used income approach mrb 1287 included additional company risk premium 1 reflect uncertainty connection extent pace improvements market conditions future company performance terminal growth rate used discounted cash flow model 2 based longterm domestic economic growth expectations assuming components fair value estimate held constant increase wacc excess 1 weaker anticipated improvements either operating margins volumes could result failure step 1 quantitative impairment test mrb reporting unit apb reporting unit goodwill 180 million july 1 2014 calculated fair value exceeded carrying value approximately 17 projections used income approach apb took consideration impact weak market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles trends selfserve parts sales certain regional markets projections assumed recovery operating margins current levels multiyear period less peak levels operating margin experienced fiscal year 2010 2011 marketbased wacc used income approach apb 1119 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc excess 125 weaker anticipated improvements operating margins could result failure step 1 quantitative impairment test apb reporting unit also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest implied control premium resulting difference market capitalization based average trading price class common stock twoweek period ended july 1 2014 higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing metals industries identified specific reconciling items including market participant synergies supported implied control premium july 1 2014 subsequent annual impairment test date july 1 2014 fiscal yearend august 31 2014 quoted market price class common stock declined second half september october 2014 believe current quoted market price class common stock impacted soft global macroeconomic indicators weak current market conditions metals recycling industry fully reflect underlying value company’s reporting units recycled metals industry’s longterm fundamentals earnings potential business however quoted market price class common stock decline remain current levels sustained period time may trigger interim evaluation goodwill could result future goodwill impairment charges result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates reporting units fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions metals recycling industry current levels trend weaker anticipated company financial performance including pace extent operating margin volume recovery lack recovery share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable 40 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff take account similar recent instances environmental remediation issues studies sites among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2014 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred 41 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc revenue recognition recognize revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipment historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2015 2014 2013 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products prior fourth quarter fiscal 2015 internal organizational reporting structure supported three operating reportable segments metals recycling business mrb auto parts business apb steel manufacturing business smb fourth quarter fiscal 2015 accordance plan announced april 2015 combined integrated auto parts metals recycling businesses single operating platform change organizational structure intended optimize efficiencies operating platform enabling additional synergies captured throughout supply chain global sales channels effectively leveraging shared services platform change internal organizational reporting structure resulted formation new operating reportable segment auto metals recycling amr business replacing former mrb apb operating segments began reporting new segment fourth quarter fiscal 2015 reflected annual report form 10k segment data comparable periods presented recast conform current period presentation activities amr recasting historical information impact consolidated financial performance ssi periods presented use operating income measure segment performance restructuring charges exitrelated costs allocated segment operating income include information measurement segments’ performance expense related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented information regarding reportable segments including financial information geographic areas see note 21 segment information notes consolidated financial statements part ii item 8 report two reportable segments amr smb collectively provide endoflife cycle solution variety products integrated businesses amr sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets amr procures scrap supply salvaged vehicles rail cars home appliances industrial machinery manufacturing scrap construction demolition scrap largest source autobodies network auto parts stores operate commercial brandname picknpull amr procures salvaged vehicles sells serviceable used auto parts vehicles 55 selfservice auto parts stores remaining portions vehicles primarily autobodies major parts containing ferrous nonferrous materials shipped metal recycling facilities sold wholesalers geographically economical amr processes mixed large pieces scrap metal smaller pieces crushing torching shearing shredding sorting resulting scrap metal pieces size density metal content required customers meet production needs processed recycled metals shipped domestic steel mill metal producers globally smb operates steel minimill produces wide range finished steel products smb’s scrap metal requirements sourced nearly 100 amr smb purchases rates approximate market prices shipments west coast us smb uses minimill near portland oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california portland oregon tacoma washington access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal shipping bulk cargoes steel manufacturers located asia europe africa middle east “eame” central america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers 24 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand strategic priorities continue closely monitor economic conditions remain focused following core strategies meet business objectives • optimization integrated operating platform maximize opportunities internal synergies cost efficiencies • use seven deep water ports groundbased logistics network directly access customers globally meet demand products wherever greatest • continuous improvement initiatives increase production efficiency improve productivity enhance effectiveness commercial activities reduce operating expense • technology process improvement investments increase separation recovery recycled materials shredding process create valueadded products • increase market share selective partnerships alliances acquisitions fourth quarter fiscal 2015 modified internal organizational reporting structure combine auto parts metals recycling businesses single operating platform intended optimize production efficiencies enable additional synergies captured throughout supply chain global sales channel effectively leverage shared services functions auto parts stores key suppliers metal recycling facilities opportunistically look enhance geographic proximity operations among facilities amr integrated presence northwestern us northern california northeastern us near amrs export facilities tacoma washington portland oregon oakland california everett massachusetts benefit synergies enhanced access supply fiscal 2015 initiated implemented restructuring initiatives consisting idling underutilized metals recycling assets including shredders johnston rhode island surrey british columbia closing seven auto parts stores amr closely align business prevalent market conditions also implemented productivity improvement initiatives reduced annual operating expenses amr corporate headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures six closed auto parts stores qualified discontinued operations reporting see note 10 discontinued operations note 12 restructuring charges exitrelated costs notes consolidated financial statements part ii item 8 report key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us western canada global economic conditions changes supply demand conditions strength us dollar affect market prices volumes recycled ferrous nonferrous metal global markets steel products western us western canada significant impact results operations reportable segments weak global demand limited availability raw materials strengthening us dollar contribute lower sales volumes recycled metals markets impacted slowdown economic activity globally recent years macroeconomic uncertainty combined global steelmaking overproduction strengthening us dollar resulted deteriorating market conditions global steel manufacturers volatile pricing swings overall downward trend commodity prices selling prices ferrous nonferrous recycled materials accelerated fiscal 2015 falling scrap metal price environment exacerbated decline iron ore prices raw material used steelmaking blast furnaces compete eaf mills use ferrous scrap metal primary feedstockthe persistently low economic growth us lower metal scrap price environment also contributed constrained scrap flows domestic supply markets combined significant scrap recycling capacity competition certain regional markets led margin compression amr business executive overview financial results generated consolidated revenues continuing operations 19 billion fiscal 2015 decrease 24 25 billion consolidated revenues prior year consolidated revenues decreased primarily due significantly lower average 25 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc net selling prices ferrous nonferrous scrap metal export domestic markets reduced sales volumes compared prior year decrease ferrous nonferrous scrap metal prices driven weaker global steel markets due excess capacity overproduction strengthening us dollar year impact lower iron ore prices market conditions recycled metals weaker demand end markets sell export net selling prices ferrous material experienced several periods sharp declines fiscal 2015 prices end fourth quarter fiscal 2015 approximately 150 per ton approximately 40 lower levels end fiscal 2014 lower sales volumes recycled scrap metal amr primarily due combination weaker export demand lesser extent weaker domestic demand competition available raw materials including endoflife vehicles partially offset higher sales volumes finished steel products smb consolidated operating loss 196 million fiscal 2015 compared consolidated operating income 24 million prior year adjusted consolidated operating income fiscal 2015 11 million excludes goodwill impairment charge 141 million asset impairment charges 45 million restructuring charges exitrelated costs 13 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million compares adjusted consolidated operating income 33 million prior year excludes asset impairment charges 1 million restructuring charges exitrelated costs 7 million see reconciliation adjusted operating income loss nongaap financial measures end item 7 environment sharply declining commodity prices average inventory costs fiscal 2015 decrease quickly purchase costs raw materials resulting substantial adverse effect cost goods sold compression operating margins amr lower price environment year also adversely impacted supply scrap metal led lower processed volumes compressing operating margins effects adverse conditions operating results partially offset benefits cost goods sold resulting restructuring actions taken reduce direct costs production including headcount nonemployee costs decrease consolidated selling general administrative sga expense 17 million 9 compared prior year primarily result lower employee compensation expense associated cost saving productivity initiatives reduced incentive compensation due lower financial performance fiscal 2015 initiated implemented additional cost reduction productivity improvement measures first quarter fiscal 2015 q115 plan followed cost saving exitrelated initiatives second quarter fiscal 2015 q215 plan targeting combined improvement annual operating performance approximately 60 million cost reduction productivity improvements associated q115 plan driven combination revenue drivers production sga cost reduction initiatives targeted aggregate annual improvement 14 million improvements performance associated q215 plan driven strategic actions consisting idling shredding equipment closing seven auto parts stores amr closely align business prevalent market conditions targeting improvement annual operating performance approximately 18 million well actions reduce annual operating expenses corporate amr primarily sga expense approximately 28 million headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures fiscal 2015 achieved approximately 28 million benefits related q115 q215 plans substantial majority full annual benefits initiatives expected achieved fiscal 2016 recognized 17 million restructuring charges exitrelated costs connection initiatives fiscal 2015 4 million reported within discontinued operations see results operations item 7 additional discussion plans net loss continuing operations attributable ssi fiscal 2015 190 million 703 per diluted share compared net income continuing operations attributable ssi 9 million 032 per diluted share prior year adjusted net income continuing operations attributable ssi fiscal 2015 excluding asset impairments restructuring charges exitrelated costs impact reselling modifying terms certain previously contracted bulk ferrous shipments 4 million 013 per diluted share compared 16 million 058 per diluted share prior year see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 generated positive cash flows operating activities fiscal 2015 145 million increase 3 million compared 141 million prior year primarily lower net working capital fiscal 2015 used cash generated operating activities primarily fund capital expenditures 32 million pay dividends 20 million repay debt decreased 91 million compared end fiscal 2014 following items summarize consolidated financial results fiscal 2015 • revenues 19 billion compared 25 billion prior year • operating loss 196 million compared operating income 24 million prior year • adjusted operating income 11 million compared 33 million prior year see reconciliation adjusted consolidated operating income loss nongaap financial measures end item 7 26 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc • net loss continuing operations attributable ssi 190 million 703 per diluted share compared net income continuing operations attributable ssi 9 million 032 per diluted share prior year • adjusted net income continuing operations attributable ssi 4 million 013 per diluted share compared 16 million 058 per diluted share prior year see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 • net loss attributable ssi 197 million 729 per diluted share compared net income 6 million 022 per diluted share prior year following items summarize consolidated cash flow balance sheet information fiscal 2015 • net cash provided operating activities 145 million compared 141 million prior year • debt net cash 205 million compared 294 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • dividends paid 20 million compared 20 million prior year following items highlight reportable segment financial results fiscal 2015 • amr revenues 17 billion operating loss 164 million compared revenues 23 billion operating income 55 million prior year • amr adjusted operating income 28 million fiscal 2015 compared 56 million prior year see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 • smb revenues 375 million operating income 20 million compared revenues 389 million operating income 19 million prior year 27 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc results operations nm meaningful 1 amr sells recycled ferrous metal smb rates per ton approximate west coast us market prices intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 joint ventures sell recycled metal amr smb prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties 4 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance operating segments exitrelated costs consist asset impairments accelerated depreciation related site closures 5 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 28 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc revenues fiscal 2015 compared fiscal 2014 consolidated revenues fiscal 2015 decreased primarily due significantly lower average net selling prices ferrous nonferrous scrap metal reduced sales volumes compared prior year export net selling prices shipments recycled ferrous metal experienced multiple sharp declines throughout fiscal 2015 decreasing approximately 150 per ton approximately 40 compared end fourth quarter fiscal 2014 decrease ferrous nonferrous scrap metal prices driven weaker global steel markets due excess capacity overproduction strengthening us dollar year impact lower iron ore prices market conditions recycled metals weaker demand end markets sell domestic net selling prices ferrous metal also decreased sharply year lower sales volumes recycled scrap metal amr primarily due combination weaker export demand lesser extent weaker domestic demand competition available raw materials including endoflife vehicles partially offset higher sales volumes finished steel products smb fiscal 2015 increased share domestic sales ferrous material due relatively stronger domestic demand compared export market fiscal 2014 compared fiscal 2013 consolidated revenues fiscal 2014 decreased primarily due lower average net selling prices ferrous nonferrous metal reduced sales volumes export ferrous metal result continued weak economic conditions globally negatively impacted export demand recycled metal partially offset higher volumes domestic sales recycled ferrous nonferrous metal finished steel products export selling prices recycled ferrous metal declined sharply shipments middle fiscal 2014 result weaker global demand impact severe winter weather conditions domestic markets partially offset modest recovery export selling prices shipments near end fiscal year lower sales volumes primarily due combination weaker export demand competition available raw materials continued adversely impact supply operating income loss fiscal 2015 compared fiscal 2014 consolidated operating loss 196 million fiscal 2015 compared consolidated operating income 24 million prior year adjusted consolidated operating income fiscal 2015 11 million excludes goodwill impairment charge 141 million asset impairment charges 45 million restructuring charges exitrelated costs 13 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million compares adjusted consolidated operating income 33 million prior year excludes asset impairment charges 1 million restructuring charges exitrelated costs 7 million see reconciliation adjusted operating income loss nongaap financial measures end item 7 environment sharply declining commodity prices average inventory costs fiscal 2015 decrease quickly purchase costs raw materials resulting substantial adverse effect cost goods sold compression operating margins amr lower price environment year also adversely impacted supply scrap metal led lower processed volumes compressing operating margins effects adverse conditions operating results partially offset benefits cost goods sold resulting restructuring actions taken reduce direct costs production including headcount nonemployee costs consolidated operating results fiscal 2015 also benefited increase operating income smb 2 million primarily result higher sales volumes increased rolling mill utilization levels lower sga expense operating results fiscal 2015 included reduction consolidated sga expense 17 million 9 compared prior year primarily result lower employee compensation 10 million associated headcount reductions productivity initiatives implemented fiscal 2014 2015 reduced incentive compensation lower financial performance reduction selling marketing expense 3 million legal settlement resulting insurance reimbursement 2 million fiscal 2015 second quarter fiscal 2015 identified combination significant weakening market conditions continued constrained supply raw materials due lower price environment negatively impacted volumes planned idling closure certain production facilities auto parts stores recent financial performance decline market capitalization first half fiscal 2015 triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 141 million related goodwill allocated former mrb reporting unit goodwill allocated former apb reporting unit deemed impaired record goodwill impairment charges fiscal 2014 see discussion critical accounting policies section end part ii item 7 report second quarter fiscal 2015 also undertook series strategic actions improve operating performance connection q215 plan amr reduced shredding capacity east west coasts order increase 29 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc operating efficiency lowering costs initiated plans close certain auto parts stores massachusetts oregon western canada operations auto parts stores fully wound third quarter fiscal 2015 result actions second quarter fiscal 2015 tested recoverability certain assets recorded noncash longlived asset impairment charge 44 million addition fiscal 2015 recorded noncash impairment charges 3 million various assets compared impairment charges 1 million fiscal 2014 see longlived assets asset impairment charges sections note 2 summary significant accounting policies notes consolidated financial statements part ii item 8 report tabular presentation longlived asset impairment charges recorded periods presented consolidated operating results fiscal 2015 also included restructuring charges exitrelated costs 13 million compared charges 7 million fiscal 2014 additional restructuring charges exitrelated costs 4 million included results discontinued operations fiscal 2015 compared charges less 1 million fiscal 2014 restructuring charges consisted severance contract termination restructuring costs exitrelated costs 7 million fiscal 2015 consisted asset impairments accelerated depreciation assets connection closure certain operations compared exitrelated costs 1 million fiscal 2014 charges relate restructuring initiatives four separate plans announced fourth quarter fiscal 2012 “q4’12 plan” “q1’14 plan” “q1’15 plan” q215 plan q412 plan initiatives completed end fiscal 2013 achieved reduction operating costs approximately 25 million annualized basis comprising approximately 18 million sga expense 7 million cost goods sold first quarter fiscal 2014 initiated q1’14 plan began implementing restructuring productivity initiatives reduce annual operating expenses approximately 30 million subsequently increased 40 million later fiscal year achieved approximately 29 million benefit fiscal 2014 full annual benefit achieved fiscal 2015 majority reduction operating expenses occurred amr resulted combination headcount reductions implementation operational efficiencies reduced lease costs productivity improvements fiscal 2014 incurred restructuring charges exitrelated costs approximately 6 million connection q114 plan substantially completed fiscal 2014 fiscal 2015 incurred restructuring charges less 1 million connection q114 plan first quarter fiscal 2015 initiated q115 plan started implementing additional productivity initiatives amr improve profitability combination revenue drivers cost reduction initiatives addition measures announced october 2014 targeted annual improvement 7 million identified additional cost reduction productivity initiatives aimed reducing sga expense connection q115 plan increased overall targeted annual improvement amr 14 million fiscal 2015 achieved total benefit cost saving productivity initiatives approximately 10 million amr full annual run rate expected achieved fiscal 2016 benefits productivity improvement initiatives impacting cost goods sold offset decline nonferrous commodity prices fiscal 2015 incurred restructuring charges approximately 2 million connection q115 plan substantially completed fiscal 2015 end second quarter fiscal 2015 initiated q215 plan consisting additional restructuring exitrelated initiatives undertaking strategic actions consisting idling shredding equipment closing seven auto parts stores amr closely align companys business prevalent market conditions expanded initiatives third quarter fiscal 2015 announcing measures aimed reducing annual operating expenses primarily sga headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures restructuring initiatives target improvement annual performance approximately 46 million strategic actions consisting idling assets closure stores expected contribute approximately 18 million amount approximately onethird reduced depreciation expense starting second half fiscal 2015 full annual run rate expected achieved fiscal 2016 sga cost saving measures expected contribute 28 million amount approximately onethird benefiting fiscal 2015 substantial majority remaining benefit expected achieved fiscal 2016 fiscal 2015 achieved aggregate estimated benefit approximately 18 million initiatives expect incur restructuring charges approximately 11 million connection q215 plan consisting employee termination benefits 6 million contract termination costs 2 million restructuring costs 2 million recognized 9 million restructuring charges fiscal 2015 discussed also incurred exitrelated costs 7 million fiscal 2015 consisting asset impairments accelerated depreciation assets connection idling assets closure certain operations 30 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc restructuring charges exitrelated costs comprised following thousands include restructuring charges exitrelated costs measurement performance operating segments significant majority restructuring charges require us make cash payments see note 12 restructuring charges exitrelated costs notes consolidated financial statements part ii item 8 report fiscal 2014 compared fiscal 2013 consolidated operating income fiscal 2014 24 million included restructuring charges exitrelated costs 7 million asset impairment charges 1 million compared consolidated operating loss 323 million fiscal 2013 included goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 8 million adjusted consolidated operating income fiscal 2014 33 million increase 14 million 74 compared adjusted consolidated operating income 19 million fiscal 2013 see reconciliation adjusted operating income loss nongaap financial measures end item 7 export selling prices recycled ferrous metal subject downward pressure fiscal 2014 leading overall lower average export selling prices compared prior year benefits productivity initiatives primarily impacting amr largely offset continued challenging ferrous nonferrous market conditions impact constrained supply conditions raw materials domestic markets consolidated operating results fiscal 2014 also benefited increase operating income smb 12 million primarily result improved demand finished steel products leading higher sales volumes benefits productivity improvements operating results fiscal 2014 included reduction 2 million selling general administrative sga expense restructuring cost saving initiatives primarily benefited amr whose sga expense declined 6 million mainly headcount reductions lower professional outside services partially offset higher incentive compensation sharebased compensation expense compared prior year sga expense associated new auto parts store locations acquired opened amr previous two fiscal years fourth quarter fiscal 2013 interim impairment test goodwill allocated reporting units resulted noncash goodwill impairment charge 321 million former mrb reporting unit addition fourth quarter fiscal 2013 recorded impairment charges 13 million various assets fiscal 2014 recorded asset impairment charges 1 million combination assets held sale assets see asset impairment charges section note 2 summary significant accounting policies notes consolidated financial statements part ii item 8 report tabular presentation asset impairment charges recorded periods presented first quarter fiscal 2014 elected change annual goodwill impairment testing date february 28 july 1 year resulting assessment goodwill carried former mrb apb reporting units july 1 2014 reporting units calculated fair value exceeded carrying value thus indicating goodwill balances impaired july 1 2014 31 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc consolidated operating income fiscal 2014 also included restructuring charges exitrelated costs 7 million consisting severance contract termination restructuring costs exitrelated impairments compared restructuring charges 8 million fiscal 2013 additional restructuring charges exitrelated costs less 1 million included results discontinued operations fiscal 2014 charges include restructuring initiatives q412 plan q114 plan income net income net 4 million 1 million less 1 million fiscal 2015 2014 2013 respectively increase fiscal 2014 fiscal 2015 primarily due foreign currency transaction gains information foreign currency transactions see note 2 summary significant accounting policies notes consolidated financial statements part ii item 8 report interest expense interest expense 9 million 11 million 10 million fiscal 2015 2014 2013 respectively decrease fiscal 2014 fiscal 2015 primarily due decreased average borrowings bank credit facilities information outstanding debt balances see note 9 longterm debt notes consolidated financial statements part ii item 8 report income tax expense benefit income tax expense benefit continuing operations 13 million 3 million 57 million fiscal 2015 2014 2013 respectively effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses effective tax rate continuing operations fiscal 2014 expense 172 lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized effective tax rate continuing operations fiscal 2013 benefit 171 differed us federal statutory rate 35 primarily due recognition expense 29 million record valuation allowance deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 goodwill impairment charge net operating losses subsidiary continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed august 31 2015 believe likely realize benefits deferred tax assets net valuation allowances 32 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc see note 18 income taxes notes consolidated financial statements part ii item 8 report discussion discontinued operations third quarter fiscal 2015 connection q215 plan ceased operations seven auto parts stores six qualified discontinued operations reporting operations six qualifying stores previously reported within amr reportable segment fiscal 2014 released certain environmental liabilities 1 million arose directly related operations component amr business qualified separate classification discontinued operation fiscal 2010 prior disposal operating results discontinued operations comprised following thousands see note 10 discontinued operations notes consolidated financial statements part ii item 8 report discussion 33 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc financial results reportable segment operate business across two reportable segments amr smb additional financial information relating reportable segments contained note 21 segment information notes consolidated financial statements part ii item 8 report auto metals recycling lt long ton 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 cars purchased auto parts stores 3 average sales price volume information excludes pgm metals catalytic converters fiscal 2015 compared fiscal 2014 revenues 33 decrease ferrous revenues 12 decrease nonferrous revenues primarily due significantly lower average net selling prices ferrous nonferrous scrap metal well reduced sales volumes compared prior year export net selling prices shipments recycled ferrous metal experienced multiple sharp declines throughout fiscal 2015 decreasing approximately 150 per ton approximately 40 compared end fourth quarter fiscal 2014 decreases driven weaker global steel markets due excess capacity overproduction strengthening us dollar year impact lower iron ore prices market conditions recycled metals weaker demand endmarkets sell domestic net selling prices ferrous metal also decreased sharply year lower sales volumes 34 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc primarily due combination weaker export demand lesser extent weaker domestic demand competition available raw materials fiscal 2015 increased share domestic sales ferrous material due relatively stronger domestic demand compared export market segment operating income loss operating loss fiscal 2015 164 million compared operating income 55 million prior year adjusted operating income fiscal 2015 excluding goodwill impairment charge 141 million asset impairment charges 44 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million 28 million compared adjusted operating income 56 million fiscal 2014 see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2015 negatively impacted sharp decline selling prices resulting significant adverse impact cost goods sold average inventory accounting compression operating margins lower price environment also adversely impacted supply scrap metal including endoflife vehicles led lower processed volumes compressing operating margins effects adverse conditions operating results partially offset operating results benefited decrease sga expense 9 million compared prior year primarily result lower employee compensation 6 million associated headcount reduction productivity initiatives implemented fiscal 2014 2015 reduced incentive compensation lower financial performance lower selling marketing expense 3 million fiscal 2015 amr achieved total benefit approximately 28 million connection cost saving productivity initiatives strategic actions initiated fiscal 2015 benefits productivity improvements impacting cost goods sold offset continued challenging ferrous nonferrous market conditions impact constrained supply conditions raw materials second quarter fiscal 2015 identified triggering event requiring interim impairment test goodwill allocated former mrb reporting unit impairment test resulted noncash goodwill impairment charge 141 million also undertook series strategic actions amr reducing shredding capacity east west coasts order improve operating efficiency lowering costs closing seven auto parts stores closely align business prevalent market conditions result actions tested recoverability certain assets recorded noncash longlived asset impairment charge 44 million 42 million reported amrs operating results asset impairment charges 3 million reported discontinued operations consolidated statements operations connection reduction shredder capacity store closings also recognized accelerated depreciation costs 7 million recorded restructuring charges exitrelated costs reflected amrs operating results fiscal 2015 recorded noncash impairment charges 3 million assets held sale amr reported within asset impairment charges amrs results operations include operating results discontinued operations see note 10 discontinued operations notes consolidated financial statements part ii item 8 report fiscal 2014 compared fiscal 2013 revenues decrease 6 ferrous revenues due lower average net selling prices reduced sales volumes export ferrous metal result continued weak economic conditions globally adversely impacted export demand recycled metal partially offset higher sales volumes domestic sales recycled ferrous metal export selling prices recycled ferrous metal declined sharply shipments middle fiscal 2014 result weaker global demand impact severe winter weather conditions domestic markets partially offset slight recovery export selling prices shipments near end fiscal year combination weaker export demand competition available raw materials continued adversely impact supply contributed lower ferrous sales volumes decrease nonferrous revenues primarily due lower average selling prices result continued weak economic conditions offset beneficial impact improved recovery nonferrous materials processed enhanced processing technologies segment operating income loss operating income fiscal 2014 55 million compared operating loss 282 million fiscal 2013 adjusted operating income fiscal 2014 excluding asset impairment charges 1 million 56 million increase 4 million compared adjusted operating income fiscal 2013 see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 export selling prices recycled ferrous metal subject downward pressure fiscal 2014 leading overall lower average export selling prices compared prior year benefits productivity improvements impacting cost goods sold largely offset continued challenging ferrous nonferrous market conditions impact constrained supply conditions raw materials leading modest improvement adjusted operating results operating results fiscal 2014 benefited restructuring cost saving initiatives amr leading reduction sga expenses 35 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc 6 million decrease compared prior year driven primarily reduction 2 million employee compensation expense headcount reduction 2 million professional outside services costs offset incremental expenses related nine auto parts store locations acquired fiscal 2013 steel manufacturing business st short ton 2000 pounds 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2015 compared fiscal 2014 revenues decreased 14 million 4 compared prior year primarily due lower average sales prices finished steel products reflecting lower raw material costs higher import activity offset increase sales volumes due higher demand west coast markets mainly driven improved business conditions nonresidential construction segment operating income operating income fiscal 2015 20 million improvement 2 million compared 19 million prior year improved results primarily due higher sales volumes increased rolling mill utilization levels decrease sga expense due recognition bad debt expense 1 million fiscal 2014 fiscal 2014 compared fiscal 2013 revenues increased 36 million 10 compared prior year primarily due increased sales volumes finished steel products result higher demand west coast markets mainly driven improved nonresidential construction benefits partially offset slightly lower average sales prices due impact reduced costs raw materials segment operating income operating income fiscal 2014 19 million improvement 12 million compared 7 million prior year significantly improved results primarily due higher sales volumes impact raw material costs goods sold decreasing faster rate average sales price finished steel products benefits operational efficiencies productivity improvements coupled increased rolling mill utilization levels improved results partially offset recognition bad debt expense 1 million fiscal 2014 liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 23 million 26 million august 31 2015 2014 respectively cash balances intended used primarily working capital expenditures acquisitions dividends share repurchases also use excess cash hand reduce amounts outstanding credit facilities august 31 2015 debt net cash 205 million compared 294 million august 31 2014 refer nongaap financial measures decrease 88 million 36 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc primarily result positive cash flows generated operating activities cash balances august 31 2015 2014 include 5 million 4 million respectively indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2015 145 million compared 141 million fiscal 2014 39 million fiscal 2013 sources cash fiscal 2015 included 56 million decrease accounts receivable primarily due timing sales collections 69 million decrease inventories due impacts decreasing raw materials prices timing purchases sales uses cash included 36 million decrease accounts payable due lower raw material purchase prices timing payments significant amount cash generated operating activities fiscal 2015 stemmed reduction net working capital primarily result sharply declining price environment ferrous nonferrous scrap metal lesser extent lower inventory volumes well positive operating performance environment stable increasing scrap metal prices would require greater use cash net working capital items ability generate significant positive cash flows operating activities would largely dependent upon achieving positive operating performance cash provided operating activities fiscal 2014 included decrease inventories 36 million due timing shipments uses cash included increase 16 million accounts receivable due timing shipments collections cash provided operating activities fiscal 2013 included decrease inventories 47 million due lower volumes material purchases uses cash included increase 79 million accounts receivable due timing shipments collections decrease accounts payable 11 million due lower levels material purchases timing payments investing activities net cash used investing activities fiscal 2015 28 million compared 41 million fiscal 2014 112 million fiscal 2013 cash used investing activities fiscal 2015 included 32 million capital expenditures upgrade equipment infrastructure expand investments environmental safetyrelated assets cash used investing activities fiscal 2014 included 39 million capital expenditures upgrade equipment infrastructure expand investments environmental safetyrelated assets cash used investing activities fiscal 2013 included 90 million capital expenditures including investments construction new shredder advanced processing equipment related infrastructure facility surrey british columbia construction new nonferrous processing facility puerto rico cash used investing activities also included 25 million acquisitions financing activities net cash used financing activities fiscal 2015 119 million compared 88 million fiscal 2014 4 million fiscal 2013 cash used financing activities fiscal 2015 included 20 million cash dividends 91 million net repayments debt refer nongaap financial measures cash used financing activities fiscal 2014 included 20 million cash dividends 64 million net repayments debt refer nongaap financial measures cash used financing activities fiscal 2013 included 20 million cash dividends 25 million purchase redeemable noncontrolling interest third quarter fiscal 2013 sources cash included 43 million net borrowings debt refer nongaap financial measures mainly used support higher working capital requirements acquisitions 37 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc credit facilities following summary outstanding balances availability credit facilities longterm debt thousands 1 remaining availability net 5 million outstanding standby letters credit august 31 2015 unsecured committed bank credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied leverage ratio borrowings outstanding credit facility 215 million 305 million august 31 2015 2014 respectively weighted average interest rate amounts outstanding facility 195 191 august 31 2015 2014 respectively also unsecured uncommitted 25 million credit line wells fargo bank na expires april 1 2016 interest rates set bank time borrowing borrowings outstanding facility august 31 2015 2014 use credit facilities fund working capital requirements acquisitions capital expenditures dividends share repurchases two bank credit agreements contain various representations warranties events default financial covenants could limit restrict ability create liens raise additional capital enter transactions affiliates acquire dispose businesses guarantee debt consolidate merge financial covenants include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures divided consolidated fixed charges consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness june 25 2015 amended unsecured committed bank credit facility primarily revise definition ebitda used calculate consolidated fixed charge coverage ratio exclude expenses incurred connection implementation business realignment cost containment productivity improvement programs losses associated discontinued operations fiscal quarters ending may 31 2015 august 31 2015 november 30 2015 february 29 2016 decrease minimum ratio permitted 150 100 125 100 fiscal quarters ending august 31 2015 november 30 2015 february 29 2016 refer forms 8k dated february 14 2011 april 16 2012 part ii item 6 exhibit 41 form 10q dated june 30 2015 include attachments copies unsecured committed bank credit agreement amended detailed methodology calculating financial covenants august 31 2015 compliance financial covenants consolidated fixed charge coverage ratio required less 125 100 183 1 august 31 2015 consolidated leverage ratio required 055 100 031 1 august 31 2015 expect remain compliance covenants assurances able event sustained deterioration current market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach either covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreements case would required evaluate available alternatives take appropriate steps obtain alternative funds assurance alternative funds sought could obtained would adequate acceptable terms addition august 31 2015 2014 8 million longterm taxexempt bonds outstanding mature january 2021 38 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc capital expenditures capital expenditures totaled 32 million 39 million 90 million fiscal 2015 2014 2013 respectively fiscal 2015 capital expenditures primarily upgrade equipment infrastructure investments environmental compliance projects capital expenditures fiscal 2014 included completion investment construction nonferrous processing facility puerto rico fiscal 2013 capital expenditures included investments construction shredder advanced processing equipment related infrastructure facility surrey british columbia substantial portion construction nonferrous processing facility puerto rico currently plan invest 50 million capital expenditures upgrades environmental compliance projects fiscal 2016 similar upgrades expenditures made fiscal 2015 exclusive capital expenditures acquisitions using cash generated operations available lines credit environmental compliance commitment recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 10 million 8 million 5 million environmental projects fiscal 2015 2014 2013 respectively plan invest 18 million capital expenditures environmental projects fiscal 2016 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “the site” group prps conducting investigation study identify characterize contamination site develop alternative approaches remediation contamination march 30 2012 group submitted epa draft feasibility study “draft fs” based approximately ten years work 100 million costs classified investigationrelated however epa largely rejected draft fs took drafting process epa provided revised draft fs lwg key stakeholders sections final section made available august 2015 revised draft fs identifies five possible remedial alternatives range estimated cost approximately 550 million 119 billion net present value least costly alternative approximately 171 billion 367 billion net present value costly estimates range four 18 years implement remedial work depending selected alternative stakeholders identified number concerns regarding epas cost estimates scheduling assumptions conclusions regarding effectiveness remediation technologies revised draft fs determine responsible remediation costs define precise cleanup boundaries select remedies revised draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” epa process presenting conceptual remedy lwg epa’s partners national remedy review board scheduled november 2015 stated expects release proposed cleanup plan public review comment spring 2016 currently available information indicates epa expect issue final rod selecting remedy site least 2017 commence remediation activities 2024 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe reasonably possible estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations future cash flows liquidity material liabilities recorded future related site could result failure maintain compliance certain covenants debt agreements significant cash outflows future related site could reduce amounts available borrowing could otherwise used investment capital expenditures acquisitions dividends share repurchases see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report share repurchase program pursuant amended share repurchase program existing authorization repurchase approximately 20 million shares class common stock deem repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program prior fiscal 2015 repurchased approximately 69 million shares 9 million shares authorized repurchase program fourth quarter fiscal 2015 repurchased additional 68 thousand shares class common stock 39 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc subsequent end fiscal 2015 october 27 2015 repurchased additional 203 thousand shares class common stock open market transactions totaling 35 million assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs acquisitions capital expenditures working capital share repurchases dividends joint ventures debt service requirements environmental obligations however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2015 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2028 2 interest payments longterm debt based interest rates effect august 31 2015 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2015 16 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill longlived assets environmental costs inventories accounting business combinations revenue recognition 40 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ prior fourth quarter fiscal 2015 reporting units goodwill allocated equivalent operating segments mrb apb fourth quarter fiscal 2015 changed internal organizational reporting structure combine auto metals recycling businesses resulted formation new operating reportable segment amr replacing mrb apb operating segments change led identification components within amr based disaggregation financial information regularly reviewed segment management geographic area components similar economic characteristics aggregated reporting units goodwill reassigned affected reporting units using relative fair value approach date reassessment july 1 2015 beginning date goodwill carried two regionallydefined reporting units smb operating segment goodwill allocated testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform twostep quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest implied control premium resulting difference market capitalization based average trading price class common stock twoweek period ended july 1 2015 higher aggregated estimated fair value reporting units within historical range mean median premiums observed historical transactions within steelmaking scrap processing metals industries identified specific reconciling items including market participant synergies supported implied control premium july 1 2015 41 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc second quarter fiscal 2015 identified combination significant weakening market conditions continued constrained supply raw materials due lower price environment negatively impacted volumes planned idling closure certain production facilities auto parts stores company’s recent financial performance decline market capitalization first half fiscal 2015 triggering event requiring interim impairment test goodwill allocated reporting units connection interim impairment test performed second quarter fiscal 2015 used measurement date february 1 2015 mrb reporting unit goodwill 141 million february 1 2015 first step impairment test showed fair value mrb reporting unit less carrying amount indicating potential impairment based second step impairment test concluded implied fair value goodwill remained mrb reporting unit resulting impairment entire carrying amount mrb’s goodwill totaling 141 million apb reporting unit goodwill 176 million february 1 2015 estimated fair value reporting unit exceeded carrying value approximately 20 fourth quarter fiscal 2015 immediately prior change reporting units goodwill allocated corresponding formation amr operating segment replaced mrb apb operating segments performed annual impairment test remaining carrying value goodwill held apb reporting unit measurement date july 1 2015 apb reporting unit goodwill 177 million measurement date estimated fair value reporting unit exceeded carrying value approximately 22 therefore goodwill impairment identified projections used income approach apb took consideration impact current market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles recent trends selfservice parts sales projections assumed recovery operating margins current historically low levels multiyear period including benefits recently initiated productivity improvements cost saving measures remaining significantly level operating margins experienced fiscal years 2010 2011 marketbased wacc used income approach apb 1043 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc 15 weakerthananticipated improvements operating margins could resulted failure step one quantitative impairment test apb reporting unit july 1 2015 performing annual test goodwill carried apb reporting unit july 1 2015 result change operating segments redefinition reporting units date allocated goodwill two regionallydefined reporting units evaluated likely fair value either two regionallydefined reporting units allocated goodwill carrying value july 1 2015 would indicate triggering event requiring goodwill impairment test based assessment july 1 2015 likely fair value reporting unit allocated goodwill carrying value result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates reporting units fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions metals recycling industry current levels trend weaker anticipated financial performance reporting units allocated goodwill including pace extent operating margin volume recovery decline share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2015 recorded 44 million impairment charges longlived tangible intangible assets associated certain regional metals recycling operations used auto parts store locations charges reported 42 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc consolidated statements operations within asset impairment charges discontinued operations related component company qualifying discontinued operations reporting environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2015 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued see contingencies environmental note 11 commitments contingencies notes consolidated financial statements part ii item 8 report inventories primarily consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar merchant bar wire rod used salvaged vehicles reported within finished goods inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory amr generally sells recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume 43 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2016 2015 2014 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products use operating income measure segment performance restructuring charges exitrelated activities allocated segment operating income include information measurement segments’ performance expense related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented see note 18 segment information notes consolidated financial statements part ii item 8 report discussion primary activities reportable segment total assets reportable segment operating results continuing operations revenues external customers concentration sales foreign countries internal organizational reporting structure supports two operating reportable segments auto metals recycling amr business steel manufacturing business smb amr sells brokers ferrous scrap metal containing iron foreign domestic steel producers including smb nonferrous scrap metal containing iron foreign domestic markets amr procures scrap supply salvaged vehicles rail cars home appliances industrial machinery manufacturing scrap construction demolition scrap largest source autobodies network auto parts stores operate commercial brandname picknpull amr procures salvaged vehicles sells serviceable used auto parts vehicles 52 selfservice auto parts stores remaining portions vehicles primarily autobodies major parts containing ferrous nonferrous materials shipped metal recycling facilities sold wholesalers geographically economical amr processes mixed large pieces scrap metal smaller pieces crushing torching shearing shredding sorting resulting scrap metal pieces size density metal content required customers meet production needs processed recycled metals shipped domestic steel mill metal producers globally smb operates steel minimill produces wide range finished steel products smb’s scrap metal raw material requirements sourced almost entirely amr smb purchases rates approximate market prices shipments west coast us smb uses minimill mcminnville oregon melt recycled metal raw materials produce finished steel products smb also maintains mill depot southern california results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california portland oregon tacoma washington access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal shipping bulk cargoes steel manufacturers located europe africa middle east asia north central south america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand 27 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc prior fourth quarter fiscal 2015 internal organizational reporting structure supported three operating reportable segments metals recycling business mrb auto parts business apb smb fourth quarter fiscal 2015 combined integrated auto parts metals recycling businesses single operating platform change organizational structure optimized efficiencies operating platform enabling additional synergies captured throughout supply chain global sales channels effectively leveraging shared services platform change internal organizational reporting structure resulted formation new operating reportable segment amr replacing former mrb apb operating segments began reporting new segment fourth quarter fiscal 2015 reflected annual report form 10k year ended august 31 2015 segment data comparable periods presented prior segment change recast conform current presentation activities amr recasting historical information impact consolidated financial performance ssi periods presented strategic priorities continue closely monitor economic conditions remain focused following core strategies meet business objectives • use seven deep water ports groundbased logistics network directly access customers domestically internationally meet demand products wherever greatest • optimization integrated operating platform maximize opportunities synergies cost efficiencies volumes • continuous improvement initiatives increase production efficiency improve productivity enhance effectiveness commercial activities reduce operating expense • technology process improvement investments increase separation recovery recycled materials shredding process generate valueadded products • increase market share initiatives maximize volumes selective partnerships alliances acquisitions auto parts stores key suppliers metal recycling facilities opportunistically look enhance geographic proximity operations among facilities amr integrated presence northwestern us northern california northeastern us near amrs export facilities tacoma washington portland oregon oakland california everett massachusetts benefit synergies enhanced access supply fiscal 2015 initiated implemented restructuring initiatives consisting idling underutilized metals recycling assets including shredder johnston rhode island another shredder surrey british columbia closing seven auto parts stores amr closely align business market conditions additional cost saving productivity improvement initiatives including additional reductions personnel savings procurement activities streamlining administrative supporting services functions adjustments operating capacity additional facility closures identified initiated fiscal 2016 facility closures fiscal 2016 included shredding facility concord new hampshire six auto parts stores closed fiscal 2015 qualified discontinued operations reporting beginning fiscal 2015 see note 8 discontinued operations note 10 restructuring charges exitrelated activities notes consolidated financial statements part ii item 8 report key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us western canada global economic conditions changes supply demand conditions strength us dollar affect market prices sales volumes recycled ferrous nonferrous metal global markets steel products western us western canada significant impact results operations reportable segments weak global demand fueled overproduction lowpriced billets using blast furnace technology iron ore primary raw material limited availability scrap metal raw materials strong us dollar contribute lower sales volumes recycled metals 28 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc markets impacted slowdown economic activity globally recent years macroeconomic uncertainty combined global steelmaking overproduction strengthening us dollar resulted deteriorating market conditions global steel manufacturers volatile pricing swings overall downward trend commodity prices selling prices ferrous nonferrous recycled materials accelerated fiscal 2015 continued first half fiscal 2016 prices improved neardecade lows falling scrap metal price environment exacerbated decline iron ore prices raw material used steelmaking blast furnaces compete eaf mills use ferrous scrap metal primary feedstock iron ore prices increased near end fiscal 2016 remained low levels relative historical levels low priced steel billets use iron ore primary raw material direct substitutes ferrous scrap metal manufacturing finished steel also contributed lower scrap metal demand price persistently low economic growth us lower scrap metal price environment also contributed constrained scrap flows domestic supply markets combined significant scrap recycling capacity competition certain regional markets led continued low margins amr business first half fiscal 2016 prices increased significantly third quarter prices increased third quarter primarily due increased demand recycled metal decreasing fourth quarter returning levels seen beginning fiscal year executive overview financial results generated consolidated revenues 14 billion fiscal 2016 decrease 29 19 billion consolidated revenues prior year due combination lower average net selling prices ferrous nonferrous scrap metal finished steel products reduced sales volumes compared prior year average net selling prices ferrous nonferrous scrap metal fiscal 2016 decreased 28 21 respectively compared prior year ferrous nonferrous sales volumes fiscal 2016 decreased 11 13 respectively compared prior year overall demand recycled metals endmarkets weaker prior year primarily due continued low global economic growth relative strength us dollar impact lower iron ore prices fiscal year demand finished steel products also weaker prior year primarily due increased competition lowerpriced imports consolidated operating loss 8 million fiscal 2016 compared 196 million prior year adjusted consolidated operating income fiscal 2016 28 million compared 11 million prior year adjusted results fiscal 2016 exclude impact goodwill impairment charge 9 million asset impairment charges 21 million restructuring charges exitrelated activities 7 million benefits contract settlements 1 million adjusted results fiscal 2015 exclude impact goodwill impairment charge 141 million asset impairment charges 45 million restructuring charges exitrelated activities 13 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million see reconciliation adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2016 2015 adversely impacted lower price environment included sharp declines commodity selling prices first half year reported operating losses fiscal 2016 2015 driven largely asset impairment charges restructuring charges exitrelated activities recorded fiscal year operating results second half fiscal 2016 benefited increase ferrous average net selling prices experiencing sharp declines first half fiscal year resulted adverse impact average inventory accounting fiscal 2016 significantly less adverse impact fiscal 2015 operating results fiscal 2016 also benefited cost saving productivity improvement measures initiated fiscal 2015 expanded fiscal 2016 reduce direct costs production selling general administrative sga expense excluding adverse impact asset impairment charges benefits contributed higher operating margins per ferrous ton sold amr compared fiscal 2015 despite lower average net selling prices sales volumes consolidated sga expense decreased 22 million 13 compared prior year primarily resulting reduced employeerelated expenses 6 million benefit insurance reimbursement recorded fiscal 2016 smbs operating results lower prior year primarily due decreased selling prices finished steel products reduced sales volumes lower rolling mill utilization driven increased competition lowerpriced imports recent years implemented number cost reduction productivity improvement measures closely align business market conditions combined benefit measures initiated since beginning fiscal 2015 represents targeted annual improvement operating performance 95 million initiatives include announced first quarter fiscal 2015 q115 plan followed additional cost saving exitrelated measures announced second quarter fiscal 2015 expanded fiscal 2016 q215 plan fiscal 2016 achieved approximately 78 million combined benefits related q115 q215 plans compared 28 million achieved prior year expect achieve substantially combined annual improvement target 95 million associated plans fiscal 2017 charges incurred connection foregoing initiatives discussed results operations operating income loss item 7 29 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc net loss continuing operations attributable ssi fiscal 2016 18 million 066 per diluted share compared 190 million 703 per diluted share prior year adjusted net income continuing operations attributable ssi fiscal 2016 19 million 069 per diluted share compared 4 million 013 per diluted share prior year adjusted net income continuing operations attributable ssi excludes impact goodwill impairment charges asset impairment charges restructuring charges exitrelated activities impact reselling modifying terms certain previously contracted bulk ferrous shipments net recoveries noncash writeoff debt issuance costs see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 following items highlight selected liquidity capital structure metrics fiscal 2016 • net cash provided operating activities 99 million compared 145 million prior year • debt 193 million compared 228 million prior yearend • debt net cash 166 million compared 205 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • dividends paid 20 million compared amount prior year following items highlight reportable segment financial results fiscal 2016 • amr revenues 12 billion operating income 23 million compared revenues 17 billion operating loss 164 million prior year • amr adjusted operating income 49 million compared 28 million prior year see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 • smb revenues 270 million operating income 4 million compared revenues 375 million operating income 20 million prior year • smb adjusted operating income 6 million compared 20 million prior year see reconciliation smb adjusted operating income nongaap financial measures end item 7 30 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc results operations nm meaningful 1 amr sells recycled ferrous metal smb rates per ton approximate west coast us market prices intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 joint ventures sell recycled metal amr smb prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties 4 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance reportable segments exitrelated activities consist asset impairments accelerated depreciation net gains exitrelated disposals related site closures 31 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc 5 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory revenues fiscal 2016 compared fiscal 2015 consolidated revenues fiscal 2016 14 billion decrease 29 compared 19 billion consolidated revenues prior year experiencing sharp declines first half fiscal 2016 net selling prices shipments ferrous scrap metal increased significantly third quarter fiscal 2016 primarily due improved demand decreasing fourth quarter returning levels seen beginning fiscal year overall demand recycled metals endmarkets weaker prior year primarily due continued low global economic growth relative strength us dollar impact lower iron ore prices fiscal year resulted significantly lower average net selling prices ferrous nonferrous scrap metal finished steel products reduced sales volumes fiscal 2016 compared prior year average net selling prices ferrous nonferrous scrap metal fiscal 2016 decreased 28 21 respectively compared prior year ferrous nonferrous sales volumes fiscal 2016 decreased 11 13 respectively compared prior year demand finished steel products also weaker prior year due increased competition lowerpriced imports fiscal 2015 compared fiscal 2014 consolidated revenues fiscal 2015 decreased primarily due significantly lower average net selling prices ferrous nonferrous scrap metal reduced sales volumes compared prior year export net selling prices shipments recycled ferrous metal experienced multiple sharp declines throughout fiscal 2015 decreasing approximately 150 per ton approximately 40 compared end fourth quarter fiscal 2014 decrease ferrous nonferrous scrap metal prices driven weaker global steel markets due excess capacity overproduction strengthening us dollar year impact lower iron ore prices market conditions recycled metals weaker demand end markets sell domestic net selling prices ferrous metal also decreased sharply year lower sales volumes recycled scrap metal amr primarily due combination weaker export demand lesser extent weaker domestic demand competition available raw materials including endoflife vehicles partially offset higher sales volumes finished steel products smb fiscal 2015 increased share domestic sales ferrous material due relatively stronger domestic demand compared export market operating income loss fiscal 2016 compared fiscal 2015 consolidated operating loss 8 million fiscal 2016 compared 196 million prior year adjusted consolidated operating income fiscal 2016 28 million compared 11 million prior year adjusted results exclude impact goodwill impairment charges asset impairment charges restructuring charges exitrelated activities impact reselling modifying terms certain previously contracted bulk ferrous shipments net recoveries see reconciliation adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2016 2015 adversely impacted lower price environment included sharp declines commodity selling prices first half year reported operating losses fiscal 2016 2015 driven largely asset impairment charges restructuring charges exitrelated activities recorded fiscal year operating results second half fiscal 2016 benefited increase ferrous average net selling prices experiencing sharp declines first half fiscal year resulted adverse impact average inventory accounting fiscal 2016 significantly less adverse impact fiscal 2015 operating results fiscal 2016 also benefited cost saving productivity improvement initiatives initiated fiscal 2015 expanded fiscal 2016 reduce direct costs production sga expense excluding adverse impact asset impairment charges benefits contributed higher operating margins per ferrous ton sold amr compared fiscal 2015 despite lower average net selling prices sales volumes consolidated sga expense decreased 22 million 13 compared prior year primarily resulting reduced employeerelated expenses 6 million benefit insurance reimbursement recorded fiscal 2016 smbs operating results lower prior year primarily due decreased selling prices finished steel products reduced sales volumes lower rolling mill utilization driven increased competition lowerpriced imports second quarter fiscal 2016 identified combination sustained weak market conditions including adverse effects lower commodity selling prices constraining impact lower price environment supply raw materials negatively impacted volumes recent financial performance decline market capitalization triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 9 million reporting unit within amr operating segment 32 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc second quarter fiscal 2015 identified triggering event requiring interim impairment test goodwill resulted noncash goodwill impairment charge 141 million former mrb reporting unit impairment charge reported within results amr record goodwill impairment charges fiscal 2014 see discussion critical accounting policies section end part ii item 7 report fiscal 2016 2015 2014 also recorded noncash impairment charges accelerated depreciation certain longlived assets impairment charges accelerated depreciation excluding goodwill impairment charges follows thousands 1 asset impairment charges incurred amr reportable segment except 79 thousand 745 thousand 532 thousand impairment charges assets related corporate recorded fiscal 2016 2015 2014 respectively 2224 thousand impairment charges supplies inventory related smb recorded fiscal 2016 consolidated operating results fiscal 2016 also included restructuring charges exitrelated activities 7 million compared charges 13 million fiscal 2015 additional restructuring charges exitrelated activities 1 million included results discontinued operations fiscal 2016 compared charges 4 million fiscal 2015 restructuring charges consisted severance contract termination restructuring costs exitrelated activities 2 million fiscal 2016 consisted asset impairments accelerated depreciation assets connection closure certain operations net gains exitrelated disposals compared exitrelated activities 7 million fiscal 2015 charges relate restructuring initiatives three separate plans announced first quarter fiscal 2014 “q1’14 plan “q1’15 plan” q215 plan first quarter fiscal 2014 initiated q114 plan began implementing restructuring productivity initiatives reduce annual operating expenses approximately 30 million subsequently increased 40 million later fiscal year achieved approximately 29 million benefits fiscal 2014 full annual benefit achieved fiscal 2015 majority reduction operating expenses occurred amr resulted combination headcount reductions implementation operational efficiencies reduced lease costs productivity improvements since beginning fiscal 2015 initiated implemented number additional cost reduction productivity improvement measures combined targeted annual improvement 95 million initiatives included announced part q115 plan followed costsaving exitrelated measures part q215 plan targeting combined benefit annual operating performance approximately 60 million subsequently increased 5 million first quarter fiscal 2016 second quarter fiscal 2016 expanded q215 plan initiatives additional 30 million 33 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc cost reduction productivity improvements associated q115 plan driven combination revenue drivers production sga cost reduction initiatives targeted aggregate annual improvement 14 million achieved fiscal 2016 improvements performance associated q215 plan include two components first component reflects strategic actions initiated second quarter fiscal 2015 consisting idling shredding equipment closing seven auto parts stores amr align business market conditions targeting improvement annual operating performance approximately 18 million approximately onethird reduced depreciation expense part second component q215 plan april 2015 initiated measures also announced integration mrb apb businesses combined amr platform order achieve operational synergies reduce annual operating expenses primarily sga expense approximately 28 million personnel reductions reducing organizational layers consolidating shared service functions reducing administrative costs expanded q215 plan target initiating measures fiscal 2016 additional 35 million expected benefits primarily additional reductions personnel savings procurement activities streamlining administrative supporting services functions adjustments operating capacity additional facility closures approximately twothirds target coming reduction sga expense rest reduction production costs primarily amr collectively initiatives commenced second quarter fiscal 2015 expanded subsequent quarters including initiatives commenced fiscal 2016 referred q215 plan fiscal 2016 achieved approximately 78 million combined benefits related q115 q215 plans compared 28 million fiscal 2015 expect achieve substantially combined annual improvement target 95 million associated q115 q215 plans fiscal 2017 restructuring charges exitrelated activities incurred connection cost reduction productivity improvement plans last three fiscal years ended august 31 comprised following thousands include restructuring charges exitrelated activities measurement performance reportable segments significant majority restructuring charges require us make cash payments see note 10 restructuring charges exitrelated activities notes consolidated financial statements part ii item 8 report 34 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc fiscal 2015 compared fiscal 2014 consolidated operating loss 196 million fiscal 2015 compared consolidated operating income 24 million prior year adjusted consolidated operating income fiscal 2015 11 million excludes goodwill impairment charge 141 million asset impairment charges 45 million restructuring charges exitrelated activities 13 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million compares adjusted consolidated operating income 33 million prior year excludes asset impairment charges 1 million restructuring charges exitrelated activities 7 million see reconciliation adjusted operating income loss nongaap financial measures end item 7 environment sharply declining commodity prices average inventory costs fiscal 2015 decrease quickly purchase costs raw materials resulting substantial adverse effect cost goods sold compression operating margins amr lower price environment year also adversely impacted supply scrap metal led lower processed volumes compressing operating margins effects adverse conditions operating results partially offset benefits cost goods sold resulting restructuring actions taken reduce direct costs production including headcount nonemployee costs consolidated operating results fiscal 2015 also benefited increase operating income smb 2 million primarily result higher sales volumes increased rolling mill utilization levels lower sga expense operating results fiscal 2015 included reduction consolidated sga expense 17 million 9 compared prior year primarily result lower employee compensation 10 million associated headcount reductions productivity initiatives implemented fiscal 2014 2015 reduced incentive compensation lower financial performance reduction selling marketing expense 3 million legal settlement resulting insurance reimbursement 2 million fiscal 2015 consolidated operating results fiscal 2015 also included restructuring charges exitrelated activities 13 million compared charges 7 million fiscal 2014 additional restructuring charges exitrelated activities 4 million included results discontinued operations fiscal 2015 compared charges less 1 million fiscal 2014 restructuring charges consisted severance contract termination restructuring costs exitrelated activities 7 million fiscal 2015 consisted asset impairments accelerated depreciation assets connection closure certain operations compared exitrelated activities 1 million fiscal 2014 income net income net 1 million 4 million 1 million fiscal 2016 2015 2014 respectively changes among fiscal years presented primarily due changes foreign currency gains losses transactions denominated canadian dollars information foreign currency transactions see note 2 summary significant accounting policies notes consolidated financial statements part ii item 8 report interest expense interest expense 9 million 9 million 11 million fiscal 2016 2015 2014 respectively decrease fiscal 2014 fiscal 2015 primarily due decreased average borrowings bank credit facilities impact fiscal 2016 interest expense reduced average borrowings compared fiscal 2015 offset higher interest rates writeoff debt issuance costs 1 million information outstanding debt balances see note 7 debt notes consolidated financial statements part ii item 8 report income tax expense benefit income tax expense benefit continuing operations 1 million 13 million 3 million fiscal 2016 2015 2014 respectively 35 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization foreign investment basis tax purposes income tax expense comprised primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized effective tax rate continuing operations fiscal 2014 expense 172 lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed see note 15 income taxes notes consolidated financial statements part ii item 8 report discussion discontinued operations third quarter fiscal 2015 connection q215 plan ceased operations seven auto parts stores six qualified discontinued operations reporting accordance accounting standards effect time prior adopting accounting standard update discontinued operations reporting first quarter fiscal 2016 operations six qualifying stores previously reported within apb reportable segment subsequently replaced amr reportable segment fourth quarter fiscal 2015 fiscal 2016 2015 recorded impairment charges accelerated depreciation 1 million 3 million respectively longlived assets discontinued auto parts stores impaired assets fiscal 2016 consisted primarily capital lease assets associated buildings two leased properties fiscal 2014 released certain environmental liabilities 1 million arose directly related operations component amr business qualified separate classification discontinued operation fiscal 2010 prior disposal operating results discontinued operations comprised following thousands see note 8 discontinued operations notes consolidated financial statements part ii item 8 report discussion 36 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc financial results reportable segment operate business across two reportable segments amr smb additional financial information relating reportable segments contained note 18 segment information notes consolidated financial statements part ii item 8 report auto metals recycling lt long ton 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 average sales price volume information excludes platinum group metals pgms catalytic converters 3 cars purchased auto parts stores fiscal 2016 compared fiscal 2015 revenues 35 decrease ferrous revenues 30 decrease nonferrous revenues primarily due significantly lower average net selling prices ferrous nonferrous scrap metal well reduced sales volumes compared prior year experiencing sharp declines first half fiscal 2016 net selling prices shipments ferrous scrap metal increased significantly third quarter fiscal 2016 primarily due improved demand decreasing fourth quarter returning levels seen beginning fiscal year overall demand recycled metals endmarkets weaker prior year primarily due continued low global economic growth relative strength us dollar impact lower iron ore prices fiscal year resulted significantly lower average net selling prices ferrous nonferrous scrap metal reduced sales volumes fiscal 2016 compared prior year 37 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc segment operating income loss operating income fiscal 2016 23 million compared operating loss 164 million prior year adjusted operating income fiscal 2016 49 million excludes goodwill impairment charge 9 million asset impairment charges 18 million benefits contract settlements 1 million adjusted operating income fiscal 2015 28 million excludes goodwill impairment charge 141 million asset impairment charges 44 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2016 2015 adversely impacted lower price environment included sharp declines commodity selling prices first half year asset impairment charges recorded year operating results second half fiscal 2016 benefited increase ferrous average net selling prices experiencing sharp declines first half fiscal year resulted adverse impact average inventory accounting fiscal 2016 significantly less adverse impact fiscal 2015 operating results fiscal 2016 also benefited cost saving productivity improvement measures initiated fiscal 2015 expanded fiscal 2016 reduce direct costs production selling general administrative sga expense excluding adverse impact asset impairment charges benefits contributed higher operating margins per ferrous ton sold amr compared fiscal 2015 despite lower average net selling prices sales volumes sga expense fiscal 2016 decreased 16 million 13 compared fiscal 2015 primarily resulting reduced employeerelated expenses second quarter fiscal 2016 identified triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 9 million reporting unit within amr operating segment also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 18 million primarily related certain regional metals recycling operations used auto parts store locations certain previouslyidled recycling equipment assets second quarter fiscal 2015 identified triggering event requiring interim impairment test goodwill resulted noncash goodwill impairment charge 141 million former mrb reporting unit impairment charge reported within results amr also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 44 million primarily connection certain strategic actions undertook improve operating performance included reducing shredding capacity closing auto parts stores amrs results operations include operating results discontinued operations see note 8 discontinued operations notes consolidated financial statements part ii item 8 report fiscal 2015 compared fiscal 2014 revenues 33 decrease ferrous revenues 12 decrease nonferrous revenues primarily due significantly lower average net selling prices ferrous nonferrous scrap metal well reduced sales volumes compared prior year export net selling prices shipments recycled ferrous metal experienced multiple sharp declines throughout fiscal 2015 decreasing approximately 150 per ton approximately 40 compared end fourth quarter fiscal 2014 decreases driven weaker global steel markets due excess capacity overproduction strengthening us dollar year impact lower iron ore prices market conditions recycled metals weaker demand endmarkets sell domestic net selling prices ferrous metal also decreased sharply year lower sales volumes primarily due combination weaker export demand lesser extent weaker domestic demand competition available raw materials fiscal 2015 increased share domestic sales ferrous material due relatively stronger domestic demand compared export market 38 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc segment operating income loss operating loss fiscal 2015 164 million compared operating income 55 million prior year adjusted operating income fiscal 2015 excluding goodwill impairment charge 141 million asset impairment charges 44 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million 28 million compared adjusted operating income 56 million fiscal 2014 see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2015 negatively impacted sharp decline selling prices resulting significant adverse impact cost goods sold average inventory accounting compression operating margins lower price environment also adversely impacted supply scrap metal including endoflife vehicles led lower processed volumes compressing operating margins effects adverse conditions operating results partially offset operating results benefited decrease sga expense 9 million compared prior year primarily result lower employee compensation 6 million associated headcount reduction productivity initiatives implemented fiscal 2014 2015 reduced incentive compensation lower financial performance lower selling marketing expense 3 million fiscal 2015 amr achieved total benefit approximately 28 million connection cost saving productivity initiatives strategic actions initiated fiscal 2015 benefits productivity improvements impacting cost goods sold offset continued challenging ferrous nonferrous market conditions impact constrained supply conditions raw materials steel manufacturing business st short ton equivalent 2000 pounds 1 revenues include sales semifinished goods billets finished steel products 2 price information shown netting cost freight incurred deliver product customer fiscal 2016 compared fiscal 2015 revenues decreased 105 million 28 compared prior year decrease due reduced average selling prices sales volumes driven increased competition lowerpriced imports finished steel products reduced steelmaking raw material costs primarily first half fiscal 2016 sales volumes improved second half fiscal 2016 compared first half fiscal year primarily due impact seasonality remained lower levels achieved fiscal 2015 segment operating income operating income fiscal 2016 4 million decrease 17 million compared 20 million prior year adjusted operating income fiscal 2016 excluding asset impairment charges 2 million 6 million compared adjusted operating income 20 million fiscal 2015 see reconciliation smb adjusted operating income nongaap financial measures end item 7 yearoveryear reduction operating results primarily due declining price environment first half fiscal 2016 led selling prices falling faster cost goods sold additionally sales volumes decreased primarily due increased competition imported steel products rolling mill utilization rate decreased primarily due lower sales volumes compared prior year optimization inventory levels 39 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc fiscal 2015 compared fiscal 2014 revenues decreased 14 million 4 compared prior year primarily due lower average sales prices finished steel products reflecting lower raw material costs higher import activity offset increase sales volumes due higher demand west coast markets mainly driven improved business conditions nonresidential construction segment operating income operating income fiscal 2015 20 million improvement 2 million compared 19 million prior year improved results primarily due higher sales volumes increased rolling mill utilization levels decrease sga expense due recognition bad debt expense 1 million fiscal 2014 liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 27 million 23 million august 31 2016 2015 respectively cash balances intended used primarily working capital expenditures acquisitions dividends share repurchases also use excess cash hand reduce amounts outstanding credit facilities august 31 2016 debt 193 million compared 228 million august 31 2015 debt net cash 166 million compared 205 million refer nongaap financial measures decrease 40 million primarily result positive cash flows generated operating activities cash balances august 31 2016 2015 include 7 million 5 million respectively indefinitely reinvested puerto rico canada operating activities net cash provided operating activities fiscal 2016 99 million compared 145 million fiscal 2015 141 million fiscal 2014 net cash provided operating activities fiscal 2016 primarily benefited improved operating performance compared prior year sources cash fiscal 2016 included 28 million decrease inventories due impact lower raw material prices timing purchases sales 6 million decrease refundable income taxes due collection tax refunds 6 million insurance reimbursement uses cash included 11 million increase accounts receivable due timing sales collections significant amount cash generated operating activities fiscal 2015 2016 stemmed reduction net working capital primarily result declining price environment ferrous nonferrous scrap metal finished steel lesser extent lower inventory volumes well positive operating performance environment stable increasing scrap metal prices would require greater use cash net working capital items ability generate significant positive cash flows operating activities would largely dependent upon achieving positive operating performance sources cash fiscal 2015 included 56 million decrease accounts receivable primarily due timing sales collections 69 million decrease inventories due impacts decreasing raw materials prices timing purchases sales uses cash included 36 million decrease accounts payable due lower raw material purchase prices timing payments cash provided operating activities fiscal 2014 included decrease inventories 36 million due timing shipments uses cash included increase 16 million accounts receivable due timing shipments collections investing activities net cash used investing activities fiscal 2016 30 million compared 28 million fiscal 2015 41 million fiscal 2014 cash used investing activities fiscal 2016 2015 2014 included 35 million 32 million 39 million respectively capital expenditures upgrade equipment infrastructure additional investments environmental safetyrelated assets fiscal years presented significant majority capital expenditures associated projects amr 40 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc financing activities net cash used financing activities fiscal 2016 65 million compared 119 million fiscal 2015 88 million fiscal 2014 cash used financing activities fiscal 2016 2015 2014 included 20 million cash dividends fiscal year 36 million 91 million 64 million respectively net repayments debt refer nongaap financial measures credit facilities following summary outstanding balances availability credit facilities longterm debt exclusive capital lease obligations thousands 1 remaining availability net 16 million outstanding standby letters credit august 31 2016 april 6 2016 certain subsidiaries entered third amended restated credit agreement “amended credit agreement” among schnitzer steel industries inc us borrower schnitzer steel canada ltd canadian borrower bank america na administrative agent lenders party thereto amended restated existing credit agreement dated february 9 2011 “prior credit agreement” amended credit agreement provides 335 million c15 million senior secured revolving credit facilities maturing april 2021 335 million credit facility includes 50 million sublimit letters credit 25 million sublimit swingline loans 50 million sublimit multicurrency borrowings subject terms conditions amended credit agreement company may request commitments us credit facility increased aggregate amount exceeding 100 million certain conditions met including preapproval lenders achievement certain pro forma financial results prior credit agreement provided unsecured credit facilities revolving loans 670 million c30 million maturing april 2017 sized credit facility renewal based historic expected future usage believe borrowing capacity amended credit agreement adequate cover short longterm financing needs interest rates outstanding indebtedness amended credit agreement based option either london interbank offered rate libor canadian equivalent plus spread 175 275 amount spread based pricing grid tied company’s leverage ratio less 250 fiscal quarters ended ending may 31 2016 august 31 2016 november 30 2016 greater prime rate federal funds rate plus 050 daily rate equal onemonth libor plus 175 case plus spread zero 100 based pricing grid tied companys leverage ratio addition commitment fees payable unused portion credit facilities rates 020 040 based pricing grid tied leverage ratio borrowings outstanding credit facility 180 million 215 million august 31 2016 2015 respectively weighted average interest rate amounts outstanding facility 301 195 august 31 2016 2015 respectively use credit facility fund working capital expenditures dividends share repurchases acquisitions amended credit agreement contains various representations warranties events default financial customary covenants limit subject certain exceptions ability among things incur suffer exist certain liens make investments incur guaranty additional indebtedness enter consolidations mergers acquisitions sales assets make distributions restricted payments change nature business engage transactions affiliates enter restrictive agreements including agreements restrict ability subsidiaries make distributions financial covenants amended credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness c consolidated asset coverage ratio defined consolidated asset value eligible assets divided consolidated funded indebtedness financial covenants require maintenance minimum consolidated fixed charge coverage ratio 125 100 fiscal quarters ending may 31 2016 august 31 2016 november 30 2016 150 100 thereafter maximum leverage ratio 055 100 minimum asset coverage ratio 090 100 fiscal quarters ending may 31 2016 august 31 2016 november 30 2016 100 thereafter 41 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc august 31 2016 compliance financial covenants amended credit agreement consolidated fixed charge coverage ratio required less 125 100 243 100 august 31 2016 consolidated leverage ratio required 055 100 029 100 august 31 2016 asset coverage ratio required less 090 100 125 100 august 31 2016 companys obligations amended credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain subsidiaries’ assets including equipment inventory accounts receivable expect remain compliance financial covenants amended credit agreement assurances able event market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach financial covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreement case would required evaluate available alternatives take appropriate steps obtain alternative funds assurances alternative funds sought could obtained would adequate acceptable terms addition august 31 2016 2015 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 company exercised option redeem bonds prior maturity company repaid bonds full september 2016 obligation reported current liability within shortterm borrowings august 31 2016 consolidated balance sheet capital expenditures capital expenditures totaled 35 million 32 million 39 million fiscal 2016 2015 2014 respectively fiscal 2016 2015 capital expenditures primarily upgrade equipment infrastructure additional investments environmental compliance safetyrelated projects capital expenditures fiscal 2014 included completion investment construction nonferrous processing facility puerto rico currently plan invest range 45 million capital expenditures maintenance environmental compliance safetyrelated projects fiscal 2017 increase expenditures made fiscal 2016 2015 primarily due increased environmental project spending using cash generated operations available lines credit environmental compliance commitment recycling operating business environmentally responsible manner requires us continue invest facilities improve environmental presence communities operate part capital expenditures invested 14 million 10 million 8 million environmental projects fiscal 2016 2015 2014 respectively plan invest range 19 million capital expenditures environmental projects fiscal 2017 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties operate formerly owned operated sites part adjacent portland harbor superfund site “the site” see note 9 commitments contingencies notes consolidated financial statements part ii item 8 report discussion matter insurance policies believe provide reimbursement costs incur defense remediation mitigation natural resource damages claims connection site although assurances policies cover costs may incur significant cash outflows future related site could reduce amounts available borrowing could otherwise used working capital expenditures dividends share repurchases acquisitions could result failure maintain compliance certain covenants debt agreements could adversely impact liquidity share repurchase program pursuant amended share repurchase program existing authorization repurchase approximately 18 million shares class common stock deem repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program beginning fiscal 2015 repurchased approximately 69 million shares class common stock program 42 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc repurchased approximately 68 thousand shares total 1 million 203 thousand shares total 3 million openmarket transactions fiscal 2015 2016 respectively assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs working capital expenditures share repurchases dividends joint ventures debt service requirements environmental obligations acquisitions however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurance supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2016 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2027 2 interest payments longterm debt based interest rates effect august 31 2016 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2016 16 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill longlived assets environmental costs inventories accounting business combinations revenue recognition 43 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ fourth quarter fiscal 2015 changed internal organizational reporting structure combine auto metals recycling businesses resulted formation new operating reportable segment amr replacing mrb apb operating segments change led identification components within amr based disaggregation financial information regularly reviewed segment management geographic area components similar economic characteristics aggregated reporting units goodwill reassigned affected reporting units using relative fair value approach date reassessment july 1 2015 beginning date goodwill carried two regionallydefined reporting units one consisting single component 168 million allocated goodwill consisting two components similar economic characteristics aggregated reporting unit 9 million allocated goodwill smb operating segment goodwill allocated testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform twostep quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest second quarter fiscal 2016 identified combination sustained weak market conditions including adverse effects lower commodity selling prices constraining impact lower price environment supply raw materials negatively impacted volumes recent financial performance decline market capitalization triggering event requiring interim impairment test goodwill allocated reporting units measurement date interim goodwill impairment test february 1 2016 reporting unit 9 million goodwill february 1 2016 first step impairment test showed fair value reporting unit less carrying amount indicating potential impairment based second step impairment test concluded implied fair value goodwill remained reporting unit resulting impairment carrying amount reporting units goodwill totaling 9 million 44 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc reporting unit 166 million goodwill february 1 2016 estimated fair value reporting unit exceeded carrying value approximately 27 projections used income approach reporting unit took consideration impact current market conditions ferrous nonferrous recycled metals cost obtaining adequate supply flows scrap metal including endoflife vehicles recent trends selfserve parts sales projections assumed limited recovery operating margins current depressed levels multiyear period including benefits recently initiated costsaving productivity improvement measures marketbased wacc used income approach reporting unit 112 terminal growth rate used discounted cash flow model 2 assuming components fair value estimate held constant increase wacc 200 basis points weaker anticipated improvements operating margins could resulted failure step one quantitative impairment test reporting unit fourth quarter fiscal 2016 performed annual goodwill impairment test july 1 2016 testing date balance companys goodwill 167 million carried single reporting unit within amr operating segment elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue operating margin growth rates marketbased wacc factors may result changes estimates reporting units fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable declines market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities metals recycling operations asset group generally comprised regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group auto parts operations generally auto parts store asset group steel manufacturing business single asset group test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2016 recorded 8 million impairment charges longlived tangible intangible assets associated certain regional metals recycling operations used auto parts store locations charges reported consolidated statements operations within asset impairment charges restructuring charges exit related activities discontinued operations related component company qualifying discontinued operations reporting respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based current plans dispose abandon asset end original useful life depreciation accelerated beginning determination made fiscal 2016 recognized accelerated depreciation due shortened useful lives connection site closures idled equipment 7 million 45 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2016 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued see contingencies environmental note 9 commitments contingencies notes consolidated financial statements part ii item 8 report inventories primarily consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar merchant bar wire rod used salvaged vehicles reported within finished goods inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory amr generally sells recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume 46 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc business combinations business combination recognize assets acquired liabilities assumed noncontrolling interests acquiree acquisition date measured fair values date generally using marketbased income approach measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired utilize management estimates incorporate input independent third party valuation firm determination fair values estimates valuations require us make significant assumptions including projections future events operating performance determining highest best use assets interests acquired acquisition costs expensed incurred revenue recognition recognize revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally detailed documents support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2017 2016 2015 following discussion analysis provides information management believes relevant assessment understanding results operations financial condition discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products prior fourth quarter fiscal 2017 internal organizational reporting structure supported two operating reportable segments auto metals recycling amr business steel manufacturing business smb fourth quarter fiscal 2017 accordance plan announced june 2017 modified internal organizational reporting structure combine steel manufacturing operations reported smb segment oregon metals recycling operations reported within amr segment forming new division named cascade steel scrap css oregon metals recycling operations include shredding export facilities portland oregon also include four metals recycling feeder yard operations located oregon southern washington one metals recycling joint venture ownership interest oregon metals recycling operations source substantially scrap raw material needs steel manufacturing operations change organizational structure intended enhance flexibility generate internal synergies enable us effectively adjust market changes across recycling steel manufacturing operations began reporting new segment structure fourth quarter fiscal 2017 reflected annual report form 10k segment data comparable periods presented recast conform current period presentation activities reorganized segments recasting historical information impact consolidated financial performance ssi periods presented use operating income measure segment performance restructuring charges exitrelated activities allocated segment operating income include information measurement segments’ performance expense related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented see note 18 segment information notes consolidated financial statements part ii item 8 report discussion primary activities reportable segment total assets reportable segment operating results continuing operations revenues external customers concentration sales foreign countries results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities respond changes selling prices processed metal seeking adjust purchase prices unprocessed scrap metal order manage impact operating income believe generally benefit sustained periods rising recycled scrap metal selling prices allow us better maintain increase operating income unprocessed scrap metal flow facilities recycled scrap metal selling prices decline sustained period operating margins typically compress deep water port facilities east west coasts united states everett massachusetts providence rhode island oakland california tacoma washington portland oregon access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal shipping bulk cargoes steel manufacturers located europe africa middle east asia north central south america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand quarterly operating results fluctuate based variety factors including limited changes market conditions ferrous nonferrous recycled metal finished steel products supply scrap metal domestic markets varying demand used auto parts selfservice retail stores factors influenced degree impact seasonal changes including severe weather conditions impact timing shipments inhibit construction activity utilizing products scrap metal collection facilities retail admissions auto parts stores 28 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc strategic priorities continue closely monitor economic conditions remain focused following core strategies plans meet business goals objectives • longterm expansion ferrous scrap metal supply processing sales volumes operating margins • use seven deep water ports groundbased logistics network directly access customers domestically internationally meet demand products wherever greatest • optimization integrated operating platform maximize opportunities synergies cost efficiencies volumes • continuous improvement initiatives increase production efficiency enhance effectiveness commercial activities reduce operating expense • technology process improvement investments increase separation recovery recycled materials shredding process generate valueadded products • increase market share initiatives maximize volumes selective partnerships alliances acquisitions auto parts stores key suppliers metal recycling facilities look enhance geographic proximity operations among facilities recycling presence northwestern us northern california northeastern us near export facilities tacoma washington portland oregon oakland california everett massachusetts enhances access regional supplies scrap metal endoflife vehicles fiscal 2015 initiated implemented restructuring initiatives consisting idling underutilized metals recycling assets including shredder johnston rhode island another shredder surrey british columbia closing seven auto parts stores amr closely align business market conditions additional cost savings productivity improvement initiatives including adjustments operating capacity additional facility closures identified initiated fiscal 2016 facility closures fiscal 2016 included small shredding facility concord new hampshire six auto parts stores closed fiscal 2015 qualified discontinued operations reporting beginning fiscal 2015 see note 8 discontinued operations note 10 restructuring charges exitrelated activities notes consolidated financial statements part ii item 8 report key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us western canada global economic conditions changes supply demand conditions strength us dollar availability price raw material alternatives affect market prices sales volumes recycled ferrous nonferrous metal global markets steel products western us western canada significant impact results operations reportable segments commencing fiscal 2012 spanning first half fiscal 2016 markets adversely impacted slowdown economic activity globally macroeconomic uncertainty combined global steelmaking overproduction strengthening us dollar resulted deteriorating market conditions global steel manufacturers volatile pricing swings weak price environment recycled metals fiscal 2015 first half fiscal 2016 exacerbated decline iron ore prices raw material used steelmaking blast furnaces compete eaf mills use ferrous scrap metal primary feedstock lowpriced steel billets use iron ore primary raw material direct substitutes ferrous scrap metal manufacture finished steel also contributed lower scrap metal demand prices years low economic growth us lower scrap metal price environment contributed constrained scrap flows domestic supply markets led significantly lower margins amr business fiscal 2015 first half fiscal 2016 prices margins recovered second half fiscal 2016 fiscal 2017 combination improved us global economic growth lower chinese steel exports driven higher domestic demand reductions less efficient steelmaking capacity contributed improved demand prices ferrous recycled scrap metal positively impacting operating results 29 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc operating results fiscal 2017 benefited improved market conditions increased sales diversification improved supply volumes expanded nonferrous metal recovery additional benefits multiyear cost reduction productivity improvement measures compared prior two years higher price environment scrap metal fiscal 2017 together benefits commercial initiatives improve supply channels improved trend us economic conditions led increase supply scrap metal domestic market including endoflife vehicles resulting higher processed volumes compared fiscal 2016 higher price environment also positively impacted spread direct purchase costs selling prices ferrous recycled metal compared prior year executive overview financial results generated consolidated revenues 17 billion fiscal 2017 increase 25 14 billion consolidated revenues generated fiscal 2016 primarily due improved market conditions recycled metals domestic export markets resulting higher average net selling prices increased sales volumes compared prior year including benefits increased sales diversification consolidated operating income 56 million fiscal 2017 compared consolidated operating loss 8 million fiscal 2016 adjusted consolidated operating income fiscal 2017 54 million compared 28 million prior year adjusted results fiscal 2017 exclude net recoveries previously impaired assets 1 million net gain restructuring exitrelated activities less 1 million recoveries related resale modification previously contracted shipments 1 million adjusted results fiscal 2016 exclude impact goodwill impairment charge 9 million asset impairment charges 21 million restructuring charges exitrelated activities 7 million recoveries related resale modification previously contracted shipments 1 million see reconciliation adjusted consolidated operating income loss nongaap financial measures end item 7 operating results fiscal 2017 benefited better market conditions increased sales diversification improved supply volumes expanded nonferrous metal recovery additional benefits cost savings productivity improvement initiatives compared fiscal 2016 higher price environment scrap metal fiscal 2017 together benefits commercial initiatives improve supply channels improved trend us economic conditions also led increase supply scrap metal including endoflife vehicles resulting higher processed volumes improved operating results primarily amr compared prior year stronger price environment also positively impacted spread direct purchase costs selling prices ferrous recycled metal amr metal spread fiscal 2017 expanding approximately 10 compared prior year operating results fiscal 2016 adversely impacted lower price environment included sharp declines commodity selling prices first half fiscal 2016 resulting unfavorable impact average inventory accounting year compares favorable impact average inventory accounting fiscal 2017 relative performance benefits drivers major contributor improvement operating results year csss operating results improved operating income 5 million fiscal 2017 compared 5 million prior year csss operating results included net recovery previously impaired assets 1 million fiscal 2017 compared asset impairments 4 million fiscal 2016 benefits css higher finished steel selling prices sales volumes fiscal 2017 offset continued pressure lowpriced imports adverse impact downtime costs associated major equipment upgrades steel mill first quarter fiscal 2017 operating results fiscal 2016 also adversely impacted noncash goodwill impairment charge 9 million reporting unit within amr noncash asset impairment charges 21 million primarily amr see results operations asset impairment charges recoveries net item 7 details asset impairment charges consolidated selling general administrative sga expense fiscal 2017 increased 23 million 15 compared prior year primarily due higher employeerelated expenses including increase incentive compensation accruals resulting improved financial performance expenses related higher volumes increased environmental liabilities increase partially offset incremental benefits cost savings productivity improvement measures sga expense fiscal 2016 included 6 million benefit insurance reimbursement recent years implemented number cost reduction productivity improvement measures closely align business market conditions combined benefit measures initiated since beginning fiscal 2015 represents targeted annual improvement operating performance approximately 95 million fiscal 2017 achieved full 95 million combined benefits related measures compared 78 million 28 million benefits fiscal 2016 2015 respectively total achieved approximately 160 million combined annual benefits operating performance since announcing initial phase cost savings productivity initiatives end fiscal 2012 charges incurred connection foregoing initiatives discussed results operations restructuring charges exitrelated activities item 7 30 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc net income continuing operations attributable ssi fiscal 2017 45 million 160 per diluted share compared net loss continuing operations attributable ssi 18 million 066 per diluted share prior year adjusted net income continuing operations attributable ssi fiscal 2017 43 million 153 per diluted share compared 19 million 069 per diluted share prior year see reconciliation adjusted net income loss continuing operations attributable ssi nongaap financial measures end item 7 following items highlight selected liquidity capital structure metrics • net cash provided operating activities 100 million fiscal 2017 compared 99 million prior year • debt 145 million august 31 2017 compared 193 million prior yearend • debt net cash 138 million august 31 2017 compared 166 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 31 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc results operations nm meaningful 1 amr sells small portion recycled ferrous metal css prices approximate local market rates intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance reportable segments exitrelated activities consist asset impairments accelerated depreciation net gains exitrelated disposals related site closures 4 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 32 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc operate business across two reportable segments amr css additional financial information relating reportable segments contained note 18 segment information notes consolidated financial statements part ii item 8 report auto metals recycling lt long ton 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 average sales price volume information excludes platinum group metals pgms catalytic converters 3 cars purchased auto parts stores fiscal 2017 compared fiscal 2016 amr segment revenues fiscal 2017 increased 29 compared fiscal 2016 primarily due improved market conditions recycled metals domestic export markets resulting higher average net selling prices increased sales volumes compared prior year including benefits increased sales diversification average net selling prices shipments ferrous scrap metal fiscal 2017 increased 25 compared prior year ferrous sales volumes fiscal 2017 also increased 9 compared prior year due higher export domestic shipments fiscal 2017 additionally nonferrous sales volumes fiscal 2017 higher 14 compared prior year nonferrous average net selling prices higher 5 33 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc amr segment operating income operating income fiscal 2017 91 million compared 23 million fiscal 2016 adjusted operating income fiscal 2017 90 million compared 48 million prior year see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2017 benefited better market conditions increased sales diversification improved supply volumes expanded nonferrous metal recovery additional benefits cost savings productivity improvement initiatives compared fiscal 2016 higher price environment scrap metal fiscal 2017 together benefits commercial initiatives improve supply channels improved trend us economic conditions also led increase supply scrap metal including endoflife vehicles resulting higher processed volumes compared prior year stronger price environment also positively impacted spread direct purchase costs selling prices ferrous recycled metal amr metal spread fiscal 2017 expanding approximately 10 compared prior year operating results fiscal 2016 adversely impacted lower price environment included sharp declines commodity selling prices first half fiscal 2016 resulting unfavorable impact average inventory accounting year compares favorable impact average inventory accounting fiscal 2017 relative performance benefits drivers major contributor improvement amrs operating results year second quarter fiscal 2016 identified triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 9 million reporting unit within amr also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 16 million primarily related certain regional metals recycling operations used auto parts store locations certain previouslyidled recycling equipment assets see results operations asset impairment charges recoveries net item 7 details asset impairment charges amr sga expense fiscal 2017 increased 10 million 9 compared prior year primarily due higher employeerelated expenses including increase incentive compensation accruals resulting improved financial performance expenses related higher volumes increased environmental liabilities increase partially offset incremental benefits cost savings productivity improvement measures reduce direct costs production sga expense amr operating results fiscal 2017 positively impacted 11 million incremental benefits measures amrs results operations include operating results discontinued operations see note 8 discontinued operations notes consolidated financial statements part ii item 8 report fiscal 2016 compared fiscal 2015 amr segment revenues 33 decrease ferrous revenues 27 decrease nonferrous revenues fiscal 2016 primarily due significantly lower average net selling prices ferrous nonferrous scrap metal well reduced sales volumes compared prior year experiencing sharp declines first half fiscal 2016 net selling prices shipments ferrous scrap metal increased significantly third quarter fiscal 2016 primarily due improved demand decreasing fourth quarter returning levels seen beginning fiscal year overall demand recycled metals endmarkets weaker prior year primarily due continued low global economic growth relative strength us dollar impact lower iron ore prices fiscal year resulted significantly lower average net selling prices ferrous nonferrous scrap metal reduced sales volumes fiscal 2016 compared prior year amr segment operating income loss operating income fiscal 2016 23 million compared operating loss 166 million prior year adjusted operating income fiscal 2016 48 million excludes goodwill impairment charge 9 million asset impairment charges 16 million benefits contract settlements 1 million adjusted operating income fiscal 2015 26 million excludes goodwill impairment charge 141 million asset impairment charges 44 million impact reselling modifying terms certain previously contracted bulk ferrous shipments 7 million see reconciliation amr adjusted operating income loss nongaap financial measures end item 7 operating results fiscal 2016 2015 adversely impacted lower price environment included sharp declines commodity selling prices first half year asset impairment charges recorded year operating results second half fiscal 2016 benefited increase ferrous average net selling prices experiencing sharp declines first half fiscal year resulted adverse impact average inventory accounting fiscal 2016 significantly less adverse impact fiscal 2015 operating results fiscal 2016 also benefited cost savings productivity improvement measures initiated fiscal 2015 expanded fiscal 2016 reduce direct costs production sga expense excluding adverse impact asset impairment charges benefits contributed higher 34 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc operating margins per ferrous ton sold amr compared fiscal 2015 despite lower average net selling prices sales volumes sga expense fiscal 2016 decreased 16 million 13 compared fiscal 2015 primarily resulting reduced employeerelated expenses second quarter fiscal 2016 identified triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 9 million reporting unit within amr operating segment also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 16 million primarily related certain regional metals recycling operations used auto parts store locations certain recycling equipment assets previously idled second quarter fiscal 2015 identified triggering event requiring interim impairment test goodwill resulted noncash goodwill impairment charge 141 million also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 44 million primarily connection certain strategic actions undertook improve operating performance included reducing shredding capacity closing auto parts stores cascade steel scrap st short ton equivalent 2000 pounds 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap 2 recycling revenues include primarily sales ferrous nonferrous recycled scrap metal export markets 3 price information shown netting cost freight incurred deliver product customer 4 rolling mill utilization fiscal 2017 based effective annual production capacity current conditions 580 thousand tons finished steel products reflecting decrease effective finished steel production capacity resulting decommissioning older rolling mill first quarter fiscal 2017 fiscal 2017 compared fiscal 2016 css segment revenues fiscal 2017 increased 36 million 12 compared fiscal 2016 primarily due increased export sales ferrous recycled scrap metal higher average selling prices finished steel products reflecting impact higher steelmaking raw material costs higher sales volumes finished steel products due stronger demand west coast markets css segment operating income operating income fiscal 2017 5 million compared operating income 5 million prior year adjusted operating income fiscal 2017 5 million compared adjusted operating income 9 million fiscal 2016 adjusted results fiscal 2017 exclude net recovery previously impaired assets 1 million adjusted results fiscal 2016 exclude asset impairment charges 4 million see reconciliation css adjusted operating income nongaap financial measures end item 7 35 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc operating results fiscal 2017 benefited stronger demand finished steel products west coast markets fourth quarter improved market conditions ferrous nonferrous recycled scrap metal export markets benefits improved conditions partially offset continued pressure lowpriced imports costs 2 million associated major equipment upgrade steel mill first quarter fiscal 2017 operating results fiscal years adversely impacted selling prices finished steel products falling faster cost goods sold primarily first half year resulting compressed operating margins operating results fiscal 2016 adversely affected impairment charges 2 million steel mill supplies inventory 2 million investment metals recycling joint venture fiscal 2017 operating results included net recovery previously impaired assets 1 million consisting primarily gain sale previously impaired metals recycling joint venture investment fiscal 2016 compared fiscal 2015 css segment revenues decreased 131 million 30 fiscal 2016 compared prior year decrease primarily due reduced average selling prices sales volumes finished steel products driven increased competition lowerpriced imports finished steel products impact selling prices reduced steelmaking raw material costs primarily first half fiscal 2016 finished steel sales volumes improved second half fiscal 2016 compared first half fiscal year primarily due impact seasonally stronger construction activity remained lower levels achieved fiscal 2015 weaker demand export markets ferrous nonferrous recycled scrap metal contributed reduced recycled metal revenues compared prior year css segment operating income operating income fiscal 2016 5 million decrease 16 million compared 21 million prior year adjusted operating income fiscal 2016 excluding asset impairment charges 4 million 9 million compared adjusted operating income 21 million fiscal 2015 see reconciliation css adjusted operating income nongaap financial measures end item 7 yearoveryear reduction operating results primarily due declining price environment finished steel products first half fiscal 2016 led selling prices falling faster cost goods sold additionally finished steel sales volumes decreased primarily due increased competition imported steel products rolling mill utilization rate decreased primarily due lower sales volumes compared prior year optimization inventory levels 36 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc asset impairment charges recoveries net periods presented recorded noncash impairment charges accelerated depreciation certain longlived assets well recoveries certain previously impaired assets following asset impairment charges subsequent recoveries excluding goodwill impairment charges recorded consolidated statements operations thousands corporate expense comprised almost entirely unallocated sga expense management certain administrative services benefit reportable segments corporate sga expense 41 million 30 million 35 million fiscal years 2017 2016 2015 respectively higher level expense fiscal 2017 due increase incentive compensation accruals resulting improved financial performance inclusion 6 million benefit insurance reimbursement fiscal 2016 37 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc restructuring charges exitrelated activities consolidated operating results fiscal 2017 also included net benefit restructuring charges exitrelated activities less 1 million compared charges 7 million fiscal 2016 13 million fiscal 2015 additional restructuring charges exitrelated activities less 1 million included results discontinued operations fiscal 2017 compared charges 1 million fiscal 2016 4 million fiscal 2015 restructuring charges consisted severance contract termination restructuring costs exitrelated activities less 1 million fiscal 2017 included gain recorded connection disposition business assets related elimination metals recycling feeder yard operation resulting net benefit restructuring charges exitrelated activities period exitrelated activities 2 million 7 million fiscal 2016 2015 respectively consisted asset impairments accelerated depreciation assets connection closure certain operations net gains exitrelated disposals charges incurred periods presented primarily pertain restructuring initiatives announced second quarter fiscal 2015 expanded subsequent periods q215 plan consolidated operating results periods presented also reflect benefits cost reduction productivity improvement measures initiated prior second quarter fiscal 2015 immaterial amount associated costs since beginning fiscal 2015 initiated implemented number additional cost reduction productivity improvement measures combined targeted annual benefit approximately 95 million initiatives included announced first quarter fiscal 2015 q115 plan followed costsaving exitrelated measures part q215 plan targeting combined benefit annual operating performance approximately 60 million subsequently increased 5 million first quarter fiscal 2016 second quarter fiscal 2016 expanded q215 plan initiatives additional 30 million cost reduction productivity improvements associated q115 plan driven combination revenue drivers production sga cost reduction initiatives targeted aggregate annual improvement 14 million achieved fiscal 2016 improvements performance associated q215 plan included two components first component reflected strategic actions initiated second quarter fiscal 2015 consisting idling shredding equipment closing seven auto parts stores amr align business market conditions targeting benefit annual operating performance approximately 18 million approximately onethird reduced depreciation expense part second component q215 plan april 2015 initiated measures also announced integration former metals recycling business auto parts business combined amr platform order achieve operational synergies reduce annual operating expenses primarily sga expense approximately 28 million personnel reductions eliminating organizational layers consolidating shared service functions reducing administrative costs expanded q215 plan target initiating measures primarily first second quarters fiscal 2016 additional 35 million expected benefits primarily reductions personnel savings procurement activities streamlining administrative supporting services functions adjustments operating capacity additional facility closures approximately twothirds target coming reduction sga expense rest reduction production costs primarily amr fiscal 2017 achieved approximately 95 million combined benefits related measures compared 78 million 28 million benefits fiscal 2016 2015 respectively total achieved approximately 160 million combined annual benefit operating performance since announcing first cost savings productivity initiatives end fiscal 2012 includes approximately 95 million benefits described 38 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc restructuring charges exitrelated activities incurred connection cost reduction productivity improvement plans last three fiscal years ended august 31 comprised following thousands include restructuring charges exitrelated activities measurement performance reportable segments significant majority restructuring charges require us make cash payments see note 10 restructuring charges exitrelated activities notes consolidated financial statements part ii item 8 report income net income net 1 million 1 million 4 million fiscal 2017 2016 2015 respectively change fiscal 2015 2016 primarily due changes foreign currency gains losses transactions denominated canadian dollars information foreign currency transactions see note 2 summary significant accounting policies notes consolidated financial statements part ii item 8 report interest expense interest expense 8 million 9 million 9 million fiscal 2017 2016 2015 respectively impact fiscal 2017 interest expense reduced average borrowings bank credit facilities compared fiscal 2016 offset higher interest rates impact fiscal 2016 interest expense reduced average borrowings compared fiscal 2015 offset higher interest rates writeoff debt issuance costs 1 million information outstanding debt balances see note 7 debt notes consolidated financial statements part ii item 8 report income tax expense benefit income tax expense benefit continuing operations 1 million 1 million 13 million fiscal 2017 2016 2015 respectively 39 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc effective tax rate continuing operations fiscal 2017 expense 27 lower us federal statutory rate 35 primarily due full valuation allowance positions federal income tax refund claims partially offset increases deferred tax liabilities indefinitelived assets jurisdictions valuation allowances deferred tax assets result negative objective evidence including effects historical losses tax jurisdictions outweighing positive objective subjective evidence indicating likely associated tax benefit realized effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization deductible foreign investment basis tax purposes income tax expense comprised primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization deductible foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed reasonably possible sufficient positive evidence required release portion valuation allowance within next twelve months may result reduction valuation allowance could material see note 15 income taxes notes consolidated financial statements part ii item 8 report discussion discontinued operations fiscal 2015 ceased operations seven auto parts stores six qualified discontinued operations reporting operations six qualifying stores previously reported within amr reportable segment fiscal 2016 2015 recorded impairment charges accelerated depreciation 1 million 3 million respectively longlived assets discontinued auto parts stores impaired assets fiscal 2016 consisted primarily capital lease assets associated buildings two leased properties results discontinued operations comprised following thousands see note 8 discontinued operations notes consolidated financial statements part ii item 8 report discussion 40 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 7 million 27 million august 31 2017 2016 respectively cash balances intended used primarily working capital expenditures dividends share repurchases investments acquisitions use excess cash hand reduce amounts outstanding credit facilities august 31 2017 debt 145 million compared 193 million august 31 2016 debt net cash 138 million compared 166 million august 31 2016 refer nongaap financial measures debt net cash decreased 28 million primarily result positive cash flows generated operating activities operating activities net cash provided operating activities fiscal 2017 100 million compared 99 million fiscal 2016 145 million fiscal 2015 net cash provided operating activities fiscal 2017 primarily benefited improved operating performance compared prior year sources cash fiscal 2017 included 33 million increase accounts payable primarily due higher raw material purchase prices timing payments 12 million increase accrued payroll related liabilities due increases incentive compensation accruals resulting improved financial performance uses cash fiscal 2017 included 22 million increase inventory due higher raw material purchase prices higher volumes hand impact timing purchases sales 36 million increase accounts receivable primarily due increases recycled metal selling prices sales volumes timing sales collections sources cash fiscal 2016 included 28 million decrease inventories due impact lower raw material prices timing purchases sales 6 million decrease refundable income taxes due collection tax refunds 6 million insurance reimbursement uses cash included 11 million increase accounts receivable due timing sales collections significant amount cash generated operating activities fiscal 2015 2016 stemmed reduction net working capital primarily result declining price environment ferrous nonferrous scrap metal finished steel lesser extent lower inventory volumes well positive operating performance sources cash fiscal 2015 included 56 million decrease accounts receivable primarily due timing sales collections 69 million decrease inventories due impacts decreasing raw materials prices timing purchases sales uses cash included 36 million decrease accounts payable due lower raw material purchase prices timing payments investing activities net cash used investing activities fiscal 2017 45 million compared 30 million fiscal 2016 28 million fiscal 2015 cash used investing activities fiscal 2017 2016 2015 included 45 million 35 million 32 million respectively capital expenditures upgrade equipment infrastructure additional investments environmental safetyrelated assets fiscal years presented significant majority capital expenditures associated projects amr financing activities net cash used financing activities fiscal 2017 75 million compared 65 million fiscal 2016 119 million fiscal 2015 cash used financing activities fiscal 2017 2016 2015 included 20 million cash dividends fiscal year 48 million 36 million 91 million respectively net repayments debt refer nongaap financial measures 41 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc debt following summary outstanding balances availability credit facilities longterm debt exclusive capital lease obligations thousands 1 remaining availability net 10 million outstanding standby letters credit august 31 2017 senior secured revolving credit facilities provide revolving loans 335 million c15 million mature april 2021 pursuant credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based option either london interbank offered rate libor canadian equivalent plus spread 175 275 amount spread based pricing grid tied company’s leverage ratio greater prime rate b federal funds rate plus 050 c daily rate equal onemonth libor plus 175 case plus spread zero 100 based pricing grid tied companys leverage ratio addition commitment fees payable unused portion credit facilities rates 020 040 based pricing grid tied leverage ratio borrowings outstanding credit facilities 140 million 180 million august 31 2017 2016 respectively weighted average interest rate amounts outstanding facility 348 301 august 31 2017 2016 respectively use credit facilities fund working capital expenditures dividends share repurchases investments acquisitions credit agreement contains various representations warranties events default financial customary covenants limit subject certain exceptions ability among things incur suffer exist certain liens make investments incur guaranty additional indebtedness enter consolidations mergers acquisitions sales assets make distributions restricted payments change nature business engage transactions affiliates enter restrictive agreements including agreements restrict ability subsidiaries make distributions financial covenants credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness c consolidated asset coverage ratio defined consolidated asset value eligible assets divided consolidated funded indebtedness august 31 2017 compliance financial covenants credit agreement consolidated fixed charge coverage ratio required less 150 100 316 100 august 31 2017 consolidated leverage ratio required 055 100 022 100 august 31 2017 asset coverage ratio required less 100 180 100 august 31 2017 companys obligations credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain subsidiaries’ assets including equipment inventory accounts receivable expect remain compliance financial covenants credit agreement assurances able event market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach financial covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreement case would required evaluate available alternatives take appropriate steps obtain alternative funds assurances alternative funds sought could obtained would adequate acceptable terms august 31 2016 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 exercised option redeem bonds prior maturity repaid bonds full september 2016 obligation reported current liability within shortterm borrowings august 31 2016 consolidated balance sheet 8 million repayment reported cash outflow financing activities year ended august 31 2017 consolidated statement cash flows 42 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc capital expenditures capital expenditures totaled 45 million 35 million 32 million fiscal 2017 2016 2015 respectively capital expenditures years primarily upgrade equipment infrastructure additional investments environmental safetyrelated projects currently plan invest range 55 million 70 million capital expenditures fiscal 2018 increase expenditures made fiscal 2017 2016 primarily due increased equipment replacement upgrades investment nonferrous processing technologies environmental projects using cash generated operations available credit facilities environmental compliance building commitment recycling operating business environmentally responsible manner continue invest facilities improve environmental presence communities operate part capital expenditures invested 17 million 14 million 10 million environmental projects fiscal 2017 2016 2015 respectively plan invest 20 million capital expenditures environmental projects fiscal 2018 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties operate formerly owned operated sites part adjacent portland harbor superfund site “the site” see note 9 commitments contingencies notes consolidated financial statements part ii item 8 report discussion matter believe possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations cash flows liquidity insurance policies believe provide reimbursement costs incur defense remediation mitigation natural resource damages claims connection site although assurances policies cover costs may incur significant cash outflows future related site could reduce amounts available borrowing could otherwise used working capital expenditures dividends share repurchases investments acquisitions could result failure maintain compliance certain covenants debt agreements could adversely impact liquidity share repurchase program pursuant amended share repurchase program existing authorization repurchase approximately 18 million shares class common stock deem repurchases appropriate evaluate long shortrange forecasts well anticipated sources uses cash determining course action share repurchase program beginning fiscal 2015 repurchased approximately 69 million shares class common stock program repurchased approximately 68 thousand shares total 1 million 203 thousand shares total 3 million openmarket transactions fiscal 2015 2016 respectively repurchase shares fiscal 2017 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs working capital expenditures share repurchases dividends joint ventures debt service requirements environmental obligations investments acquisitions however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurances supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none requiring disclosure pursuant item 303 regulation sk securities exchange act 1934 43 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2017 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2027 2 interest payments longterm debt based interest rates effect august 31 2017 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement including purchases inventory items sold ordinary course business 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2017 10 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill longlived assets environmental costs inventories accounting business combinations revenue recognition goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly quantitative impairment test beginning third quarter fiscal 2017 earlyadopted accounting standard update revises quantitative goodwill impairment test impact consolidated financial statements revised guidance apply onestep quantitative test record amount goodwill impairment excess reporting units carrying amount fair value exceed total amount goodwill allocated reporting unit 44 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue operating margin growth rates marketbased wacc factors may result changes estimates reporting units fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable declines market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations fourth quarter fiscal 2017 performed annual goodwill impairment test july 1 2017 testing date balance companys goodwill 167 million carried single reporting unit within amr operating segment elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities metals recycling operations reported within amr asset group generally comprised regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group prior combination css fourth quarter fiscal 2017 steel manufacturing operations oregon metals recycling operations distinct asset groups test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based current plans dispose abandon asset end original useful life depreciation accelerated beginning determination made 45 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2017 included 1 million related third party investigation costs portland harbor superfund site determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued see contingencies environmental note 9 commitments contingencies notes consolidated financial statements part ii item 8 report inventories consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar merchant bar wire rod used salvaged vehicles supplies inventories stated lower cost market consider estimated future selling prices determining estimated net realizable value inventory generally sell recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand accounting process use record metal quantities relies significant estimates respect unprocessed metal inventory rely weighed quantities reduced estimated amounts moved production estimates utilize estimated recoveries yields based historical trends time estimates reasonably good indicators ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventory estimates however due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume revenue recognition recognize revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing 46 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally contractual terms support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations three fiscal years ended august 31 2018 2017 2016 following discussion analysis provides information management believes relevant assessment understanding financial condition results operations discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report business founded 1906 schnitzer steel industries inc “ssi” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business use segment operating income measure segment performance allocate corporate interest income expense income taxes income expense reportable segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition allocate certain items segment operating income management include information measurement performance operating segments unallocated items include restructuring charges exitrelated activities charges related legacy environmental liabilities provisions certain legal matters unallocated income expense operating income reportable segment reflect operating income reportable segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented see note 16 segment information notes consolidated financial statements part ii item 8 report discussion primary activities reportable segment total assets reportable segment operating results continuing operations reportable segment revenues external customers concentration sales foreign countries results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities respond changes selling prices processed metal seeking adjust purchase prices unprocessed scrap metal order manage impact operating income believe generally benefit sustained periods rising recycled scrap metal selling prices allow us better maintain increase operating income unprocessed scrap metal flow facilities recycled scrap metal selling prices decline sustained period operating margins typically compress deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california tacoma washington portland oregon access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal enabling us ship bulk cargoes steel manufacturers located europe africa middle east asia north america central america south america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers wholesalers recycled metal processors globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand results operations also depend demand prices finished steel products manufacture uses internally sourced ferrous recycled scrap metal primary feedstock well raw materials steel mill oregon sells industrial customers primarily north america quarterly operating results fluctuate based variety factors including limited changes market conditions ferrous nonferrous recycled metal finished steel products supply scrap metal domestic markets varying demand used auto parts selfservice retail stores certain factors influenced degree impact seasonal changes including severe weather conditions impact timing shipments inhibit construction activity utilizing products scrap metal collection facilities retail admissions parts sales auto parts stores 29 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc strategic priorities continue closely monitor economic conditions remain focused following core strategies plans meet business goals objectives • longterm expansion ferrous scrap metal supply processing sales volumes operating margins • technology process improvement investments increase separation recovery recycled materials shredding process generate valueadded products • use seven deep water ports groundbased logistics network directly access customers domestically internationally meet demand products wherever greatest • optimization integrated recycling steel manufacturing operating platforms maximize opportunities synergies cost efficiencies volumes • continuous improvement initiatives increase production efficiency enhance effectiveness commercial activities ensure safety employees work reduce operating expense • increase market share initiatives maximize volumes selective partnerships alliances acquisitions • continued adoption sustainable business practices manage social environmental impacts improve operating efficiency natural resource stewardship key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us global economic conditions changes supply demand conditions strength us dollar availability price raw material alternatives trade actions tariffs affect market prices sales volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations reportable segments commencing fiscal 2012 spanning first half fiscal 2016 markets adversely impacted slowdown economic activity globally macroeconomic uncertainty combined global steelmaking overproduction strengthening us dollar resulted deteriorating market conditions global steel manufacturers volatile pricing swings weak price environment recycled metals fiscal 2015 first half fiscal 2016 exacerbated decline iron ore prices raw material used steelmaking blast furnaces compete eaf mills use ferrous scrap metal primary feedstock lowpriced steel billets use iron ore primary raw material direct substitutes ferrous scrap metal manufacture finished steel also contributed lower scrap metal demand prices years low economic growth us lower scrap metal price environment time contributed constrained scrap flows domestic supply markets led significantly lower margins amr business fiscal 2015 first half fiscal 2016 prices margins recovered second half fiscal 2016 fiscal 2017 2018 combination improved us global economic growth lower chinese steel exports development steel industries using eafs export markets contributed improved demand prices ferrous recycled scrap metal positively impacting operating results compared prior two years performance fiscal 2018 also benefited improvements market conditions increased sales diversification improved supply volumes higher price environment scrap metal fiscal 2018 together benefits commercial initiatives improve supply channels strong us economy led increase scrap supply flows facilities including endoflife vehicles resulting higher processed volumes compared fiscal 2017 2016 fiscal 2018 selling prices ferrous recycled metal rose gradually first three quarters followed modest decrease fourth quarter higher average selling prices supported expansion spread direct purchase costs selling prices ferrous recycled metal compared prior year operating margins also benefited improved volumes nonferrous material endoflife vehicles shredding process partially offset operating margin compression experienced near end fiscal 2018 result decrease average net selling prices certain nonferrous products driven primarily global impact new regulations measures put place policymakers china year including import regulations tariffs us scrap imports css business benefited fiscal 2018 reduced price pressure steel imports impact us tariffs steel imports steady demand finished steel products west coast markets contributed higher selling prices finished steel products css business experienced improved metal margins selling prices increasing faster raw material purchase prices combination operational synergies gained following integration steel manufacturing 30 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc oregon metals recycling operations fourth quarter fiscal 2017 led significantly improved results compared prior two years trade actions including tariffs quotas retaliation affected countries impact profit sales products certain cases impede ability sell certain export markets require us direct sales alternative market destinations cause quarterly operating results fluctuate information regarding potential impact changing conditions global markets including impact tariffs quotas trade actions business results operations see part item 1a risk factors report executive overview financial results generated consolidated revenues 24 billion fiscal 2018 increase 40 17 billion consolidated revenues generated fiscal 2017 reflecting significantly improved market conditions recycled metals domestic export markets increased supply flows sales diversification higherprice environment finished steel products compared prior year fiscal 2018 average net selling price ferrous recycled metal amr 31 higher compared prior year ferrous sales volumes amr 18 higher compared prior year average net selling price finished steel products fiscal 2018 increased 25 compared prior year consolidated operating income 149 million fiscal 2018 compared consolidated operating income 56 million fiscal 2017 amr reported operating income fiscal 2018 169 million compared 91 million prior year operating results amr fiscal 2018 benefited stronger market conditions ferrous recycled metal combination commercial initiatives led increase scrap supply flows facilities including endoflife vehicles higher processed volumes compared fiscal 2017 higherprice environment together benefits commercial initiatives also positively impacted spread direct purchase costs selling prices ferrous recycled metal amr metal spread fiscal 2018 expanding approximately 29 compared prior year css reported operating income 38 million fiscal 2018 compared 5 million prior year reflecting significantly higher metal margins selling prices increasing faster raw material purchase prices reduced price pressure steel imports steady demand finished steel products west coast markets well operational synergies gained following integration steel manufacturing oregon metals recycling operations fourth quarter fiscal 2017 form css division css’s operating results fiscal 2017 adversely impacted competition lowerpriced steel imports adverse impact downtime costs associated major equipment upgrades steel mill first quarter fiscal 2017 consolidated selling general administrative “sga” expense fiscal 2018 increased 37 million 22 compared prior year primarily due higher employeerelated expenses including 10 million increase incentive sharebased compensation accruals resulting improved financial performance 6 million increase legal professional services expenses accruals environmental liabilities totaling 7 million expenses related higher volumes net income continuing operations attributable ssi fiscal 2018 156 million 546 per diluted share compared 45 million 160 per diluted share prior year net income continuing operations attributable ssi fiscal 2018 included discrete income tax benefits totaling 37 million 130 per diluted share related release valuation allowances certain deferred tax assets income tax benefit 7 million 024 per diluted share related impacts us federal tax legislation enacted year following items highlight selected liquidity capital structure metrics • net cash provided operating activities 160 million fiscal 2018 compared 100 million prior year • debt 107 million august 31 2018 compared 145 million prior yearend • debt net cash 103 million august 31 2018 compared 138 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • share repurchases totaling 17 million fiscal 2018 compared share repurchases prior year 31 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc results operations 32 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc nm meaningful 1 amr sells small portion recycled ferrous metal css prices approximate local market rates intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance reportable segments exitrelated activities consist asset impairments accelerated depreciation net gains exitrelated disposals related site closures 4 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 33 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc operate business across two reportable segments amr css additional financial information relating reportable segments contained note 16 segment information notes consolidated financial statements part ii item 8 report auto metals recycling lt long ton equivalent 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 average sales price volume information excludes platinum group metals “pgms” catalytic converters 3 cars purchased auto parts stores fiscal 2018 compared fiscal 2017 amr segment revenues fiscal 2018 increased 40 compared fiscal 2017 primarily due stronger market conditions recycled metal domestic export markets resulting significantly higher average net selling prices increased sales volumes compared prior year amr’s revenues sales volumes fiscal 2018 also benefited increased sales diversification compared prior year 34 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc amr segment operating income operating income fiscal 2018 169 million compared 91 million fiscal 2017 operating results benefited stronger market conditions ferrous recycled metal combination commercial initiatives led increase scrap supply flows facilities including endoflife vehicles higher processed volumes compared fiscal 2017 higher price environment fiscal 2018 including period gradually rising selling prices ferrous recycled metal first three quarters followed modest decrease fourth quarter together benefits commercial initiatives supported expansion spread direct purchase costs selling prices ferrous recycled metal amr metal spread fiscal 2018 expanding approximately 29 compared prior year operating margins also benefited improved volumes nonferrous material endoflife vehicles shredding process partially offset operating margin compression experienced near end fiscal 2018 result decrease average net selling prices certain nonferrous products driven primarily global impact new regulations measures put place policymakers china year including import regulations tariffs us scrap imports amr selling general administrative “sga” expense fiscal 2018 increased 17 million 14 compared prior year primarily due higher employeerelated expenses including increase incentive compensation accruals result improved operating performance expenses related higher volumes fiscal 2017 compared fiscal 2016 amr segment revenues fiscal 2017 increased 29 compared fiscal 2016 primarily due improved market conditions recycled metals domestic export markets resulting higher average net selling prices increased sales volumes compared prior year including benefits increased sales diversification average net selling prices shipments ferrous scrap metal fiscal 2017 increased 25 compared prior year ferrous sales volumes fiscal 2017 also increased 9 compared prior year due higher export domestic shipments fiscal 2017 additionally nonferrous sales volumes fiscal 2017 higher 14 compared prior year nonferrous average net selling prices higher 5 amr segment operating income operating income fiscal 2017 91 million compared 23 million fiscal 2016 adjusted operating income fiscal 2017 90 million compared 48 million prior year see reconciliation amr adjusted operating income nongaap financial measures end item 7 operating results fiscal 2017 benefited better market conditions increased sales diversification improved supply volumes expanded nonferrous metal recovery additional benefits cost savings productivity improvement initiatives compared fiscal 2016 higher price environment scrap metal fiscal 2017 together benefits commercial initiatives improve supply channels improved trend us economic conditions also led increase supply scrap metal including endoflife vehicles resulting higher processed volumes compared prior year stronger price environment also positively impacted spread direct purchase costs selling prices ferrous recycled metal amr metal spread fiscal 2017 expanding approximately 10 compared prior year operating results fiscal 2016 adversely impacted lower price environment included sharp declines commodity selling prices first half fiscal 2016 resulting unfavorable impact average inventory accounting year compares favorable impact average inventory accounting fiscal 2017 relative performance benefits drivers major contributor improvement amr’s operating results year amr sga expense fiscal 2017 increased 10 million 9 compared prior year primarily due higher employeerelated expenses including increase incentive compensation accruals resulting improved financial performance expenses related higher volumes increased environmental liabilities increase partially offset incremental benefits cost savings productivity improvement measures reduce direct costs production sga expense amr operating results fiscal 2017 positively impacted approximately 11 million incremental benefits measures second quarter fiscal 2016 identified triggering event requiring interim impairment test goodwill allocated reporting units impairment test resulted noncash goodwill impairment charge 9 million reporting unit within amr also recorded noncash impairment charges accelerated depreciation certain longlived assets amr 16 million primarily related certain regional metals recycling operations used auto parts store locations certain previouslyidled recycling equipment assets see results operations asset impairment charges recoveries net item 7 details asset impairment charges 35 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc cascade steel scrap st short ton equivalent 2000 pounds nm meaningful 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap 2 recycling revenues include primarily sales ferrous nonferrous recycled scrap metal export markets 3 price information shown netting cost freight incurred deliver product customer 4 rolling mill utilization fiscal 2017 2018 based effective annual production capacity current conditions 580 thousand tons finished steel products reflecting decrease effective finished steel production capacity resulting decommissioning older rolling mill first quarter fiscal 2017 fiscal 2018 compared fiscal 2017 css segment revenues fiscal 2018 increased 141 million 42 compared fiscal 2017 primarily due significantly higher average selling prices finished steel products increased export sales ferrous recycled scrap metal higher average selling prices finished steel products reflect impacts higher steelmaking raw material costs compared prior year well reduced pressure steel imports css segment operating income operating income fiscal 2018 38 million compared operating income 5 million prior year improved operating results fiscal 2018 reflect significantly higher metal margins selling prices increasing faster raw material purchase prices reduced price pressure steel imports steady demand finished steel products west coast markets well operational synergies gained following integration steel manufacturing oregon metals recycling operations fourth quarter fiscal 2017 form css division css’s operating results fiscal 2017 adversely impacted competition lowerpriced steel imports adverse impact downtime costs associated major equipment upgrades steel mill first quarter fiscal 2017 fiscal 2017 compared fiscal 2016 css segment revenues fiscal 2017 increased 36 million 12 compared fiscal 2016 primarily due increased export sales ferrous recycled scrap metal higher average selling prices finished steel products reflecting impact higher steelmaking raw material costs higher sales volumes finished steel products due stronger demand west coast markets css segment operating income operating income fiscal 2017 5 million compared operating income 5 million prior year adjusted operating income fiscal 2017 5 million compared adjusted operating income 9 million fiscal 2016 adjusted results fiscal 2017 exclude net recovery previously impaired assets 1 million adjusted results fiscal 2016 exclude asset impairment charges 4 million see reconciliation css adjusted operating income nongaap financial measures end item 7 36 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc operating results fiscal 2017 benefited stronger demand finished steel products west coast markets fourth quarter improved market conditions ferrous nonferrous recycled scrap metal export markets benefits improved conditions partially offset continued pressure lowpriced imports costs 2 million associated major equipment upgrade steel mill first quarter fiscal 2017 operating results fiscal years adversely impacted selling prices finished steel products falling faster cost goods sold primarily first half year resulting compressed operating margins operating results fiscal 2016 adversely affected impairment charges 2 million steel mill supplies inventory 2 million investment metals recycling joint venture fiscal 2017 operating results included net recovery previously impaired assets 1 million consisting primarily gain sale previously impaired metals recycling joint venture investment asset impairment charges recoveries net periods presented recorded noncash impairment charges accelerated depreciation certain longlived assets well recoveries certain previously impaired assets following asset impairment charges subsequent recoveries excluding goodwill impairment charges recorded consolidated statements operations thousands 37 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc corporate sga expense 59 million 41 million 30 million fiscal years 2018 2017 2016 respectively higher level expense fiscal 2018 primarily due higher employeerelated expenses including increase 6 million incentive sharebased compensation accruals resulting improved financial performance 5 million increase legal professional services expenses primarily reflecting net impact legal settlements 6 million legacy environmental liabilities recorded year higher level expense fiscal 2017 compared fiscal 2016 due increase incentive compensation accruals resulting improved financial performance inclusion 6 million benefit insurance reimbursement fiscal 2016 fourth quarter fiscal 2018 modified measurement segment operating income classify legacy environmental charges within corporate order align measures chief executive officer considered company’s chief operating decision maker reviews performance makes decisions resource allocation change applied prospectively beginning fourth quarter fiscal 2018 charges incurred quarter reported within corporate division fourth quarter fiscal 2018 recorded 1 million legacy environmental charges corporate division prior change would classified within amr legacy environmental charges reflected amr’s operating results prior change material consolidated financial statements either individually aggregate environmental charges reported within sga expense consolidated statements operations restructuring charges exitrelated activities past several years implemented number cost reduction productivity improvement restructuring initiatives closely align business market conditions initiatives focused decreasing annual operating expenses reorganizing business reduce organizational layers streamline administrative supporting services functions optimizing operating capacity idling underutilized metals recycling assets closing facilities fiscal 2017 substantially completed multiyear program initiatives end fiscal 2017 achieved approximately 160 million combined annual benefits operating performance since initial phase initiatives announced end fiscal 2012 incurred significant restructuring charges exitrelated activities fiscal 2016 primarily related initiatives announced second quarter fiscal 2015 expanded subsequent periods “q2’15 plan” targeted annual improvement operating performance approximately 95 million approximately 160 million combined annual benefits achieved end fiscal 2017 multiyear program announced fiscal 2012 achieved approximately 95 million combined annual benefits related q2’15 plan fiscal 2017 compared 78 million fiscal 2016 consolidated operating results fiscal 2018 included net benefit restructuring charges exitrelated activities 1 million compared net benefit less 1 million fiscal 2017 charges 7 million fiscal 2016 restructuring charges consisted severance contract termination restructuring costs exitrelated activities consisted asset impairments accelerated depreciation assets connection closure certain operations net gains exitrelated disposals charges incurred periods presented primarily pertain q2’15 plan consolidated operating results periods presented also reflect benefits cost reduction productivity improvement measures initiated prior second quarter fiscal 2015 immaterial amount associated costs 38 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc restructuring charges exitrelated activities incurred connection cost reduction productivity improvement plans fiscal year ended august 31 2016 comprise following thousands include restructuring charges exitrelated activities measurement performance reportable segments significant majority restructuring charges require us make cash payments see note 9 restructuring charges exitrelated activities notes consolidated financial statements part ii item 8 report interest expense interest expense 9 million 8 million 9 million fiscal 2018 2017 2016 respectively impact interest expense reduced average borrowings bank credit facilities fiscal 2018 fiscal 2017 fiscal 2017 2016 offset higher interest rates information outstanding debt balances see note 7 debt notes consolidated financial statements part ii item 8 report income tax expense december 22 2017 president united states signed enacted law comprehensive tax legislation commonly referred tax cuts jobs act “tax act” except certain provisions effective tax years beginning january 1 2018 tax act’s primary change reduction federal statutory corporate tax rate 35 21 resulting pro rata reduction company’s tax rate 35 257 fiscal 2018 pertinent changes tax act effective fiscal 2018 include limited acceleration deductions qualified property placed service september 27 2017 addition effective company’s fiscal 2019 year tax act also limits deductibility executive compensation eliminates deduction qualified domestic production activities changes tax act significantly impact company upon enactment include implementation modified territorial tax system modifications foreign earnings subject us tax change tax law accounted period enactment recognized provisional discrete benefit 7 million second quarter fiscal 2018 due revaluation us net deferred tax liabilities reflect lower statutory rate effective tax rate fiscal 2018 also reflects tax acts lower federal statutory corporate tax rate known certain estimated effects based upon current interpretation tax act incorporated financial results beginning quarterly report form 10q quarterly period ended february 28 2018 additional clarification implementation guidance issued tax act may necessary adjust provisional amounts 39 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc adjustments provisional amounts could material results operations cash flows addition risk states foreign jurisdictions may amend tax laws response tax act could material impact future results operations cash flows effective tax rate continuing operations fiscal 2018 benefit 124 compared expense 27 prior year reported tax benefit pretax income fiscal 2018 primarily due release valuation allowances certain deferred tax assets resulting recognition discrete tax benefits totaling 37 million fiscal 2018 impact tax act release valuation allowances fiscal 2018 result sufficient positive evidence including cumulative income us canadian tax jurisdictions recent years projections future taxable income based primarily improved financial performance morelikelythannot deferred tax assets realized effective tax rate continuing operations fiscal 2017 lower us federal statutory rate time 35 primarily due full valuation allowance positions federal income tax refund claims partially offset increases deferred tax liabilities indefinitelived assets jurisdictions effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate time 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization deductible foreign investment basis tax purposes income tax expense composed primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence time including recent losses tax jurisdictions outweighing subjective positive evidence time indicating likely associated tax benefit would realized assess realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income consider negative positive evidence including weight evidence determine valuation allowances deferred tax assets required continue maintain valuation allowances certain deferred tax assets related certain jurisdictions result negative objective evidence including effects historical losses tax jurisdictions outweighing positive objective subjective evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed see note 13 income taxes notes consolidated financial statements part ii item 8 report discussion liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 5 million 7 million august 31 2018 2017 respectively cash balances intended used primarily working capital expenditures dividends share repurchases investments acquisitions use excess cash hand reduce amounts outstanding credit facilities august 31 2018 debt 107 million compared 145 million august 31 2017 debt net cash 103 million compared 138 million august 31 2017 refer nongaap financial measures operating activities net cash provided operating activities fiscal 2018 160 million compared 100 million fiscal 2017 99 million fiscal 2016 40 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc net cash provided operating activities fiscal 2018 primarily benefited improved operating performance compared prior year sources cash earnings fiscal 2018 included 26 million increase accounts payable due higher raw material purchase prices timing payments 11 million combined increase accrued liabilities accrued payroll related liabilities primarily due increased incentive compensation liabilities higher legal accruals uses cash fiscal 2018 included 45 million increase accounts receivable primarily due increases recycled metal finished steel selling prices sales volumes well timing sales collections 24 million increase inventories due higher raw material purchase prices higher volumes hand timing purchases sales sources cash earnings fiscal 2017 included 33 million increase accounts payable primarily due higher raw material purchase prices timing payments 12 million increase accrued payroll related liabilities due increases incentive compensation accruals resulting improved financial performance uses cash fiscal 2017 included 22 million increase inventories due higher raw material purchase prices higher volumes hand impact timing purchases sales 36 million increase accounts receivable primarily due increases recycled metal selling prices sales volumes timing sales collections sources cash fiscal 2016 included 28 million decrease inventories due impact lower raw material prices timing purchases sales 6 million decrease refundable income taxes due collection tax refunds 6 million insurance reimbursement uses cash included 11 million increase accounts receivable due timing sales collections significant amount cash generated operating activities fiscal 2016 stemmed reduction net working capital primarily result declining price environment ferrous nonferrous scrap metal finished steel lesser extent lower inventory volumes well positive operating performance investing activities net cash used investing activities fiscal 2018 73 million compared 45 million fiscal 2017 30 million fiscal 2016 cash used investing activities fiscal 2018 2017 2016 included 78 million 45 million 35 million respectively capital expenditures upgrade equipment infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets fiscal years presented significant majority capital expenditures associated projects amr financing activities net cash used financing activities fiscal 2018 88 million compared 75 million fiscal 2017 65 million fiscal 2016 cash used financing activities fiscal 2018 2017 2016 included 21 million cash dividends fiscal 2018 20 million cash dividends fiscal 2017 2016 41 million 48 million 36 million respectively net repayments debt refer nongaap financial measures cash used financing activities fiscal 2018 also included 17 million share repurchases compared share repurchases fiscal 2017 3 million fiscal 2016 debt following summary outstanding balances availability credit facilities longterm debt exclusive capital lease obligations thousands 1 remaining availability net 10 million outstanding standby letters credit august 31 2018 august 24 2018 certain subsidiaries entered first amendment third amended restated credit agreement “amended credit agreement” among schnitzer steel industries inc us borrower schnitzer steel canada ltd canadian borrower bank america na administrative agent lenders party thereto amends restates existing credit agreement dated april 6 2016 “prior credit agreement” amended credit agreement provides 700 million c15 million senior secured revolving credit facilities maturing august 2023 700 million credit facility includes 50 million sublimit letters credit 25 million sublimit swingline loans 50 million sublimit multicurrency borrowings prior credit agreement provided 335 million 41 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc c15 million senior secured credit facilities maturing april 2021 incurred 3 million debt issuance costs connection amended credit agreement amortized interest expense fiveyear term arrangement interest rates outstanding indebtedness credit facilities based option either london interbank offered rate “libor” canadian equivalent c loans plus spread 125 275 amount spread based pricing grid tied company’s consolidated funded debt ebitda ratio greater prime rate b federal funds rate plus 050 c daily rate equal onemonth libor plus 175 case plus spread zero 150 based pricing grid tied company’s consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 015 045 based pricing grid tied company’s consolidated funded debt ebitda ratio borrowings outstanding credit facilities 100 million 140 million august 31 2018 2017 respectively weighted average interest rate amounts outstanding credit facilities 357 348 august 31 2018 2017 respectively use credit facilities fund working capital expenditures dividends share repurchases investments acquisitions amended credit agreement contains various representations warranties events default financial customary covenants limit subject certain exceptions ability among things incur suffer exist certain liens make investments incur guaranty additional indebtedness enter consolidations mergers acquisitions sales assets make distributions restricted payments change nature business engage transactions affiliates enter restrictive agreements including agreements restrict ability subsidiaries make distributions financial covenants amended credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures certain environmental expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness august 31 2018 compliance financial covenants amended credit agreement consolidated fixed charge coverage ratio required less 150 100 397 100 august 31 2018 consolidated leverage ratio required 055 100 015 100 august 31 2018 company’s obligations amended credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain subsidiaries’ assets including equipment inventory accounts receivable expect remain compliance financial covenants amended credit agreement assurances able event market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach financial covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreement case would required evaluate available alternatives take appropriate steps obtain alternative funds assurances alternative funds sought could obtained would adequate acceptable terms august 31 2016 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 exercised option redeem bonds prior maturity repaid bonds full september 2016 8 million repayment reported cash outflow financing activities year ended august 31 2017 consolidated statement cash flows capital expenditures capital expenditures totaled 78 million 45 million 35 million fiscal 2018 2017 2016 respectively capital expenditures years primarily upgrade equipment facilities infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets currently plan invest range 80 million capital expenditures fiscal 2019 excluding capital expenditures growth projects using cash generated operations available credit facilities higher expenditures fiscal 2018 planned expenditures fiscal 2019 reflect increased equipment replacement upgrades investment nonferrous processing technologies environmental projects 42 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc environmental compliance building commitment recycling operating business environmentally responsible manner continue invest facilities improve environmental presence communities operate part capital expenditures discussed prior paragraph invested 20 million 17 million 14 million environmental projects fiscal 2018 2017 2016 respectively plan invest range 20 million capital expenditures environmental projects fiscal 2019 excluding additional environmental projects currently review projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties operate formerly owned operated sites part adjacent portland harbor superfund site “site” see note 8 commitments contingencies notes consolidated financial statements part ii item 8 report discussion matter well legacy environmental loss contingencies believe possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations cash flows liquidity insurance policies believe provide reimbursement costs incur defense remediation mitigation natural resource damages claims connection site although assurances policies cover costs may incur significant cash outflows future related site could reduce amounts available borrowing could otherwise used working capital expenditures dividends share repurchases investments acquisitions could result failure maintain compliance certain covenants debt agreements could adversely impact liquidity share repurchase program pursuant amended share repurchase program august 31 2018 existing authorization repurchase approximately 13 million shares class common stock deem repurchases appropriate evaluate short longrange forecasts well anticipated sources uses cash determining course action share repurchase program beginning fiscal 2016 repurchased approximately 7 million shares class common stock program repurchased approximately 203 thousand shares total 3 million openmarket transactions fiscal 2016 approximately 516 thousand shares total 17 million openmarket transactions fiscal 2018 repurchase shares fiscal 2017 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs working capital expenditures dividends share repurchases investments acquisitions joint ventures debt service requirements environmental obligations contingencies however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurances supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none requiring disclosure pursuant item 303 regulation sk securities exchange act 1934 43 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2018 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2027 2 interest payments longterm debt based interest rates effect august 31 2018 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2018 10 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related goodwill longlived assets environmental costs inventories accounting business combinations revenue recognition income taxes goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment likely required perform quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly quantitative impairment test beginning third quarter fiscal 2017 earlyadopted accounting standard update revises quantitative goodwill impairment test impact consolidated financial statements revised guidance apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit 44 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue operating margin growth rates marketbased wacc factors may result changes estimates reporting units’ fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable declines market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations fourth quarter fiscal 2018 performed annual goodwill impairment test july 1 2018 testing date balance company’s goodwill 168 million carried two reporting units within amr operating segment elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based plans dispose abandon asset end original useful life depreciation accelerated beginning determination made 45 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2018 included 2 million related third party investigation costs portland harbor superfund site company believes costs associated certain preremedial design investigation baseline sampling fully covered existing insurance coverage thus also insurance receivable recorded 2 million august 31 2018 determination specific remediation actions required amount natural resource damages allocation costs investigations remedy natural resource damages among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued notified may potentially responsible party sites portland harbor currently formerly owned operated us sites may responsibility costs due past disposal activities see contingencies environmental note 8 commitments contingencies notes consolidated financial statements part ii item 8 report inventories consist processed unprocessed scrap metal ferrous nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value consider estimated future selling prices determining estimated net realizable value inventory generally sell recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts sales orders accounting process use record scrap metal quantities relies significant estimates respect unprocessed scrap metal inventory rely weighed quantities reduced estimated amounts moved production process utilizes estimated metal recoveries yields based historical trends time estimates reasonably reliable indicators recycled scrap metal ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventories due inherent nature scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume 46 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc revenue recognition recognize revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally contractual terms support revenue recognition based transfer title risk loss recognize revenues partially loaded shipments requires estimate product weight involved partial shipments period end retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized present taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted see discussion credit risk contained item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations fiscal years ended august 31 2019 2018 following discussion analysis provides information management believes relevant assessment understanding financial condition results operations discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report discussion results operations fiscal year 2017 including comparison fiscal 2018 refer part ii item 7 managements discussion analysis financial condition results operations annual report form 10k year ended august 31 2018 filed securities exchange commission october 24 2018 business founded 1906 schnitzer steel industries inc “ssi” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business use segment operating income measure segment performance allocate corporate interest income expense income taxes income expense reportable segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition allocate certain items segment operating income management include information measurement performance operating segments unallocated items include restructuring charges exitrelated activities charges net recoveries related legacy environmental matters provisions certain legal matters unallocated income expense operating income reportable segment reflect operating income reportable segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented see note 16 segment information notes consolidated financial statements part ii item 8 report discussion primary activities reportable segment total assets reportable segment operating results continuing operations reportable segment revenues external customers concentration sales foreign countries results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities respond changes selling prices processed metal seeking adjust purchase prices unprocessed scrap metal order manage impact operating income believe generally benefit sustained periods rising recycled scrap metal selling prices allow us better maintain increase operating income unprocessed scrap metal flow facilities recycled scrap metal selling prices decline particularly sustained period operating margins typically compress deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california tacoma washington portland oregon access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal enabling us ship bulk cargoes steel manufacturers located europe africa middle east asia north america central america south america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers wholesalers recycled metal processors globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand results operations also depend demand prices finished steel products manufacture uses internally sourced ferrous recycled scrap metal primary feedstock well raw materials steel mill oregon sells industrial customers primarily north america 29 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc quarterly operating results fluctuate based variety factors including limited changes market conditions ferrous nonferrous recycled metal finished steel products supply scrap metal domestic markets varying demand used auto parts selfservice retail stores certain factors influenced degree impact seasonal changes including severe weather conditions impact timing shipments inhibit construction activity utilizing products scrap metal collection facilities production levels yards retail admissions parts sales auto parts stores trade actions including tariffs retaliation affected countries licensing inspection requirements impact level profitability sales products certain cases impede restrict ability sell certain export markets require us direct sales alternative market destinations cause quarterly operating results fluctuate information regarding potential impact changing conditions global markets including impact tariffs quotas trade actions import restrictions business results operations see part item 1a risk factors report strategic priorities continue closely monitor economic conditions remain focused following core strategies plans meet business goals objectives • longterm expansion ferrous nonferrous scrap metal supply processing sales volumes operating margins • technology investments process improvements increase separation recovery recycled materials shredding process expand product optionality • productivity continuous improvement initiatives ensure safety employees increase operating efficiency effectiveness advance sustainable business practices improve natural resource stewardship reduce operating expense • use seven deep water ports groundbased logistics network directly access customers domestically internationally meet demand products wherever greatest • optimization integrated recycling steel manufacturing operating platforms maximize opportunities synergies cost efficiencies volumes • increase market share initiatives maximize volumes selective partnerships alliances acquisitions key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us demand products cyclical nature sensitive changes general economic conditions timing magnitude economic cycles industries products used including global steel manufacturing nonresidential infrastructure construction us difficult predict global economic conditions changes supply demand conditions strength us dollar availability price raw material alternatives trade actions tariffs affect market prices sales volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations reportable segments beginning second half fiscal 2016 fiscal 2018 combination improved us global economic growth lower chinese steel exports increased use eafs steel manufacturers export markets contributed improved demand prices ferrous recycled scrap metal positively impacting operating results fiscal 2018 selling prices ferrous recycled metal rose first three quarters followed modest decrease fourth quarter higher price environment scrap metal fiscal 2018 together benefits increased sales diversification commercial initiatives improve supply channels strong us economy led increase scrap supply flows facilities including endoflife vehicles resulting higher processed volumes compared recent prior years higher average selling prices supported expansion spread direct purchase costs selling prices ferrous recycled metal compared prior year operating margins also benefited improved volumes nonferrous material endoflife vehicles shredding process partially offset operating margin compression experienced near end fiscal 2018 result decrease average net selling prices certain nonferrous products driven primarily global impact new regulations measures put place china year including import regulations tariffs us scrap imports 30 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc fiscal 2018 css business benefited reduced price pressure steel imports impact us tariffs steel imports steady demand finished steel products west coast markets contributed higher selling prices finished steel products css experienced improved metal margins fiscal 2018 selling prices increasing faster raw material purchase prices combination operational synergies gained following integration steel manufacturing oregon metals recycling operations fourth quarter fiscal 2017 led significantly improved results compared prior year fiscal 2019 weaker market conditions recycled metals primarily due slower global economic growth effects tariffs regulatory measures resulted lower average net selling prices ferrous nonferrous recycled metal products lower ferrous export sales volumes compared fiscal 2018 operating results amr fiscal 2019 decreased significantly compared fiscal 2018 result operating margin compression decline average net selling prices recycled metal products outpaced reduction purchase costs raw materials average net selling prices ferrous recycled metal trended downwards since third quarter fiscal 2018 domestic ferrous sales volumes fiscal 2019 increased compared prior year reflecting strong demand us market particularly first half fiscal 2019 partially offsetting adverse impact weaker ferrous export market conditions lower average net selling prices nonferrous average net selling prices fiscal 2019 decreased significantly compared fiscal 2018 primarily reflecting reduced demand nonferrous products globally well continued impact chinese import restrictions tariffs certain nonferrous products put place starting second half fiscal 2018 fiscal 2019 css benefited reduced pressure steel imports higher net selling prices finished steel products particularly first quarter fiscal 2019 resulting higher finished steel margins fiscal 2019 compared prior year however benefits offset lower finished steel recycled metal sales volumes increased steelmaking consumables costs compared fiscal 2018 resulting lower operating results css yearoveryear executive overview financial results generated consolidated revenues 21 billion fiscal 2019 decrease 10 24 billion consolidated revenues generated fiscal 2018 primarily reflecting weaker market conditions recycled metals globally resulting lower average net selling prices ferrous nonferrous products compared prior year fiscal 2019 average net selling prices ferrous nonferrous recycled metal amr 9 18 lower respectively compared prior year steel revenues fiscal 2019 flat compared prior year reflecting impact higher average net selling prices finished steel products offset lower finished steel sales volumes compared prior year consolidated operating income 84 million fiscal 2019 compared 149 million fiscal 2018 amr reported operating income fiscal 2019 96 million compared 169 million prior year decrease amr operating results fiscal 2019 primarily result operating margin compression decline average net selling prices ferrous nonferrous products outpaced reduction purchase costs raw materials partially offset benefits productivity initiatives higher nonferrous sales volumes compared prior year lower average ferrous selling prices fiscal 2019 primarily reflected weaker price environment recycled metals domestic markets effects tariffs regulatory measures demand recycled metals export markets lower average nonferrous selling prices fiscal 2019 primarily resulted reduced demand nonferrous products globally well continued effects chinese import restrictions tariffs certain nonferrous products put place starting second half fiscal 2018 spread direct purchase costs selling prices ferrous recycled metal amr fiscal 2019 contracted approximately 4 compared prior year average net selling prices amr’s nonferrous joint products recovered shredding process comprising primarily zorba decreased 26 fiscal 2019 compared prior year contributing significantly operating margin compression amr fiscal 2019 css reported operating income 32 million fiscal 2019 compared 38 million prior year reflecting lower sales recycled scrap metal lower finished steel sales volumes partially offset higher finished steel margins driven effects higher price environment benefits productivity initiatives consolidated selling general administrative “sga” expense fiscal 2019 decreased 17 million 8 compared prior year primarily due decreased employeerelated expenses including lower incentive compensation accruals decreased environmentalrelated legal professional services expenses fiscal 2019 undertook productivity initiatives aimed delivering 35 million annual benefits order mitigate weaker price environment ferrous nonferrous markets expect benefits achieved combination production cost efficiencies reductions sga expense increases retail sales total approximately 75 targeted benefits amr remainder split css corporate achieved 80 total targeted benefits fiscal 2019 full amount expected achieved fiscal 2020 fiscal 2019 achieved approximately 30 million benefits result initiatives 31 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc net income continuing operations attributable ssi shareholders fiscal 2019 57 million 201 per diluted share compared 156 million 546 per diluted share prior year adjusted net income continuing operations attributable ssi shareholders fiscal 2019 61 million 216 per diluted share compared 161 million 564 per diluted share prior year reported adjusted net income continuing operations attributable ssi shareholders fiscal 2018 included discrete income tax benefits totaling 37 million 130 per diluted share related release valuation allowances certain deferred tax assets income tax benefit 7 million 024 per diluted share related impacts us federal tax legislation enacted year see reconciliation adjusted net income continuing operations attributable ssi shareholders nongaap financial measures end item 7 following items highlight selected liquidity capital structure metrics • net cash provided operating activities 145 million fiscal 2019 compared 160 million prior year • debt 105 million august 31 2019 compared 107 million prior yearend • debt net cash 93 million august 31 2019 compared 103 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 • share repurchases totaling 13 million fiscal 2019 compared 17 million prior year 32 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc results operations nm meaningful 1 amr sells small portion recycled ferrous metal css prices approximate local market rates intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 restructuring charges consist expense severance contract termination restructuring costs management include measurement performance reportable segments exitrelated activities consist asset impairments accelerated depreciation net gains exitrelated disposals related site closures 4 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 33 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc operate business across two reportable segments amr css additional financial information relating reportable segments contained note 16 segment information notes consolidated financial statements part ii item 8 report auto metals recycling amr lt long ton equivalent 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 average sales price volume information excludes platinum group metals “pgms” catalytic converters 3 cars purchased auto parts stores amr segment revenues fiscal 2019 decreased 12 compared fiscal 2018 primarily due weaker market conditions recycled metal globally resulting lower average net selling prices ferrous nonferrous products compared fiscal 2018 despite lower price environment domestic ferrous sales volumes fiscal 2019 increased 17 compared prior year due increased us steel mill utilization partially offsetting adverse impact weaker ferrous export market conditions year nonferrous revenues fiscal 2019 decreased 11 compared prior year average net selling prices decreased 18 compared fiscal 2018 primarily reflecting reduced demand nonferrous products globally well continued impact chinese import restrictions tariffs certain nonferrous products put place starting second half fiscal 2018 34 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc amr segment operating income operating income fiscal 2019 96 million compared 169 million fiscal 2018 decrease amr operating results fiscal 2019 primarily result operating margin compression decline average net selling prices ferrous nonferrous products outpaced reduction purchase costs raw materials lower average ferrous nonferrous selling prices fiscal 2019 reflect effects tariffs regulatory measures demand recycled metals export markets weaker price environment recycled metals domestic markets reduced demand nonferrous products globally spread direct purchase costs selling prices ferrous recycled metal amr fiscal 2019 contracted approximately 4 compared prior year average net selling prices amr’s nonferrous joint products recovered shredding process comprising primarily zorba decreased 26 fiscal 2019 compared prior year contributing significantly operating margin compression amr fiscal 2019 adverse effects lower average net selling prices recycled metals partially offset benefits productivity initiatives higher nonferrous sales volumes compared prior year positive contributions limitedduration contract substantially complete end fiscal 2019 provided high margin source supply benefited amr operating income 20 million fiscal 2019 compared 23 million prior year amr sga expense fiscal 2019 decreased 2 million 2 compared prior year primarily due lower employeerelated expenses including reduced incentive compensation accruals cascade steel scrap css st short ton equivalent 2000 pounds 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap 2 recycling revenues include primarily sales ferrous nonferrous recycled scrap metal export markets 3 price information shown netting cost freight incurred deliver product customer 4 rolling mill utilization based effective annual production capacity current conditions 580 thousand tons finished steel products css segment revenues fiscal 2019 decreased 21 million 4 compared fiscal 2018 primarily due significantly lower sales ferrous recycled scrap metal steel revenues flat compared prior year reflecting impact higher average net selling prices finished steel products offset lower finished steel sales volumes compared prior year css segment operating income operating income fiscal 2019 32 million compared operating income 38 million prior year decreased operating results fiscal 2019 primarily reflect impact lower finished steel sales volumes recycled scrap metal sales partially offset higher finished steel margins driven effects higher price environment benefits productivity initiatives corporate sga expense decreased 15 million 25 compared prior year primarily due decreased employeerelated expenses including lower incentive compensation accruals decreased environmentalrelated legal professional services expenses partially offset 2 million charge related settlement wage hour class action lawsuit 35 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc productivity initiatives fiscal 2019 undertook productivity initiatives aimed delivering 35 million annual benefits order mitigate weaker price environment ferrous nonferrous markets expect benefits achieved combination production cost efficiencies reductions sga expense increases retail sales total approximately 75 targeted benefits amr remainder split css corporate achieved 80 total targeted benefits fiscal 2019 full amount expected achieved fiscal 2020 fiscal 2019 achieved approximately 30 million benefits result initiatives income tax december 22 2017 president united states signed enacted law comprehensive tax legislation commonly referred tax cuts jobs act “tax act” except certain provisions effective tax years beginning january 1 2018 tax act’s primary change reduction federal statutory corporate tax rate 35 21 resulting pro rata reduction company 35 257 fiscal 2018 full reduction 21 fiscal 2019 change tax law accounted period enactment recognized discrete benefit 7 million second quarter fiscal 2018 due revaluation us net deferred tax liabilities reflect lower statutory rate effective tax rate fiscal 2018 also reflected application tax act’s lower federal statutory corporate tax rate fiscal 2018 taxable income accounting impacts tax act complete november 30 2018 recorded material adjustments provisional amounts recorded second quarter fiscal 2018 related tax act effective tax rate continuing operations fiscal 2018 benefit 124 reported tax benefit pretax income fiscal 2018 primarily due release valuation allowances certain deferred tax assets resulting recognition discrete tax benefits totaling 37 million fiscal 2018 impact tax act release valuation allowances fiscal 2018 result sufficient positive evidence time including cumulative income us canadian tax jurisdictions recent years projections future taxable income based primarily improved financial performance morelikelythannot deferred tax assets realized assess realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income consider negative positive evidence including weight evidence determine valuation allowances deferred tax assets required continue maintain valuation allowances certain deferred tax assets related certain jurisdictions result negative objective evidence including effects historical losses tax jurisdictions outweighing positive objective subjective evidence indicating morelikelythannot associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed see note 13 income taxes notes consolidated financial statements part ii item 8 report discussion liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities 36 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc sources uses cash balances 12 million 5 million august 31 2019 2018 respectively cash balances intended used primarily working capital expenditures dividends share repurchases investments acquisitions use excess cash hand reduce amounts outstanding credit facilities august 31 2019 debt 105 million compared 107 million august 31 2018 debt net cash 93 million august 31 2019 compared 103 million august 31 2018 see reconciliation debt net cash nongaap financial measures end item 7 operating activities net cash provided operating activities fiscal 2019 145 million compared 160 million fiscal 2018 sources cash earnings fiscal 2019 included 33 million decrease inventories due lower raw material purchase prices timing payments sales 9 million decrease accounts receivable due lower selling prices timing sales collections uses cash fiscal 2019 included 19 million decrease accrued payroll related liabilities primarily due incentive compensation payments made first quarter fiscal 2019 17 million decrease accounts payable primarily due lower raw material purchase prices timing payments sources cash earnings fiscal 2018 included 26 million increase accounts payable due higher raw material purchase prices timing payments 11 million combined increase accrued liabilities accrued payroll related liabilities primarily due increased incentive compensation liabilities higher legal accruals uses cash fiscal 2018 included 45 million increase accounts receivable primarily due increases recycled metal finished steel selling prices sales volumes well timing sales collections 24 million increase inventories due higher raw material purchase prices higher volumes hand timing purchases sales investing activities net cash used investing activities fiscal 2019 90 million compared 73 million fiscal 2018 cash used investing activities fiscal 2019 included capital expenditures 95 million upgrade equipment infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets compared 78 million prior year significant majority capital expenditures associated projects amr financing activities net cash used financing activities fiscal 2019 47 million compared 88 million fiscal 2018 uses cash fiscal 2019 2018 included 21 million payment dividends 13 million 17 million respectively share repurchases uses cash fiscal 2019 also included 4 million net repayments debt compared 41 million prior year refer nongaap financial measures end item 7 debt following summary outstanding balances availability credit facilities longterm debt exclusive capital lease obligations thousands 1 remaining availability net 10 million outstanding standby letters credit august 31 2019 37 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc senior secured revolving credit facilities provide revolving loans 700 million c15 million mature august 2023 pursuant credit agreement bank america na administrative agent lenders party thereto 700 million credit facility includes 50 million sublimit letters credit 25 million sublimit swingline loans 50 million sublimit multicurrency borrowings interest rates outstanding indebtedness credit agreement based option either london interbank offered rate “libor” canadian equivalent c loans plus spread 125 275 amount spread based pricing grid tied consolidated funded debt ebitda ratio greater prime rate b federal funds rate plus 050 c daily rate equal onemonth libor plus 175 case plus spread zero 150 based pricing grid tied consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 015 045 based pricing grid tied consolidated funded debt ebitda ratio borrowings outstanding credit facilities 97 million 100 million august 31 2019 2018 respectively weighted average interest rate amounts outstanding credit facilities 378 357 august 31 2019 2018 respectively use credit facilities fund working capital expenditures dividends share repurchases investments acquisitions credit agreement contains various representations warranties events default financial customary covenants limit subject certain exceptions ability among things incur suffer exist certain liens make investments incur guaranty additional indebtedness enter consolidations mergers acquisitions sales assets make distributions restricted payments change nature business engage transactions affiliates enter restrictive agreements including agreements restrict ability subsidiaries make distributions financial covenants credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated adjusted ebitda less defined maintenance capital expenditures certain environmental expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness august 31 2019 compliance financial covenants credit agreement consolidated fixed charge coverage ratio required less 150 100 365 100 august 31 2019 consolidated leverage ratio required 055 100 014 100 august 31 2019 obligations credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain subsidiaries’ assets including equipment inventory accounts receivable expect remain compliance financial covenants credit agreement assurances able event market conditions negative factors adversely impact results operations financial position lead trend consolidated net losses maintain compliance financial covenants unable obtain amendment waiver lenders breach financial covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreement case would required evaluate available alternatives take appropriate steps obtain alternative funds assurances alternative funds sought could obtained would adequate acceptable terms capital expenditures capital expenditures totaled 95 million fiscal 2019 compared 78 million fiscal 2018 capital expenditures fiscal 2019 2018 primarily upgrade equipment facilities infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets currently plan invest 125 million capital expenditures fiscal 2020 including 60 million investments growth including new nonferrous processing technology support volume initiatives growth projects using cash generated operations available credit facilities environmental compliance building commitment recycling operating business environmentally responsible manner continue invest facilities improve environmental presence communities operate part capital expenditures discussed prior paragraph invested 36 million 20 million environmental projects fiscal 2019 2018 respectively plan invest range 15 million planned capital expenditures environmental projects fiscal 2020 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations 38 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc identified united states environmental protection agency “epa” one potentially responsible parties operate formerly owned operated sites part adjacent portland harbor superfund site “site” see note 8 commitments contingencies notes consolidated financial statements part ii item 8 report discussion matter well legacy environmental loss contingencies believe possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations cash flows liquidity insurance policies believe provide reimbursement costs incur defense remediation mitigation natural resource damages claims connection site although assurances policies cover costs may incur significant cash outflows future related site could reduce amounts available borrowing could otherwise used working capital expenditures dividends share repurchases investments acquisitions could result failure maintain compliance certain covenants debt agreements could adversely impact liquidity dividends august 2 2019 board directors declared dividend fourth quarter fiscal 2019 01875 per common share equates annual cash dividend 075 per common share dividends 075 per common share totaling 21 million declared paid fiscal 2019 share repurchase program pursuant amended share repurchase program august 31 2019 authorization repurchase remaining 759 thousand shares class common stock deem repurchases appropriate may repurchase common stock variety reasons optimize capital structure offset dilution related sharebased compensation arrangements consider several factors determining whether make share repurchases including among factors cash needs availability funding future business plans market price stock beginning fiscal 2018 repurchased approximately 72 million shares class common stock program repurchased approximately 516 thousand shares total 17 million openmarket transactions fiscal 2018 approximately 527 thousand shares total 13 million openmarket transactions fiscal 2019 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs working capital expenditures dividends share repurchases investments acquisitions joint ventures debt service requirements environmental obligations contingencies however event sustained market deterioration may need additional liquidity would require us evaluate available alternatives take appropriate steps obtain sufficient additional funds assurances supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none requiring disclosure pursuant item 303 regulation sk securities exchange act 1934 39 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2019 thousands 1 longterm debt represents principal amounts outstanding longterm debt maturities extend 2027 2 interest payments longterm debt based interest rates effect august 31 2019 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 3 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement 4 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2019 10 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related inventories longlived assets goodwill environmental costs revenue recognition income taxes inventories consist processed unprocessed scrap metal ferrous nonferrous mixed nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value consider estimated future selling prices determining estimated net realizable value inventory generally sell recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated net realizable value quantities hand shipped contracts sales orders 40 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc accounting process use record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production rely weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventories due inherent nature scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based plans dispose abandon asset end original useful life depreciation accelerated beginning determination made goodwill evaluate goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination morelikelythannot estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment morelikelythannot required perform quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly quantitative impairment test performing quantitative impairment test apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit estimate fair value reporting units using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow model employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year model discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use significant estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions critical assumptions primarily include revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants 41 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue operating margin growth rates marketbased wacc factors may result changes estimates reporting units’ fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable declines market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations fourth quarter fiscal 2019 performed annual goodwill impairment test july 1 2019 testing date balance company’s goodwill 170 million 1 million balance carried single reporting unit within amr elected first assess qualitative factors determine whether existence events circumstances led determination morelikelythannot estimated fair value reporting unit carrying goodwill less carrying amount result qualitative assessment concluded morelikelythannot fair value reporting unit carrying goodwill less carrying value testing date therefore impairment testing required environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental staff finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2019 included 1 million related third party investigation costs portland harbor superfund site determination specific remediation actions required amount natural resource damages allocation costs investigations remedy natural resource damages among prps believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued notified may potentially responsible party sites portland harbor currently formerly owned operated us sites may responsibility costs due past disposal activities see “contingencies environmental” note 8 commitments contingencies notes consolidated financial statements part ii item 8 report 42 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc revenue recognition recognize revenue upon satisfying promises transfer goods services customers terms contract nearly promises referred performance obligations consist transfer physical goods including ferrous nonferrous recycled scrap metal auto bodies auto parts finished steel products customers performance obligations satisfied point time transfer control goods customer nearly cases title risk loss goods transfer customer timing transfer title risk loss dictated customary explicitly stated contract terms example recognize revenue partially loaded bulk shipments ferrous recycled scrap metal contractual terms support revenue recognition based transfer title risk loss significant majority sales involve transfer control customer thus revenue recognition delivery customer’s destination example upon release goods shipper billandhold arrangements involve transfer control customer goods segregated inventory facility ready physical transfer customer shipping handling activities occur customer obtained control good accounted fulfillment costs rather additional promise contract shipping handling consideration freight revenue recognized control goods transfers customer freight expense accrued cost goods sold related revenue recognized certain regional markets enter contracts whereby arrange broker transfer scrap material scrap suppliers end customers transactions obtain substantive control scrap material goods transferred end customer example arranging processing warehousing material recognize revenue equal gross amount consideration expect receive customer principal alternatively transactions obtain substantive control scrap material product transferred end customer recognize revenue equal net amount consideration expect retain paying supplier purchase scrap metal agent transaction substantial majority brokerage arrangements nearly sales contracts reflect market pricing time contract executed one year less generally provide shipment within 30 60 days price agreed upon customer retail auto parts sales listed prices recognized point sale recognize revenue based contractually stated selling prices quantities shipped net sales tax adjusted estimated claims discounts claims customary recycled scrap metal industry arise variances quantity quality delivered products revenue adjustments may required settlement claims exceeds original estimates discounts offered certain finished steel customers qualify variable consideration discounts contingent upon future events variable consideration arising discounts recognized upon transfer finished steel products customers based upon either expected value likely amount experience sales returns therefore material provisions returns made sales recognized income taxes tax cuts jobs act december 22 2017 president united states signed enacted law comprehensive tax legislation commonly referred tax cuts jobs act “tax act” except certain provisions effective tax years beginning january 1 2018 tax act’s primary change reduction federal statutory corporate tax rate 35 21 resulting pro rata reduction company’s tax rate 35 257 fiscal 2018 full reduction 21 fiscal 2019 pertinent changes tax act include limited acceleration deductions qualified property placed service september 27 2017 limitations deductibility executive compensation elimination deduction qualified domestic production activities changes tax act significantly impact us upon enactment include implementation modified territorial tax system modifications foreign earnings subject us tax including tax global intangible lowtaxed income elected treat period costs incurred change tax law accounted period enactment recognized discrete benefit second quarter fiscal 2018 due revaluation us net deferred tax liabilities reflect lower statutory rate also recorded benefit second quarter fiscal 2018 resulting application lower federal statutory corporate tax rate fiscal 2018 projected taxable income time accounting impacts tax act complete november 30 2018 record material adjustments provisional amounts recorded second quarter fiscal 2018 related tax act 43 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc valuation allowances assess realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income consider negative positive evidence including weight evidence determine valuation allowances deferred tax assets required fiscal 2018 released valuation allowances certain us federal state canadian deferred tax assets resulting discrete tax benefits totaling 37 million release valuation allowances result sufficient positive evidence time including cumulative income recent years projections future taxable income based primarily improved financial performance morelikelythannot deferred tax assets realized continue maintain valuation allowances certain us federal state canadian puerto rican deferred tax assets recently issued accounting standards description recent accounting pronouncements may impact financial condition results operations cash flows see note 3 recent accounting pronouncements notes consolidated financial statements part ii item 8 report nongaap financial measures debt net cash debt net cash difference sum longterm debt shortterm borrowings ie total debt ii cash equivalents believe debt net cash useful measure investors cash equivalents used among things repay indebtedness netting total debt useful measure leverage following reconciliation debt net cash thousands net borrowings repayments debt net borrowings repayments debt sum borrowings longterm debt repayments longterm debt present amount net change borrowings repayments period believe useful investors meaningful presentation change debt following reconciliation net borrowings repayments debt thousands adjusted consolidated operating income adjusted amr operating income adjusted css operating income adjusted net income continuing operations attributable ssi shareholders adjusted diluted earnings per share continuing operations attributable ssi shareholders management believes providing nongaap financial measures adds meaningful presentation results business operations excluding adjustments charge related settlement wage hour class action lawsuit charges legacy environmental matters net recoveries restructuring charges exitrelated activities asset impairment charges net recoveries related resale modification previously contracted shipments income tax expense benefit allocated adjustments items related underlying business operational performance improves 44 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc periodtoperiod comparability results business operations adjusted operating results fiscal 2015 excluded impact resale modification terms significantly lower prices due sharp declines selling prices certain previously contracted bulk shipments delivery fiscal 2015 recoveries resulting settlements original contract parties began fiscal 2016 concluded fiscal 2018 reported within sga expense consolidated statements income also excluded measures following reconciliation adjusted consolidated operating income adjusted amr operating income adjusted css operating income thousands 1 legal environmental charges legacy environmental matters net recoveries fiscal years 2018 2017 recast comparability legacy environmental matters include charges net recoveries related portland harbor superfund site legacy environmental loss contingencies see note 8 commitments contingencies ‘portland harbor’ ‘other legacy environmental loss contingencies’ notes consolidated financial statements part ii item 8 report 45 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc following reconciliation adjusted net income continuing operations attributable ssi shareholders adjusted diluted earnings per share continuing operations attributable ssi shareholders thousands except per share data 1 legal environmental charges legacy environmental matters net recoveries fiscal years 2018 2017 recast comparability legacy environmental matters include charges net recoveries related portland harbor superfund site legacy environmental loss contingencies see note 8 commitments contingencies ‘portland harbor’ ‘other legacy environmental loss contingencies’ notes consolidated financial statements part ii item 8 report 2 income tax allocated aggregate adjustments reconciling reported adjusted net income continuing operations attributable ssi shareholders diluted earnings per share continuing operations attributable ssi shareholders determined based tax provision calculated without adjustments believe nongaap financial measures allow better understanding operating financial performance nongaap financial measures considered addition substitute directly comparable us gaap measures although find nongaap financial measures useful evaluating performance business reliance measures limited adjustments often material impact consolidated financial statements presented accordance us gaap therefore typically use adjusted amounts conjunction us gaap results address limitations 46 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc item 7aitem 7 management’s discussion analysis financial condition results operations section includes discussion operations fiscal years ended august 31 2020 2019 following discussion analysis provides information management believes relevant assessment understanding financial condition results operations discussion read conjunction consolidated financial statements related notes thereto part ii item 8 report selected financial data contained part ii item 6 report discussion results operations fiscal year 2018 including comparison fiscal 2019 refer part ii item 7 managements discussion analysis financial condition results operations annual report form 10k year ended august 31 2019 filed securities exchange commission october 24 2019 business founded 1906 schnitzer steel industries inc “ssi” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business use segment operating income measure segment performance allocate corporate interest income expense income taxes income expense segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit segments addition allocate certain items segment operating income management include information measurement performance segments unallocated items include restructuring charges exitrelated activities charges net recoveries related legacy environmental matters provisions certain legal matters unallocated income expense operating income segment reflect operating income segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented april 2020 announced intention modify internal organizational reporting structure functionally based integrated model consolidate operations sales services functional capabilities enterprise level change structure intended result agile organization solidify recent productivity improvement cost reduction initiatives expect complete transition first quarter fiscal 2021 resulting single operating reportable segment see note 18 segment information notes consolidated financial statements part ii item 8 report information regarding current reportable segments including discussion primary activities reportable segment total assets reportable segment operating results continuing operations reportable segment revenues external customers concentration sales foreign countries results operations depend large part demand prices recycled metal foreign domestic markets supply raw materials including endoflife vehicles available processed facilities respond changes selling prices processed metal seeking adjust purchase prices unprocessed scrap metal order manage impact operating income believe generally benefit sustained periods stable rising recycled scrap metal selling prices allow us better maintain increase operating income unprocessed scrap metal flow facilities recycled scrap metal selling prices decline either sharply sustained period operating margins typically compress deep water port facilities east west coasts us everett massachusetts providence rhode island oakland california tacoma washington portland oregon access public deep water port facilities kapolei hawaii salinas puerto rico allow us efficiently meet global demand recycled ferrous metal enabling us ship bulk cargoes steel manufacturers located europe africa middle east asia north america central america south america exports nonferrous recycled metal shipped containers various public docks specialty steelmakers foundries aluminum sheet ingot manufacturers copper refineries smelters brass bronze ingot manufacturers wire cable producers wholesalers recycled metal processors globally also transport ferrous nonferrous metals truck rail barge order transfer scrap metal facilities processing load shipments export facilities meet regional domestic demand 34 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc results operations also depend demand prices finished steel products manufacture uses internally sourced ferrous recycled scrap metal primary feedstock well raw materials steel mill oregon sells industrial customers primarily north america quarterly operating results fluctuate based variety factors including limited changes market conditions ferrous nonferrous recycled metal finished steel products supply scrap metal domestic markets varying demand used auto parts selfservice retail stores certain factors influenced degree impact seasonal changes including severe weather conditions impact timing shipments inhibit construction activity utilizing products scrap metal collection facilities production levels yards retail admissions parts sales auto parts stores trade actions including tariffs retaliation affected countries licensing inspection requirements impact level profitability sales products certain cases impede restrict ability sell certain export markets require us direct sales alternative market destinations cause quarterly operating results fluctuate information regarding potential impact changing conditions global markets including impact sanctions tariffs quotas trade actions import restrictions business results operations see part item 1a risk factors report strategic priorities continue closely monitor economic conditions remain focused following core strategies plans meet business goals objectives • longterm expansion ferrous nonferrous scrap metal supply processing sales volumes operating margins • technology investments process improvements increase separation recovery recycled materials shredding process expand product optionality • development new products expansion recycling services capabilities reach broader market enhance customer value increase operating margins • productivity continuous improvement initiatives ensure safety employees increase operating efficiency effectiveness advance sustainable business practices improve natural resource stewardship reduce operating expense • use seven deep water ports groundbased logistics network directly access customers domestically internationally meet demand products wherever greatest • optimization integrated recycling steel manufacturing operating platforms maximize opportunities synergies cost efficiencies volumes • increase market share initiatives maximize volumes selective partnerships alliances acquisitions key economic factors trends affecting industries operate sell recycled metals global steel industry production finished steel financial results largely depend supply raw materials us western canada demand recycled metal foreign domestic markets finished steel products western us demand products cyclical nature sensitive changes general economic conditions timing magnitude economic cycles industries products used including global steel manufacturing nonresidential infrastructure construction us difficult predict global economic conditions including impacts covid19 pandemic discussed section changes supply demand conditions strength us dollar availability price raw material alternatives trade actions tariffs affect market prices sales volumes recycled ferrous nonferrous metal global markets steel products western us significant impact results operations reportable segments fiscal 2020 operating results amr decreased significantly compared fiscal 2019 weaker market conditions resulted declining commodity prices lower sales prices volumes recycled metal products compared prior year amr experienced operating margin compression fiscal 2020 declining average net selling prices recycled metal products outpaced reduction purchase costs raw materials market conditions recycled metals weakened entering fiscal 2020 due softer demand finished steel globally time structural changes market certain recycled nonferrous products resulting primarily chinese import restrictions tariffs market selling prices ferrous recycled metal declined approximately 60 per ton approximately 20 beginning august 2019 october 2019 recovering moderately remainder first half fiscal 2020 global economic conditions deteriorated significantly beginning march 2020 large part due impacts covid19 pandemic resulting weaker market conditions recycled metals steel products market selling prices ferrous recycled metal declined approximately 70 per ton approximately 25 march 35 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc 2020 sharply declining price environment combination economic restrictions suppliers relating covid19 severely constricted supply scrap metal including endoflife vehicles resulted significantly lower processed volumes substantial adverse impact operating margins overall operating results amr market selling prices ferrous recycled metal began recover may 2020 continued improve end fiscal 2020 resulting stronger demand products fourth quarter fiscal 2020 compared prior quarter fiscal 2019 market conditions recycled metals weakened primarily due slower global economic growth effects tariffs regulatory measures resulting lower average net selling prices ferrous nonferrous recycled metal products lower ferrous export sales volumes compared fiscal 2018 operating results amr fiscal 2019 decreased significantly compared fiscal 2018 result operating margin compression decline average net selling prices recycled metal products outpaced reduction purchase costs raw materials domestic ferrous sales volumes fiscal 2019 increased compared prior year reflecting strong demand us market particularly first half fiscal 2019 partially offsetting adverse impact weaker ferrous export market conditions lower average net selling prices nonferrous average net selling prices fiscal 2019 decreased significantly compared fiscal 2018 primarily reflecting reduced demand nonferrous products globally well continued impact chinese import restrictions tariffs certain nonferrous products put place starting second half fiscal 2018 fiscal 2020 css impacted overall lower price environment finished steel products compared prior year partially due impacts covid19 pandemic reduced sales ferrous recycled scrap metal effects covid19 significant impact sales volumes finished steel products demand west coast construction markets remained steady fiscal 2019 css benefited reduced pressure steel imports higher net selling prices finished steel products particularly first quarter fiscal 2019 resulting higher finished steel margins fiscal 2019 compared fiscal 2018 however benefits offset lower finished steel recycled metal sales volumes increased steelmaking consumables costs compared fiscal 2018 resulting lower operating results css yearoveryear coronavirus disease 2019 “covid19” march 2020 world health organization characterized covid19 pandemic president united states declared covid19 outbreak national emergency outbreak resulted governments around world implementing stringent measures help control spread virus followed phased regulations guidelines reopening communities economies addition governments central banks several parts world enacted fiscal monetary stimulus measures counteract impacts covid19 example march 27 2020 president united states signed enacted law coronavirus aid relief economic security “cares” act 2 trillion economic relief bill aimed supporting individuals businesses affected pandemic economic downturn see “income taxes” within results operations item 7 discussion impact cares act accounting income taxes company operating critical infrastructure industry defined us department homeland security consistent federal guidelines state local orders date continued operate across footprint throughout covid19 pandemic ensuring health welfare employees visit sites top priority following us centers disease control prevention state local health department guidelines implemented infection control measures sites put place restrictions travel inperson meetings physical distancing measures notwithstanding continued operations covid19 negatively impacted may unfavorable impacts financial performance operations supply chain flows raw materials transportation logistics networks customers due large part impacts response spread covid19 global economic conditions declined sharply third quarter fiscal 2020 resulting historic unemployment levels rapid changes supply demand certain industry sectors businesses switching remote work ceasing operations consumers eliminating restricting redirecting spending economic downturn adversely affected demand products contributed weaker supply demand conditions affecting prices volumes markets products services raw materials global economic conditions partially recovered fourth quarter fiscal 2020 resulting improved demand products compared third quarter fiscal 2020 particular third quarter operations margins results adversely impacted lower sales volumes recycled metals driven severely constrained supplies scrap metal including endoflife vehicles leading lower processed volumes recycling facilities also experienced significant decreases selling prices recycled metal products softer demand supply chain disruptions reduced availability shipping containers logistics constraints 36 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc expect covid19 pandemic continue negatively impact results operations cash flows financial position current level uncertainty economic operational impacts covid19 means related financial impact cannot reasonably estimated time discussion risks related matter refer risk factors part item 1a report executive overview financial results generated consolidated revenues 17 billion fiscal 2020 decrease 20 21 billion consolidated revenues generated fiscal 2019 primarily due significantly lower average net selling prices ferrous nonferrous finished steel products reduced ferrous nonferrous sales volumes compared prior year decreases driven weaker market conditions recycled metals steel products compared prior year including result sharp decline global economic conditions third quarter fiscal 2020 primarily due impacts covid19 pandemic market selling prices ferrous recycled metal declined sharply approximately 70 per ton approximately 25 march 2020 gradually recovering end fiscal year fiscal 2020 average net selling prices ferrous nonferrous recycled metal amr 18 7 lower respectively compared prior year steel revenues fiscal 2020 decreased 8 compared prior year reflecting impact lower average net selling prices finished steel products partially offset higher finished steel sales volumes compared prior year consolidated operating income 7 million fiscal 2020 compared 84 million fiscal 2019 adjusted consolidated operating income 27 million fiscal 2020 compared 89 million fiscal 2019 see reconciliation adjusted consolidated operating income nongaap financial measures end item 7 amr reported operating income fiscal 2020 34 million compared 96 million prior year period decrease amr operating results fiscal 2020 primarily result operating margin compression decline average net selling prices ferrous nonferrous products outpaced reduction purchase costs raw materials amr’s fiscal 2020 operating margins overall operating results adversely impacted periods sharply declining commodity prices reduced scrap metal supply flows due weaker market conditions recycled metals including third quarter fiscal 2020 large part due impacts covid19 pandemic market selling prices ferrous recycled metal began recover may 2020 continued improve end fiscal 2020 resulting stronger demand products improved scrap metal supply flows fourth quarter fiscal 2020 compared prior quarter adverse effects market conditions amr’s operating results fiscal 2020 partially offset benefits productivity restructuring initiatives implemented year css reported operating income 23 million fiscal 2020 compared 32 million prior year decrease primarily reflecting impact lower price environment compared prior year finished steel average net selling prices fiscal 2020 declined 83 per ton 12 compared prior year adverse effects partially offset higher finished steel sales volumes benefits productivity initiatives compared prior year consolidated selling general administrative “sga” expense fiscal 2020 decreased 4 million 2 compared prior year primarily driven lower employeerelated expenses result cost savings initiatives reduced travel resulting restrictions due covid19 partially offset higher legacy environmentalrelated expenses net loss continuing operations attributable ssi shareholders fiscal 2020 4 million 015 per diluted share compared income 57 million 201 per diluted share prior year adjusted net income continuing operations attributable ssi shareholders fiscal 2020 12 million 043 per diluted share compared 61 million 216 per diluted share prior year see reconciliation adjusted net loss income continuing operations attributable ssi shareholders adjusted diluted loss earnings per share continuing operations attributable ssi shareholders nongaap financial measures end item 7 following items highlight selected liquidity capital structure metrics • net cash provided operating activities 125 million fiscal 2020 compared 145 million prior year • debt 104 million august 31 2020 compared 105 million prior yearend • debt net cash 87 million august 31 2020 compared 93 million prior yearend see reconciliation debt net cash nongaap financial measures end item 7 37 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc results operations nm meaningful 1 intercompany sales recycled metal prices approximate local market rates intercompany revenues cost goods sold eliminated consolidation 2 corporate expense consists primarily unallocated expenses management certain administrative services benefit reportable segments 3 restructuring charges exitrelated activities consist expense severance contract termination restructuring costs management include measurement performance reportable segments 4 intercompany profits recognized finished products sold third parties therefore intercompany profit eliminated products remain inventory 38 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc operate business across two reportable segments amr css additional financial information relating reportable segments contained note 18 segment information notes consolidated financial statements part ii item 8 report auto metals recycling amr lt long ton equivalent 2240 pounds nm meaningful 1 price information shown netting cost freight incurred deliver product customer 2 average sales price volume information excludes platinum group metals “pgms” catalytic converters 3 cars purchased auto parts stores amr segment revenues fiscal 2020 decreased 22 compared fiscal 2019 primarily due significantly lower average net selling prices ferrous nonferrous products reduced sales volumes compared fiscal 2019 decrease driven weaker market conditions recycled metals compared prior year including result sharp decline global economic conditions third quarter fiscal 2020 due large part impacts covid19 pandemic nonferrous revenues fiscal 2020 decreased 16 compared prior year average net selling prices decreased 7 compared fiscal 2019 primarily reflecting structural changes market certain recycled nonferrous products resulting primarily chinese import restrictions tariffs 39 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc amr segment operating income operating income fiscal 2020 34 million compared 96 million fiscal 2019 decrease amr operating results fiscal 2020 primarily result operating margin compression decline average net selling prices ferrous nonferrous products outpaced reduction purchase costs raw materials amr’s fiscal 2020 operating margins overall operating results adversely impacted periods sharply declining commodity prices experienced first third quarters fiscal 2020 due weaker market conditions recycled metals market conditions partially recovered fourth quarter fiscal 2020 resulting moderate improvement sales volumes net selling prices ferrous nonferrous products compared third quarter increase scrap metal supply flows ferrous metal spreads amr fiscal 2020 average net selling prices nonferrous joint products recovered shredding process comprising primarily zorba declined approximately 16 11 respectively compared prior year lower price environment combination impact economic slowdowns restrictions suppliers relating covid19 also severely constricted supply scrap metal including endoflife vehicles primarily third quarter resulted lower processed volumes compared prior year lower average ferrous nonferrous selling prices fiscal 2020 also reflected effects tariffs regulatory measures demand recycled metals export markets weaker price environment recycled metals domestic markets reduced demand nonferrous products globally adverse effects market conditions amr’s operating results fiscal 2020 partially offset positive contributions increased sales revenues higher priced pgm products compared prior year benefits productivity restructuring initiatives implemented subsequent prior year amr sga expense fiscal 2020 decreased 1 million 1 compared end prior year primarily due lower employeerelated advertising expenses partially offset higher charges related environmental matters operating results amr fiscal 2019 included 20 million positive contributions limitedduration contract substantially complete end fiscal 2019 provided high margin source supply cascade steel scrap css st short ton equivalent 2000 pounds 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap 2 recycling revenues include primarily sales ferrous nonferrous recycled scrap metal export markets 3 price information shown netting cost freight incurred deliver product customer 4 rolling mill utilization based effective annual production capacity current conditions 580 thousand tons finished steel products css segment revenues fiscal 2020 decreased 46 million 10 compared fiscal 2019 primarily reflecting lower average net selling prices finished steel products partially due impacts covid19 pandemic decreased sales ferrous recycled scrap metal partially offset increased finished steel sales volumes sales volumes finished steel products fiscal 2020 significantly impacted effects covid19 primarily due steady demand west coast construction markets higher average net selling prices finished steel products prior year reflected impacts reduced pressure steel imports higher steelmaking raw material costs time 40 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc css segment operating income operating income fiscal 2020 23 million compared operating income 32 million prior year decreased operating results fiscal 2020 primarily reflected impact lower price environment finished steel compared prior year decreased sales ferrous recycled scrap metal compared fiscal 2019 partially due weaker market conditions recycled metals result adverse impacts covid19 pandemic finished steel average net selling prices fiscal 2020 declined 12 compared prior year adverse effects partially offset reduced raw material purchase prices input costs benefits productivity initiatives compared prior year corporate sga expense decreased 2 million 5 compared prior year primarily due lower employeerelated expenses result reduced incentive compensation accruals cost savings initiatives reduced travel resulting restrictions due covid19 partially offset increased charges related legacy environmental matters productivity initiatives restructuring charges fiscal 2020 implemented productivity initiatives aimed reducing annual operating expenses corporate amr css mainly reductions nontrade procurement spend including outside professional services lower employeerelated expenses nonheadcount measures targeted 15 million realized benefits fiscal 2020 additional initiatives exceeded target achievement approximately 18 million benefits fiscal 2020 fiscal 2019 also implemented productivity initiatives aimed delivering 35 million annual benefits primarily combination production cost efficiencies reductions sga expense achieved approximately 30 million benefits result initiatives fiscal 2019 achieved full run rate benefits fiscal 2020 april 2020 announced intention modify internal organizational reporting structure functionally based integrated model change structure intended result agile organization solidify recent productivity improvement cost reduction initiatives expect complete transition first quarter fiscal 2021 fiscal 2020 incurred aggregate restructuring charges exitrelated costs approximately 9 million connection initiatives comprising severance costs 2 million costs associated lease contract termination 1 million professional services costs 6 million substantial majority restructuring charges exitrelated costs related initiatives recognized fiscal 2020 required us make cash payments income taxes effective tax rate continuing operations fiscal 2020 expense 86 compared 232 fiscal 2019 effective tax rate continuing operations fiscal 2020 lower us federal statutory rate 21 reflective income tax expense pretax loss continuing operations primarily due partially offsetting impacts individually immaterial permanent differences nondeductible expenses research development credits effects unrecognized tax benefits aggregate impact state taxes assess realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income consider negative positive evidence including weight evidence determine valuation allowances deferred tax assets required continue maintain valuation allowances certain deferred tax assets related certain jurisdictions result negative objective evidence including effects historical losses tax jurisdictions outweighing positive objective subjective evidence indicating morelikelythannot associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause us adjust valuation allowance deferred tax assets would impact results operations period determine factors changed 41 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc cares act march 27 2020 president united states signed enacted law cares act contains several income tax provisions well measures aimed assisting businesses impacted economic effects covid19 pandemic among provisions cares act removes certain limitations utilization net operating losses “nols” allows carrybacks certain past future nols applied nol carryback provisions cares act nol fiscal 2020 resulted reclassification 11 million nol deferred income tax asset refundable income taxes recognition 1 million income tax benefit third quarter fiscal 2020 anticipate income tax provisions cares act material impact financial statements see note 14 income taxes notes consolidated financial statements part ii item 8 report discussion liquidity capital resources rely cash provided operating activities primary source liquidity supplemented current cash hand borrowings existing credit facilities sources uses cash balances 18 million 12 million august 31 2020 2019 respectively cash balances intended used primarily working capital expenditures dividends share repurchases investments acquisitions use excess cash hand reduce amounts outstanding credit facilities august 31 2020 debt 104 million compared 105 million august 31 2019 debt net cash 87 million august 31 2020 compared 93 million august 31 2019 see reconciliation debt net cash nongaap financial measures end item 7 operating activities net cash provided operating activities fiscal 2020 125 million compared 145 million fiscal 2019 sources cash fiscal 2020 included 39 million decrease inventories due lower raw material purchase prices timing purchases sales 13 million increase accrued payroll related liabilities due increased incentive compensation liabilities deferred payroll taxes permitted cares act uses cash fiscal 2020 included 8 million decrease accounts payable primarily due lower raw material purchase prices timing payments sources cash earnings fiscal 2019 included 33 million decrease inventories due lower raw material purchase prices timing payments sales 9 million decrease accounts receivable due lower selling prices timing sales collections uses cash fiscal 2019 included 19 million decrease accrued payroll related liabilities primarily due incentive compensation payments made first quarter fiscal 2019 17 million decrease accounts payable primarily due lower raw material purchase prices timing payments investing activities net cash used investing activities fiscal 2020 79 million compared 90 million fiscal 2019 cash used investing activities fiscal 2020 included capital expenditures 82 million upgrade equipment infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets compared 95 million prior year significant majority capital expenditures associated projects amr financing activities net cash used financing activities fiscal 2020 41 million compared 47 million fiscal 2019 uses cash fiscal 2020 2019 included 21 million payment dividends 1 million 13 million respectively share repurchases uses cash fiscal 2020 also included 8 million net repayments debt compared 4 million prior year refer nongaap financial measures end item 7 additionally third quarter fiscal 2020 borrowed incremental 250 million credit facilities order increase cash position preserve financial flexibility light covid19 outbreak repaid 250 million additional borrowings fourth quarter fiscal 2020 42 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc debt following summary outstanding balances availability credit facilities longterm debt exclusive finance lease obligations thousands 1 remaining availability net 10 million outstanding standby letters credit august 31 2020 senior secured revolving credit facilities provide revolving loans 700 million c15 million mature august 2023 pursuant credit agreement bank america na administrative agent lenders party thereto 700 million credit facility includes 50 million sublimit letters credit 25 million sublimit swingline loans 50 million sublimit multicurrency borrowings august 31 2020 interest rates outstanding indebtedness credit agreement based option either london interbank offered rate “libor” canadian equivalent c loans plus spread 125 350 amount spread based pricing grid tied ratio consolidated funded debt ebitda defined credit agreement greater prime rate b federal funds rate plus 050 c daily rate equal onemonth libor plus 175 case plus spread 000 250 based pricing grid tied consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 020 050 based pricing grid tied ratio consolidated funded debt ebitda june 30 2020 large part due uncertainties resulting effects covid19 entered amendment existing credit agreement bank america na administrative agent lenders party thereto principal changes existing credit agreement effected amendment reduction consolidated fixed charge coverage minimum ratio 150 100 minimum ratio 120 100 fiscal quarter ending august 31 2020 minimum ratio 110 100 fiscal quarters ending november 30 2020 february 28 2021 may 31 2021 ii introduction minimum consolidated asset coverage ratio 100 fiscal quarters ending august 31 2020 may 31 2021 amendment provides revisions definition libor include 050 floor mechanics parties may replace benchmark interest rate used agreement libor one rates based secured overnight financing rate administered federal reserve bank new york borrowings outstanding credit facilities 90 million 97 million august 31 2020 2019 respectively weighted average interest rate amounts outstanding credit facilities 459 378 august 31 2020 2019 respectively use credit facilities fund working capital expenditures dividends share repurchases investments acquisitions credit agreement contains various representations warranties events default financial customary covenants limit subject certain exceptions ability among things incur suffer exist certain liens make investments incur guaranty additional indebtedness enter consolidations mergers acquisitions sales assets make distributions restricted payments change nature business engage transactions affiliates enter restrictive agreements including agreements restrict ability subsidiaries make distributions financial covenants credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated ebitda less defined maintenance capital expenditures certain environmental expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness c consolidated asset coverage ratio defined consolidated asset values divided consolidated funded indebtedness august 31 2020 compliance financial covenants credit agreement consolidated fixed charge coverage ratio required less 120 100 217 100 august 31 2020 consolidated leverage ratio required 055 100 014 100 august 31 2020 consolidated asset coverage ratio required less 100 271 100 august 31 2020 43 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc obligations credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain subsidiaries’ assets including equipment inventory accounts receivable currently expect remain compliance financial covenants credit agreement may able event market conditions covid19 negative factors significant adverse impact results operations financial position maintain compliance financial covenants unable obtain amendment waiver lenders breach financial covenant would constitute event default allow lenders exercise remedies agreements severe termination credit facility committed bank credit agreement acceleration amounts owed agreement case would required evaluate available alternatives take appropriate steps obtain alternative funds cannot assure alternative funds sought could obtained would adequate acceptable terms debt obligations primarily relate equipment purchase contract consideration includes obligation make future monthly payments vendor form licensing fees accounting purposes obligation treated partial financing purchase price equipment vendor monthly payments commence equipment placed service continue period four years thereafter impute interest obligation rate 425 reflecting estimated rate would recorded market transaction similar terms capital expenditures capital expenditures totaled 82 million fiscal 2020 compared 95 million fiscal 2019 capital expenditures fiscal 2020 2019 primarily upgrade equipment facilities infrastructure additional investments nonferrous processing technologies environmental safetyrelated assets currently plan invest 125 million capital expenditures fiscal 2021 including approximately 65 million investments growth including new nonferrous processing technologies support volume initiatives growth projects using cash generated operations available credit facilities covid19 pandemic caused delays construction activities equipment deliveries related capital projects including delays obtaining permits government agencies resulting deferral certain capital expenditures fiscal 2021 given continually evolving nature covid19 pandemic extent forecasted capital expenditures could deferred uncertain environmental compliance building commitment recycling operating business environmentally responsible manner continue invest facilities improve environmental presence communities operate part capital expenditures discussed prior paragraph invested 10 million 36 million environmental projects fiscal 2020 2019 respectively plan invest range 24 million planned capital expenditures environmental projects fiscal 2021 projects include investments storm water systems equipment ensure ongoing compliance air quality environmental regulations identified united states environmental protection agency “epa” one potentially responsible parties operate formerly owned operated sites part adjacent portland harbor superfund site “site” see note 9 commitments contingencies notes consolidated financial statements part ii item 8 report discussion matter well legacy environmental loss contingencies believe possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material financial position results operations cash flows liquidity insurance policies believe provide reimbursement costs incur defense remediation mitigation natural resource damages claims connection site although assurances policies cover costs may incur significant cash outflows future related site could reduce amounts available borrowing could otherwise used working capital expenditures dividends share repurchases investments acquisitions could result failure maintain compliance certain covenants debt agreements could adversely impact liquidity 44 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc dividends july 31 2020 board directors declared dividend fourth quarter fiscal 2020 01875 per common share equates annual cash dividend 075 per common share dividends 075 per common share totaling 21 million declared paid fiscal 2020 october 20 2020 board directors declared dividend first quarter fiscal 2021 01875 per common share payable november 16 2020 shareholders record november 2 2020 share repurchase program pursuant share repurchase program amended 2001 2006 2008 authorized repurchase nine million shares class common stock august 31 2020 authorization repurchase remaining 706 thousand shares class common stock deem repurchases appropriate may repurchase common stock variety reasons optimize capital structure offset dilution related sharebased compensation arrangements consider several factors determining whether make share repurchases including among factors cash needs availability funding future business plans market price stock beginning fiscal 2019 repurchased approximately 77 million shares class common stock program repurchased approximately 527 thousand shares total 13 million openmarket transactions fiscal 2019 approximately 53 thousand shares total 09 million openmarket transactions fiscal 2020 assessment liquidity capital resources historically available cash resources internally generated funds credit facilities equity offerings financed acquisitions capital expenditures working capital financing needs generally believe current cash resources internally generated funds existing credit facilities access capital markets provide adequate shortterm longterm liquidity needs working capital expenditures dividends share repurchases investments acquisitions joint ventures debt service requirements environmental obligations contingencies however event sustained market deterioration may need evaluate alternative sources liquidity take appropriate steps obtain sufficient additional funds assurances supplemental funding sought could obtained would adequate acceptable terms offbalance sheet arrangements none requiring disclosure pursuant item 303 regulation sk securities exchange act 1934 contractual obligations commitments certain contractual obligations make future payments following table summarizes future obligations august 31 2020 thousands 1 credit facilities include principal amount borrowings outstanding bank secured revolving credit facilities mature august 2023 2 interest payments credit facilities based interest rates effect august 31 2020 contractual interest rates amount debt outstanding variable certain cases actual cash payments may differ estimates provided 45 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc 3 debt obligations primarily relate equipment purchase contract consideration includes obligation make future monthly payments vendor form licensing fees accounting purposes obligation treated partial financing purchase price equipment vendor monthly payments commence equipment placed service continue period four years thereafter 4 operating lease payments reflect embedded measurement operating lease liabilities thus include future lease payments remaining noncancellable period lease together periods covered renewal termination options reasonably certain exercise 5 purchase obligations include enforceable legally binding agreements purchase goods services specify significant terms regardless duration agreement 6 contractual obligations consist pension funding obligations accrued liabilities maintain standby letters credit provide support certain obligations including workers’ compensation performance bonds august 31 2020 10 million outstanding arrangements critical accounting policies estimates preparation financial statements accordance accounting principles generally accepted united states america requires us make certain judgments estimates assumptions regarding uncertainties affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities accounting policy deemed critical requires accounting estimate made based assumptions judgments matters inherently uncertain time estimate made different estimates reasonably could used changes estimate reasonably likely occur could materially impact consolidated financial statements deem critical accounting policies important portrayal financial condition results operations uncertainty inherent matters actual results could differ estimates use applying critical accounting policies currently aware reasonably likely events circumstances would result materially different amounts reported critical accounting estimates include related inventories longlived assets leases goodwill environmental costs income taxes inventories consist processed unprocessed scrap metal ferrous nonferrous mixed nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value consider estimated future selling prices determining estimated net realizable value inventory generally sell recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilize selling prices committed contracts sales orders determining estimated net realizable value quantities hand shipped contracts sales orders accounting process use record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production rely weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates periodically review shrink factors perform monthly physical inventories due inherent nature scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk adjust ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume longlived assets test longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities operating lease rightofuse assets considered longlived assets subject impairment testing metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group test asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds estimate 46 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined using one income market cost approaches depending nature asset group determination fair value considered critical accounting estimate leases determine whether arrangement contains lease inception assessing whether company receives right direct use obtain substantially economic benefit use underlying asset lease classification measurement recognition determined lease commencement date underlying asset available use company accounting classification lease based whether arrangement effectively financed purchase underlying asset finance lease operating lease leases lease commencement noncancellable lease term 12 months less include option either purchase underlying asset renew lease beyond 12 months company reasonably certain exercise classified shortterm leases recognized balance sheet leases shortterm leases recognize rightofuse assets lease liabilities based primarily present value future minimum lease payments lease term lease commencement rightofuse assets represent company’s right use underlying asset lease term lease liabilities represent company’s obligation make future lease payments lease term noncancellable period lease together periods covered renewal termination options company reasonably certain exercise determination lease term considered critical accounting estimate lease payments discounted present value using company’s incremental borrowing rate unless discount rate implicit lease readily determinable company’s incremental borrowing rate lease estimated rate interest company would pay borrow aggregate lease payments collateralized basis lease term estimation incremental borrowing rate considered critical accounting estimate requires judgment management reflects assessment company’s credit standing derive implied secured credit rating corresponding yield curve company used incremental borrowing rate recognize operating lease rightofuse assets liabilities new lease accounting standard application date rightofuse assets lease liabilities subject remeasurement lease commencement certain events changes circumstances arise change lease term due reassessment whether company reasonably certain exercise renewal termination option operating leases lease expense recognized straightline basis lease term finance leases lease rightofuse asset amortized straightline basis interest expense recognized lease liability using effective interest rate method many company’s real property leases contain variable lease payments depend index rate included measurement rightofuse asset lease liability using index rate lease commencement respect company’s transition new lease accounting standard index rate application date subsequent changes variable lease payments recorded variable lease expenses period incurred company elected practical expedient separate lease related nonlease components accounting purposes thus costs related nonlease components disclosed lease expense payments shortterm leases recognized income statement straightline basis lease term goodwill evaluate goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ testing goodwill impairment option first assess qualitative factors determine whether existence events circumstances leads determination morelikelythannot estimated fair value reporting unit less carrying amount elect perform qualitative assessment determine impairment morelikelythannot required perform quantitative impairment test otherwise analysis required also may elect perform qualitative assessment instead proceed directly quantitative impairment test performing quantitative impairment test apply onestep quantitative test record amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit 47 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc estimate fair value reporting unit using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit estimate present value cash flows extend beyond final year discounted cash flow analysis employ terminal value technique whereby use estimated operating cash flows minus capital expenditures adjust changes working capital requirements final year analysis discount estimated cash flows wacc establish terminal value determination fair value using income approach requires judgment involves use estimates assumptions expected future cash flows derived internal forecasts impact market conditions assumptions primarily include revenue growth rates driven future ferrous nonferrous commodity price sales volume expectations gross margins selling general administrative expense relative total revenues capital expenditures working capital requirements discount rate wacc tax rate terminal growth rate benefits associated taxable transaction synergistic benefits available market participants also use market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations reconcile company’s market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest company fourth quarter fiscal 2020 performed annual goodwill impairment test july 1 2020 testing date balance goodwill 169 million 1 million balance carried single reporting unit within amr last performed quantitative impairment test goodwill carried reporting unit second quarter fiscal 2016 using measurement date february 1 2016 based changes market conditions related general economy metals recycling industry increase carrying amount reporting unit since last quantitative impairment test elected perform qualitative assessment reporting unit instead proceeded directly quantitative impairment test reporting unit within amr subject quantitative impairment test estimated fair value reporting unit exceeded carrying amount approximately 29 july 1 2020 projections used income approach reporting unit took consideration impact current market conditions ferrous nonferrous recycled metals cost obtaining adequate supply flows scrap metal including endoflife vehicles recent trends retail auto parts sales projections assumed limited recovery operating margins current levels multiyear period wacc used income approach valuation reporting unit 111 terminal growth rate used 20 assuming components fair value estimate held constant increase wacc 228 basis points weaker anticipated improvements operating margins could resulted failure quantitative impairment test reporting unit see note 7 goodwill intangible assets net notes consolidated financial statements part ii item 8 report detail result inherent uncertainty associated forming estimates described actual results could differ estimates future events changing market conditions may impact assumptions future revenue operating margin growth wacc factors may result changes estimates reporting units’ fair value although believe assumptions used testing reporting units’ goodwill impairment reasonable lack recovery deterioration market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline share price current levels sustained period time increase wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect financial condition results operations 48 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc environmental costs operate industries inherently possess environmental risks manage risks employ environmental staff outside consultants environmental management finance personnel meet regularly discuss environmental risks estimate future costs known environmental remediation requirements accrue undiscounted basis probable incurred liability related costs reasonably estimated timing incurring estimated costs unknown regulatory government management projects complex one primary factors make difficult assess cost potential future remediation wide range estimated amounts reasonably established amount within range better low end range recorded financial statements developments resolution environmental matter result facts circumstances significantly different assumptions used develop liabilities accrual environmental remediation could materially understated overstated adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures accruals established made factors consider recognition measurement environmental liabilities include • current regulations time liability established course investigation remediation process specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment senior level internal staff outside consultants take account similar recent instances environmental remediation issues studies sites among considerations • available technologies used remediation • number financial condition potentially responsible parties extent responsibility costs study remediation accrued environmental liabilities august 31 2020 included 4 million related portland harbor superfund site final remedial actions yet designed determination amount natural resource damages allocation among potentially responsible parties costs investigations remedial action costs natural resource damages believe possible reasonably estimate amount range costs likely reasonably possible may incur connection site although costs could material financial position results operations cash flows liquidity therefore additional amounts accrued notified may potentially responsible party sites portland harbor currently formerly owned operated us sites may responsibility costs due past disposal activities see “contingencies environmental” note 9 commitments contingencies notes consolidated financial statements part ii item 8 report income taxes valuation allowances assess realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income consider negative positive evidence including weight evidence determine valuation allowances deferred tax assets required due significant judgment involved realizability deferred tax assets considered critical accounting estimate fiscal 2018 released valuation allowances certain us federal state canadian deferred tax assets resulting discrete tax benefits totaling 37 million release valuation allowances result sufficient positive evidence time including cumulative income recent years projections future taxable income based primarily improved financial performance morelikelythannot deferred tax assets realized continue maintain valuation allowances certain state canadian puerto rican deferred tax assets 49 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc recently issued accounting standards identified recent accounting pronouncements expected material impact financial condition results operations cash flows upon adoption nongaap financial measures debt net cash debt net cash difference sum longterm debt shortterm borrowings ie total debt ii cash equivalents believe debt net cash useful measure investors cash equivalents used among things repay indebtedness netting total debt useful measure leverage following reconciliation debt net cash thousands net borrowings repayments debt net borrowings repayments debt sum borrowings longterm debt repayments longterm debt present amount net change borrowings repayments period believe useful investors meaningful presentation change debt following reconciliation net borrowings repayments debt thousands adjusted consolidated operating income adjusted amr operating income adjusted css operating income adjusted corporate expense adjusted net loss income continuing operations attributable ssi shareholders adjusted diluted loss earnings per share continuing operations attributable ssi shareholders management believes providing nongaap financial measures adds meaningful presentation results business operations excluding adjustments restructuring charges exitrelated activities asset impairment charges net recoveries charges legacy environmental matters net recoveries business development costs related ongoing operations charges related settlement wage hour class action lawsuit recoveries related resale modification previously contracted shipments income tax benefit expense allocated adjustments items related underlying business operational performance improves periodtoperiod comparability results business operations 50 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc following reconciliation adjusted consolidated operating income adjusted amr operating income adjusted css operating income adjusted corporate expense thousands 1 legal environmental charges legacy environmental matters net recoveries legacy environmental matters include charges net recoveries related portland harbor superfund site legacy environmental loss contingencies see note 9 commitments contingencies “portland harbor” “other legacy environmental loss contingencies” notes consolidated financial statements part ii item 8 report 51 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc following reconciliation adjusted net loss income continuing operations attributable ssi shareholders adjusted diluted loss earnings per share continuing operations attributable ssi shareholders thousands except per share data 1 legal environmental charges legacy environmental matters net recoveries legacy environmental matters include charges net recoveries related portland harbor superfund site legacy environmental loss contingencies see note 9 commitments contingencies “portland harbor” “other legacy environmental loss contingencies” notes consolidated financial statements part ii item 8 report 2 income tax allocated aggregate adjustments reconciling reported adjusted net loss income continuing operations attributable ssi shareholders diluted loss earnings per share continuing operations attributable ssi shareholders determined based tax provision calculated without adjustments believe nongaap financial measures allow better understanding operating financial performance nongaap financial measures considered addition substitute directly comparable us gaap measures although find nongaap financial measures useful evaluating performance business reliance measures limited adjustments often material impact consolidated financial statements presented accordance us gaap therefore typically use adjusted amounts conjunction us gaap results address limitations 52 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc item 7a nannannannannannannanitem 7a quantitative qualitative disclosures market risk company periodically uses derivative financial instruments limit exposure changes interest rates derivative instruments used solely hedges speculative trading purposes represent incremental risk company discussion derivative financial instruments refer fair value financial instruments consolidated financial statements included item 8 note 1 notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk company periodically uses derivative financial instruments limit exposure changes interest rates derivative instruments used solely hedges speculative trading purposes represent incremental risk company discussion derivative financial instruments refer fair value financial instruments consolidated financial statements included item 8 note 1 notes consolidated financial statements schnitzer steel industries inc form 10k item 8item 7a quantitative qualitative disclosures market risk discussion derivative financial instruments refer “fair value financial instruments” consolidated financial statements included item 8 note 1 “notes consolidated financial statements” item 8item 7a quantitative qualitative disclosures market risk foreign currency exchange risk company’s international operations subject risks typical international business including limited differing economic conditions changes political climate differing tax structures foreign exchange rate volatility regulations restrictions accordingly future results could materially adversely affected changes factors company also exposed foreign exchange rate fluctuations balance sheets income statements foreign subsidiaries translated us dollars consolidation process exchange rates vary results translated may vary expectations adversely affect overall expected profitability company enters sales contracts denominated foreign currencies therefore financial results subject variability arises exchange rate movements mitigate foreign currency exchange risk company uses foreign currency forward contracts related cash receipts sales denominated foreign currencies trading purposes contracts generally mature within three months entitle company upon delivering euros receive us dollars stipulated rates contract periods fair value contracts estimated based quoted market prices contract rate comparable market rate yearend liability august 31 2006 immaterial company hold foreign currency forward contracts fiscal 2005 risks company considered market risk conditions including interest rate risk commodity price risk relevant market risks relates consolidated assets liabilities august 31 2006 believe risk material fluctuations result changes factors schnitzer steel industries inc form 10k item 8item 7a quantitative qualitative disclosures market risk commodity price risk company exposed risks associated fluctuations market price ferrous nonferrous metals times volatile see discussion section entitled “risk factors industries company operates cyclical demand volatile could material adverse effect company’s results operations financial condition” part item 1a report company attempts mitigate risk seeking turn inventories quickly rather holding inventories speculation higher commodity prices company’s also exposed risks associated fluctuations market prices electricity natural gas times volatile company’s risk strategy associated purchase commodities utilized within production processes generally make certain commitments suppliers relating future expected requirements commodities company’s gas contract contains provisions require “take pay” specified quantities without regard actual usage 12 month periods company’s commitments natural gas “take pay” similar commitment provisions years ending august 31 follows thousands company believes production requirements consumption products services purchased commitments occur normal production process company also purchases electricity consumed smb pursuant contract extends september 2011 contract designates hours annually “interruptible service” establishes agreed fixed rate energy charge per millkwh consumed year expiration agreement 10 increase electricity rates would result 1 million impact fiscal 2007 cost goods sold interest rate risk company exposed market risk associated changes interest rates related primarily debt obligations company’s credit line revolving credit facility variable rate therefore exposure changes interest rates 10 change interest rates would result 1 million impact fiscal 2007 interest expense foreign currency risk company’s international operations subject foreign exchange rate volatility company’s risk strategy mitigate foreign currency exchange risk entering foreign currency forward contracts related expected cash receipts sales denominated euros company held foreign currency forward contracts denominated euros total notional amounts 8 million august 31 2007 assuming hypothetical 10 weakening strengthening us dollar compared euro august 31 2007 fair value company’s foreign currency contracts would decrease increase respectively less 1 million company’s related derivative liability would increase amount important note increase decrease derivative liability indicated sensitivity analysis would somewhat offset changes fair value underlying receivables offsetting gains losses reflected analysis item 8item 7a quantitative qualitative disclosures market risk commodity price risk company exposed commodity price risk mainly associated variations market price ferrous nonferrous metal including scrap autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions company responds changes recycled metal selling prices adjusting purchase prices timely basis turning rather holding inventory expectation higher prices company actively manages exposure commodity price risk monitors actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based spot market prices generally orders placed 30 90 days ahead shipment date however financial results may negatively impacted selling prices fall quickly purchase price adjustments made levels inventory anticipated net realizable value average cost mrb’s estimate selling prices per ton increased decreased 10 estimate net realizable value adjustment would increase decrease 6 million company also exposed risks associated fluctuations market prices electricity natural gas significantly related smb’s energy requirements steel minimill facility company’s risk strategy associated purchase commodities utilized within production processes generally make certain commitments suppliers relating future expected requirements commodities smb purchases electricity longterm contract expires september 2011 contract designates hours annually “interruptible service” establishes agreed upon fixed rate energy charge per millionkwh consumed year expiration agreement 10 increase electricity rates would resulted 1 million impact fiscal 2008 cost goods sold smb also ‘takeorpay’ natural gas contract based fixed prices expires may 31 2011 obligates purchase minimum quantities per day october 2010 whether amount utilized natural gas contract subject requirements sfas 133 “accounting derivative instruments hedging activities” august 31 2008 fair value natural gas contract derivative unrealized loss 4 million compared 1 million august 31 2007 fair value natural gas contract derivative determined using forward price curve based observable market price quotations major natural gas trading hub company’s valuation model updated monthly reflect current market information hypothetical 10 increase decrease forward market prices contracted volumes would changed fair value august 31 2008 2 million interest rate risk company exposed market risk associated changes interest rates related debt obligations company’s credit line revolving credit facility variable rate therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2008 2007 effect company’s interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations company extends credit based variety methods including letters credit ferrous scrap exports establishment credit limits proportion sales open terms collection deposits certain nonferrous export customers open terms mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deemed creditworthy company letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 90 days price agreed mrb’s customers typically difficulty obtaining letters 44 schnitzer steel industries inc form 10k 2008 credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped company may need extend credit open terms difference sales value contract value supported letter credit addition company could exposed loss customer fails pay bank providing letter credit fails august 31 2008 49 company’s total accounts receivable balance covered letters credit remaining balance 99 less 60 days past due schnitzer steel industries inc form 10k 2008 45 item 8item 7a quantitative qualitative disclosures market risk commodity price risk company exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metal including scrap autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions company responds changes recycled metal selling prices adjusting purchase prices timely basis turning rather holding inventory expectation higher prices company actively manages exposure commodity price risk monitors actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based spot market prices generally orders placed 30 90 days ahead shipment date however financial results may negatively impacted selling prices fall faster adjustments purchase prices average inventory costs made customers fail meet contractual obligations levels inventory anticipated net realizable value average cost smb’s estimate finished steel product selling prices per ton decreased 10 based inventory hand august 31 2009 would noncash nrv writedown 4 million within smb segment company also exposed risks associated fluctuations market prices natural gas significantly related smb’s energy requirements steel minimill facility company’s risk strategy associated purchase commodities utilized within production processes generally make certain commitments suppliers relating future expected requirements commodities smb ‘takeorpay’ natural gas contract based fixed prices expires may 31 2011 obligates purchase minimum quantities per day october 2010 whether amount utilized august 31 2009 fair value natural gas contract derivative unrealized loss 6 million compared 4 million august 31 2008 fair value natural gas contract derivative determined using forward price curve based observable market price quotations major natural gas trading hub company’s valuation model updated monthly reflect current market information hypothetical 10 increase decrease forward market prices contracted volumes would changed fair value august 31 2009 less 1 million interest rate risk company exposed market risk associated changes interest rates related debt obligations company’s credit line revolving credit facility variable rate therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2009 2008 effect company’s interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations company extends credit based variety methods including letters credit ferrous scrap exports establishment credit limits proportion sales open terms collection deposits certain nonferrous export customers open terms mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deemed creditworthy company letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 90 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped company may need extend credit open terms difference sales value contract value supported letter credit addition company could exposed loss customer fails pay bank providing letter credit fails 50 schnitzer steel industries inc form 10k 2009 august 31 2009 2008 49 company’s trade accounts receivable balance covered letters credit remaining balance august 31 2009 85 less 60 days past due compared 99 august 31 2008 schnitzer steel industries inc form 10k 2009 51 item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metals including scrap metal autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices timely basis actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 90 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices august 31 2010 10 decrease selling price per ton finished steel products would cause nrv inventory write approximately 3 million smb interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility variable rate therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2010 2009 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems credit worthy letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 90 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped may need extend credit open terms difference sales value contract value supported letter credit addition could exposed loss customer fails pay bank providing letter credit fails august 31 2010 2009 43 49 respectively trade accounts receivable balance covered letters credit remaining balance august 31 2010 89 less 60 days past due compared 85 august 31 2009 schnitzer steel industries inc form 10k 2010 43 item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metals including scrap metal autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices timely basis actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices august 31 2011 2010 10 decrease selling price per ton finished steel products would caused nrv inventory write approximately 3 million smb interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2011 2010 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped may need extend credit open terms difference sales value contract value supported letter credit addition could exposed loss customer fails pay bank providing letter credit fails august 31 2011 2010 44 43 respectively trade accounts receivable balance covered letters credit remaining balance august 31 2011 93 less 60 days past due compared 89 august 31 2010 38 schnitzer steel industries inc form 10k 2011 item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metals including scrap metal autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices timely basis actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would caused nrv impact operating segments august 31 2012 interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2012 2011 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped may need extend credit open terms difference sales value contract value supported letter credit addition could exposed loss customer fails pay bank providing letter credit fails august 31 2012 2011 28 44 respectively trade accounts receivable balance covered letters credit remaining balance august 31 2012 89 less 60 days past due compared 93 august 31 2011 41 schnitzer steel industries inc form 10k 2012 item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metals including scrap metal autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices timely basis actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price per ton finished steel products would caused nrv inventory write 2 million smb august 31 2013 10 decrease selling price inventory would caused material nrv impact mrb apb august 31 2013 interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2013 2012 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms designation collateral financial guarantees securing advances loans contractual receivables mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped may need extend credit open terms difference sales value contract value supported letter credit addition could exposed loss customer fails pay bank providing letter credit fails august 31 2013 2012 49 28 respectively trade accounts receivable balance covered letters credit remaining balance august 31 2013 95 less 60 days past due compared 89 august 31 2012 44 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price finished steel products ferrous nonferrous metals including scrap metal autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices timely basis actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would material nrv impact operating segments august 31 2014 interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2014 2013 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms designation collateral financial guarantees securing advances loans contractual receivables mrb generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer mrb generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed mrb’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices mrb’s customers may able obtain letters credit full sales value inventory shipped may need extend credit open terms difference sales value contract value supported letter credit addition could exposed loss customer fails pay bank providing letter credit fails august 31 2014 2013 39 49 respectively trade accounts receivable balance covered letters credit remaining balance 96 less 60 days past due august 31 2014 2013 foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances use derivatives manage portion risk derivatives agreements independent counterparties provide payments based notional amount august 31 2014 derivative transactions related actual anticipated economic transactions normal course business change foreign exchange rates 10 would changed fair value contracts reported condensed consolidated balance sheets 2 million august 31 2014 44 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would material nrv impact operating segments august 31 2015 2014 interest rate risk exposed market risk associated changes interest rates related debt obligations credit line revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2015 2014 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables amr generally ships ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer amr generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed amr’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices amr’s customers may able obtain letters credit full sales value inventory shipped august 31 2015 2014 28 39 respectively trade accounts receivable balance covered letters credit remaining balance 95 96 less 60 days past due august 31 2015 2014 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances use derivatives manage portion risk derivatives agreements independent counterparties provide payments based notional amount august 31 2015 derivative transactions related actual anticipated economic transactions normal course business change foreign exchange rates 10 would changed fair value contracts reported consolidated balance sheets less 1 million august 31 2015 47 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would material nrv impact reportable segments august 31 2016 2015 interest rate risk exposed market risk associated changes interest rates related debt obligations revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2016 2015 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables amr ships nearly ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer amr generally sells export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed amr’s customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices amr’s customers may able obtain letters credit full sales value inventory shipped august 31 2016 2015 34 28 respectively trade accounts receivable balance covered letters credit remaining balance 94 95 less 60 days past due august 31 2016 2015 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances use derivatives manage portion risk derivatives agreements independent counterparties provide payments based notional amount august 31 2016 derivative contracts 50 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would material nrv impact reportable segments august 31 2017 2016 interest rate risk exposed market risk associated changes interest rates related debt obligations revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2017 2016 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables ship nearly ferrous bulk sales foreign customers contracts supported letters credit issued confirmed banks deems creditworthy letters credit ensure payment customer generally sell export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices customers may able obtain letters credit full sales value inventory shipped august 31 2017 2016 33 34 respectively trade accounts receivable balance covered letters credit remaining balance 88 94 less 60 days past due august 31 2017 2016 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances use derivatives manage portion risk august 31 2017 derivative contracts 50 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products autobodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon contracted sales orders estimated future selling prices based contracted sales estimates future selling prices 10 decrease selling price inventory would material nrv impact reportable segments august 31 2018 2017 interest rate risk exposed market risk associated changes interest rates related debt obligations revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2018 2017 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables historically shipped almost large shipments ferrous scrap metal foreign customers contracts supported letters credit issued confirmed banks deemed creditworthy letters credit ensure payment customer generally sell export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices customers may able obtain letters credit full sales value inventory shipped august 31 2018 2017 33 trade accounts receivable balance covered letters credit remaining balance 99 88 less 60 days past due august 31 2018 2017 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances use derivatives manage portion risk august 31 2018 derivative contracts 51 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products auto bodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon committed contracts sales orders estimated future selling prices uncommitted inventories 10 decrease selling price inventory would material nrv impact reportable segments august 31 2019 2018 interest rate risk exposed market risk associated changes interest rates related debt obligations revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2019 2018 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits certain sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables historically shipped almost large shipments ferrous scrap metal foreign customers contracts supported letters credit issued confirmed banks deemed creditworthy letters credit ensure payment customer generally sell export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices customers may able obtain letters credit full sales value inventory shipped august 31 2019 2018 32 33 respectively accounts receivable balance covered letters credit remaining balance 96 99 less 60 days past due august 31 2019 2018 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances may use derivatives manage portion risk august 31 2019 2018 derivative contracts 47 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc item 8item 7a quantitative qualitative disclosures market risk commodity price risk exposed commodity price risk mainly associated variations market price ferrous nonferrous metals including scrap metal finished steel products auto bodies commodities timing magnitude industry cycles difficult predict impacted general economic conditions respond increases decreases forward selling prices adjusting purchase prices actively manage exposure commodity price risk monitor actual expected spread forward selling prices purchase costs processing shipping expense sales contracts based prices negotiated customers generally orders placed 30 60 days ahead shipment date however financial results may negatively impacted forward selling prices fall quickly adjust purchase prices customers fail meet contractual obligations assess net realizable value inventory “nrv” quarter based upon committed contracts sales orders estimated future selling prices uncommitted inventories 10 decrease selling price inventory would material nrv impact reportable segments august 31 2020 2019 interest rate risk exposed market risk associated changes interest rates related debt obligations revolving credit facility subject variable interest rates therefore exposure changes interest rates market interest rates changed 10 actual interest rate levels fiscal 2020 2019 effect interest expense net income would material credit risk credit risk relates risk loss might occur result nonperformance counterparties contractual obligations take delivery scrap metal finished steel products make financial settlements obligations provide sufficient quantities scrap metal payment settle advances loans contractual receivables connection demolition scrap extraction projects manage exposure credit risk variety methods including shipping ferrous scrap metal exports letters credit collection deposits prior shipment certain nonferrous export customers establishment credit limits certain sales open terms credit insurance designation collateral financial guarantees securing advances loans contractual receivables result covid19 experienced reductions availability credit insurance historically used cover portion recycled metal finished steel sales domestic customers reduced availability may increase exposure customer credit risk historically shipped almost large shipments ferrous scrap metal foreign customers contracts supported letters credit issued confirmed banks deemed creditworthy letters credit ensure payment customer generally sell export recycled ferrous metal contracts orders generally provide shipment within 30 60 days price agreed customers typically difficulty obtaining letters credit banks periods rising ferrous prices value letters credit collateralized value inventory ship however periods significantly declining prices customers may able obtain letters credit full sales value inventory shipped august 31 2020 2019 40 32 respectively accounts receivable balance covered letters credit remaining balance 98 96 less 60 days past due august 31 2020 2019 respectively foreign currency exchange rate risk exposed foreign currency exchange rate risk mainly associated sales transactions related accounts receivable denominated us dollar canadian subsidiary functional currency canadian dollar certain instances may use derivatives manage portion risk august 31 2020 2019 derivative contracts 53 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc item 8 item 8 financial statements supplementary data index consolidated financial statements schedule schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheet related consolidated statements operations cash flows shareholders equity present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 1996 1995 results operations cash flows three years period ended august 31 1996 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed sprice waterhouse llp price waterhouse llp portland oregon september 27 1996 except note 13 november 15 1996 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts schnitzer steel industries inc consolidated statement operations thousands except per share amounts schnitzer steel industries inc consolidated statement cash flows thousands schnitzer steel industries inc consolidated statement shareholders equity thousands schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates scrap metal processing recycling business minimill steel production business oregon washington california february 1996 company sold 2500000 shares class common stock 2950 per share public offering march 1995 company purchased outstanding common stock manufacturing management inc mmi note 12 november 16 1993 company sold 2922500 shares class common stock initial public offering summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest four joint ventures operating western united states accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using lifo lastin firstout average cost methods property plant equipment property plant equipment recorded cost major renewals improvements capitalized expenditures maintenance repairs charged income incurred financial reporting purposes depreciation determined principally using straightline method estimated useful lives 20 40 years buildings 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income goodwill amortized straightline basis 40 years august 31 1996 1995 accumulated amortization aggregated 2456 1235 respectively goodwill periodically reviewed company impairments fair value may less carrying value schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts common stock voting rights share class common stock entitled one vote share class b common stock entitled ten votes net income per share net income per share based weighted average common equivalent shares outstanding 9295705 7906593 7285010 fiscal years 1996 1995 1994 respectively interest income taxes paid company paid 5016 2719 1078 interest fiscal years 1996 1995 1994 respectively periods company paid 10703 12431 4791 income taxes fair value financial instruments cash receivables current liabilities reflected consolidated financial statements fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates reclassifications certain line items prior years financial statements reclassified consistency current year note 2 inventories consist following august 31 1996 1995 scrap metals 21006 11861 work process 24535 29468 finished goods 29767 20591 supplies 15438 9933 90746 71853 scrap metal inventories valued lifo remainder average cost scrap metal inventories exceeded stated lifo value 8215 10478 august 31 1996 1995 respectively 1994 net income increased 114 02 per share resulting liquidation lifo inventory quantities carried lower costs prevailing prior years schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 3 property plant equipment property plant equipment consist following august 31 1996 1995 land improvements 31235 30911 buildings leasehold improvements 15425 13433 machinery equipment 195367 139377 construction progress 8489 28242 250516 211963 less accumulated depreciation 99999 92299 150517 119664 capitalized interest costs associated construction 1112 529 fiscal years 1996 1995 respectively 1991 company installed new melt shop minimill steel production facility time estimated useful life certain melt shop assets ten years may 1996 company hired consultant estimate remaining useful life assets based consultants findings company extended original life assets five years beginning fiscal 1996 company began depreciating assets estimated remaining life ten years change accounting estimate increased net income 1100 increased earnings per share 12 fiscal 1996 august 31 1996 company outstanding purchase orders totalling 6408 machinery equipment new rod block constructed companys steel operations schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 4 longterm debt longterm debt consists following august 31 1996 1995 bank unsecured revolving credit facility 100000 maximum due march 2000 interest payable floating interest rates varying dates depending upon maturity individual advances 41500 61500 state oregon loan energy conservation equipment secured 789 fixedrate interest principal interest installments payable monthly june 2011 2273 2351 956 1094 total longterm debt 44729 64945 less portion due within one year 254 247 longterm debt less current portion 44475 64698 august 31 1996 company 100 million unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 1996 rates approximated 54 interest payable upon maturity advance line unless term advance exceeds three months case interest payable threemonth interval facility matures march 2000 time principal amounts outstanding due addition facility company committed line credit 20 million uncommitted line credit 35 million banks committed bank credit facilities contain financial covenants including covenants related net worth ratios current assets current liabilities debt equity cash flow payments longterm debt next five fiscal years follows 1997 254 1998 362 1999 180 2000 41693 2001 207 thereafter 2033 44729 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 5 environmental liabilities fiscal 1995 conjunction due diligence proceedings companys acquisition mmi independent thirdparty consultant hired estimate costs cure current future potential environmental liabilities cumulative provision total costs specified consultants report aggregated 24366 included mmis statement operations prior acquisition company resulting increase mmis reserve environmental liabilities 24981 august 31 1996 environmental liability aggregated 22938 portion liability recorded fiscal 1995 relates mmis status potentially responsible party prp investigation cleanup sediment along hylebos waterway tacoma scrap yard located well alleged damage natural resources waterway additionally washington state department ecology issued consent decree 1990 required paving mmis ferrous scrap yard installation stormwater treatment system completed fiscal 1996 1994 mmi reached settlement insurance carriers respect costs incurred 1990 consent decree hylebos waterway projects settlement company reimbursed covered costs 600 1997 funds expended remaining recorded liability covers thirdparty sites mmi named prp well potential future cleanup sites mmi conducted business allegedly disposed materials schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 6 income taxes provision benefit income taxes follows august 31 1996 1995 1994 current federal 7235 12360 4915 state 721 1600 559 deferred federal 1678 2011 325 state 372 167 26 10006 11782 5773 deferred tax assets liabilities follows august 31 1996 1995 net current deferred tax assets inventory valuation methods 1035 2173 employee benefit accruals 1607 1757 state income tax 486 905 3128 4835 net noncurrent deferred tax liabilities accelerated depreciation bases differences 25957 22157 environmental liabilities 8638 8392 325 419 15994 14184 reasons difference effective income tax rate statutory federal income tax rate follows august 31 1996 1995 1994 federal statutory rate 35 foreign sales corporation 5 4 3 state taxes credits 2 3 1 33 35 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport scrap metal foreign markets charges incurred charters 7943 3309 3360 1996 1995 1994 respectively 1993 company signed fiveyear timecharter agreement one vessel agreement guarantees ship owner residual market value 2500 end timecharter company entered two additional sevenyear time charters may 1995 august 1996 two time charters renegotiated due condition vessels lower charter rates experienced shipping industry resulting 769 refund timecharter expenses related first three fiscal quarters 1996 refund recorded fourth quarter 1996 company purchased scrap metals joint venture operations totalling 8513 7704 8118 1996 1995 1994 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents lease current location expiration annual rent scrap operations portland facility marine terminal 2063 1056 sacramento facility 2003 80 administrative offices 2006 166 net minimum sublease minimum rents income rents 1997 1319 38 1281 1998 1319 38 1281 1999 1319 38 1281 2000 1319 38 1281 2001 1319 38 1281 thereafter 66628 rent expense 1274 1315 1185 1996 1995 1994 respectively rents scrap operations increased 15 1994 adjusted every 5 years thereafter based upon changes consumer producer price indices beginning 2003 every 15 years thereafter rent adjusted market schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totalled 816 872 1579 1996 1995 1994 respectively transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities charges incurred subcharters totalled 3135 1996 net 163 refund recorded fourth quarter resulting renegotiation timecharter contracts previously discussed charges offset income 3157 1996 subcharter activity previous years february 27 1996 company sold parcel land related real estate company received 585000 recognizing gain loss transaction transactions affecting property plant equipment time law firm ball janik llp director robert ball partner provides legal services company mr ball director significant shareholder secretary electrical construction company ecc electrical contractor provided electrical construction services companys new rolling mill company paid ecc 7301 1256 1996 1995 respectively note 8 employee benefits accordance union agreements company contributed union pension plans 1782 1444 1275 1996 1995 1994 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totalled 1268 935 789 1996 1995 1994 respectively schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth plans funded status august 31 1996 july 1 1995 actuarial present value accumulated plan benefits vested 2669 1841 nonvested 333 218 accumulated benefit obligation 3002 2059 effect projected future compensation levels 544 288 projected benefit obligation 3546 2347 plan assets fair value primarily marketable securities 3408 2290 plan assets less projected benefit obligation 138 57 unrecognized prior service costs 75 49 unrecognized net loss 369 129 net pension asset 306 121 components defined benefit net pension cost follows august 31 1996 1995 1994 service costs benefits earned year 367 280 285 interest cost projected benefit obligation 219 186 167 actual return plan assets 248 192 158 net amortization deferral 4 2 net pension cost 342 276 294 assumptions used year determining defined benefit net pension cost 1996 1995 1994 weighted average discount rate 75 80 75 rate increase future compensation levels 45 expected longterm rate return assets 90 80 75 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts 1991 company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows august 31 1996 1995 1994 restricted trust fund 459 234 97 deferred compensation expense 545 741 776 longterm pension liability 1249 1308 1194 pension cost 136 149 96 note 9 stock incentive plan september 1993 company adopted stock incentive plan employees consultants directors company plan covers 375000 shares class common stock options tenyear term become exercisable 20 shares covered option first five anniversaries grant october 7 1996 meeting companys board directors voted amend stock incentive plan among things increase number reserved shares 375000 1200000 proposed revisions submitted company shareholders january 6 1997 annual meeting shareholders following table summarizes stock option transactions shares option price range balance august 31 1993 options granted 99167 1800 1850 balance august 31 1994 99167 1800 1850 options granted 81460 2000 balance august 31 1995 180627 1800 2000 options granted 113888 2425 balance august 31 1996 294515 1800 2425 exercisable august 31 1996 55955 available grant august 31 1996 80485 note 10 segment information company operates two industry segments scrap metal processing recycling minimill steel production business segments operate oregon washington california intersegment sales primarily scrap operations steel operations transferred negotiated market rate per ton eliminated consolidation segment income operations include general corporate expenses income taxes schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts scrap operations segment sells foreign customers primarily asia resulting export sales 137701 140046 79961 1996 1995 1994 respectively 1996 sales one customer accounted 12 consolidated revenues august 31 1996 1995 1994 net revenues scrap operations 233484 244129 161755 steel operations 160019 141469 154634 intersegment sales 54151 54887 54692 339352 330711 261697 income operations scrap operations 29587 26282 12297 steel operations 6303 9252 6513 income joint ventures 3291 2511 2370 corporate eliminations 6239 5478 4598 32942 32567 16582 total assets scrap operations 133324 122545 47352 steel operations 191823 147059 106992 corporate eliminations 12342 10701 9798 337489 280305 164142 depreciation amortization expense scrap operations 6891 5036 3498 steel operations 6907 6401 5486 corporate 196 161 364 13994 11598 9348 capital expenditures scrap operations 7695 5375 6820 steel operations 36323 25638 14187 corporate 571 145 77 44589 31158 21084 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 11 summarized financial information joint ventures summary combined operations joint venture partnerships follows august 31 1996 1995 current assets 9526 10465 noncurrent assets 24527 22022 34053 32487 current liabilities 5613 6256 noncurrent liabilities 7874 7344 minority interest 1762 1870 partners equity 18804 17017 34053 32487 august 31 1996 1995 1994 revenues 43883 57377 55282 income operations 7691 5910 5318 net income taxes 6636 5019 4737 companys share combined operations 50 companys investment one partnership 742 excess partnership equity due asset carryover values inception excess amortized 20 years accumulated amortization totalled 266 229 august 31 1996 1995 respectively company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totalled 184 185 218 1996 1995 1994 respectively advances joint venture partnerships included noncurrent assets liabilities respectively bear interest prime rate less one percent although advances collectible demand management intend request payment foreseeable future company earned interest income 309 385 134 advances 1996 1995 1994 respectively note 12 acquisition manufacturing management inc mmi march 29 1995 company purchased outstanding shares stock mmi 66000 cash company borrowed funds acquisition banks 100000 revolving line credit note 4 control mmis board directors transferred company march 17 1995 designated effective date purchase schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts company accounted acquisition using purchase method accordingly purchase price allocated assets acquired liabilities assumed based fair values effective date acquisition goodwill aggregating 42017 recorded difference acquisition cost fair values assets acquired liabilities assumed company amortizing goodwill forty years using straightline method consolidated results operations included mmis results operations beginning march 17 1995 following supplemental pro forma information presents combined results operations company mmi though acquisition occurred beginning periods shown however pro forma information necessarily indicative results would resulted acquisition occurred beginning periods presented provision environmental liabilities related mmi note 5 included results operations year ended august 31 1994 year ended august 31 1995 1994 unaudited revenues 392031 365809 net income 22601 3176 earnings per share 286 44 conjunction acquisition liabilities assumed follows fair value assets acquired 95958 cash paid stock 66000 liabilities assumed 29958 note 13 subsequent events september 16 1996 company announced signing agreement among company proler international corp proler company would acquire proler environmental services company involved recovery recycling scrap metals industrial wastes joint ventures proler exports ferrous scrap foreign markets scrap collection processing deep water facilities los angeles california providence rhode island everett massachusetts jersey city new jersey pursuant agreement proler company commenced cash tender offer outstanding shares proler cash price 750 per share tender offer completed proler become wholly owned subsidiary company cash merger per share price agreement provides tender offer conditioned among things least majority prolers outstanding shares tendered withdrawn prior expiration offer tender offer merger also subject expiration termination applicable waiting period schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts hartscottrodino antitrust improvements act 1976 hsr act tender offer originally scheduled expire october 18 1996 extended three occasions currently scheduled expire november 29 1996 october 4 1996 company received second request us department justice doj additional information respect filings hsr act request extended waiting period hsr act 10 days doj receives requested information unless doj grants early termination company currently working complying dojs request hugo neu corporation hugo neu partner proler three principal joint ventures proler conducts scrap metal business proposed acquire outstanding shares proler 900 per share cash subject certain conditions november 15 1996 response hugo neus proposal company announced increased offer price 900 per share cash extended tender offer november 29 1996 prolers board directors continues support companys offer proler stock superior hugo neus offer proler approximately 47 million shares outstanding making value transaction 900 per share 42 million hugo neu also taken various steps including commencing lawsuits arbitration proceedings block acquisition proler company november 14 1996 hugo neu added company defendant action pending us district court southern district texas seeks among things prevent company purchasing proler stock company believes hugo neus claims legal factual merit completion acquisition proler continues subject considerable uncertainty due ongoing review doj hsr act possibility hugo neu might increase offer proler stock succeed efforts block transactions litigation schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 14 quarterly financial data unaudited fiscal year 1996 first second third fourth net revenues 71591 82721 86950 98090 income operations 8575 8209 8031 8129 net income 5078 5400 4551 5755 income per common share 64 65 44 55 results fourth quarter 1996 include refund timecharter expenses 769 subcharter expenses 163 related first three fiscal quarters 1996 see note 7 fiscal year 1995 first second third fourth net revenues 56002 63339 106611 104759 income operations 3958 5399 12702 10508 net income 2764 3762 7854 7867 income per common share 35 47 98 102 schnitzer steel industries inc form 10k part ii continued item 9item 8 financial statements supplementary data index consolidated financial statements schedule page report independent accountants28 consolidated balance sheet august 31 1997 199629 consolidated statement operations years ended august 31 1997 1996 199530 consolidated statement shareholders equity years ended august 31 1997 1996 199531 consolidated statement cash flows years ended august 31 1997 1996 199532 notes consolidated financial statements33 report independent accountants financial statement schedules55 financial statement schedule years ended august 31 1997 1996 199556 schedule ii valuation qualifying accounts reserves schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 1997 1996 results operations cash flows three years period ended august 31 1997 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed price waterhouse llp portland oregon september 26 1997 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates scrap metal processing recycling business minimill steel production business oregon washington california additionally result acquisition proler international corp effective november 29 1996 see note 12 joint ventures company participates management additional scrap collection processing facilities california massachusetts rhode island new jersey new york arizona new hampshire maine summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest seven joint ventures operating western eastern united states 33 13 interest one joint venture new jersey accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using lifo lastin firstout average cost methods property plant equipment property plant equipment recorded cost major renewals improvements capitalized expenditures maintenance repairs charged income incurred depreciation determined principally using straightline method estimated useful lives 20 40 years buildings 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income goodwill amortized straightline basis 40 years august 31 1997 1996 accumulated amortization aggregated 3670 2456 respectively goodwill periodically reviewed company impairments fair value may less carrying value common stock voting rights share class common stock entitled one vote share class b common stock entitled ten votes net income per share net income per share based weighted average common equivalent shares outstanding 10377137 9295705 7906593 fiscal years 1997 1996 1995 respectively february 1997 financial accounting standards board issued statement 128 earnings per share sfas 128 establishes standards computing presenting earnings per share eps sfas 128 replaces presentation primary fully diluted eps presentation basic diluted eps basic eps computed schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts dividing income available common shareholders weightedaverage number common shares outstanding period diluted eps reflects potential dilution would occur instrument could result additional common shares issued sfas 128 must adopted companys fiscal 1998 requires restatement priorperiod eps data presented adoption materially affect eps reported fiscal 1997 interest income taxes paid company paid 5093 5016 2719 interest fiscal years 1997 1996 1995 respectively periods company paid 7283 10703 12431 income taxes fair value financial instruments cash receivables current liabilities reflected consolidated financial statements fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates note 2 inventories consist following scrap metal inventories valued lifo remainder average cost scrap metal inventories exceeded stated lifo value 8039 8215 august 31 1997 1996 respectively schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 3 property plant equipment property plant equipment consist following capitalized interest costs associated construction 292 1112 fiscal years 1997 1996 respectively note 4 longterm debt longterm debt consists following schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts august 31 1997 company 200000 unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 1997 rates averaged 58 interest payable upon maturity advance line facility matures june 2002 time principal amounts outstanding due addition facility company committed line credit 20 million uncommitted line credit 35 million banks committed bank credit facilities contain financial covenants including covenants related net worth ratios current assets current liabilities debt equity cash flow payments longterm debt next five fiscal years follows 1998 361 1999 180 2000 193 2001 207 2002 82820 thereafter 9481 93242 february 1997 company entered interest rate agreement sole purpose locking interest rate planned private placement debt company subsequently decided pursuing private placement april 1997 thus recognized deferred gain agreement approximately 3 million amount included income accompanying statement operations year ended august 31 1997 note 5 environmental liabilities conjunction due diligence proceedings companys acquisition manufacturing management inc mmi march 1995 independent thirdparty consultant hired estimate costs cure current future potential environmental liabilities cumulative provision total costs specified consultants report included mmis statement operations prior acquisition company reserve carried companys balance sheet august 31 1997 aggregated 205 million schnitzer steel tacoma sst formerly general metals tacoma subsidiary mmi owns operates scrap facility located hylebos waterway part commencement bay subject ongoing environmental investigation remediation project us environmental protection agency epa comprehensive environmental response compensation liability act cercla sst well 60 parties named potentially responsible parties prp investigation cleanup contaminated sediment along hylebos waterway sst five prps voluntarily entered administrative order consent epa fund preremedial study sediment contamination remediation alternatives ssts share study expected completed 1998 approximately 2 million potential liabilities cannot estimated time 1996 prior companys acquisition proler international corp proler see note 12 independent thirdparty consultant engaged estimate costs cure present future environmental liabilities related prolers whollyowned joint venture properties proler recorded liability 86 million probable costs remediate whollyowned properties based upon consultants estimates increasing environmental reserve 98 million company carried aggregate reserve financial statements upon acquiring proler schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts 96 million remained outstanding august 31 1997 also prolers joint venture operations recorded additional liabilities 41 million probable costs remediate properties based upon consultants estimates 1996 prior companys acquisition proler 1982 1987 mri corporation mri whollyowned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigation property december 1996 added site national priorities list mri proler along several parties named prps site epa additionally proler subsidiary named identified prps several sites proler included probable costs associated site aforementioned reserve part proler acquisition company became fiftypercent owner hugo neuproler company hnp agreed part recent lease renewal port los angeles responsible multiyear phased remedial cleanup project involving certain environmental conditions scrap processing facility terminal island site los angeles california year 2001 remediation include limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring probable costs remediate property included aforementioned reserve note 6 income taxes provision benefit income taxes follows schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts deferred tax assets liabilities follows reasons difference effective income tax rate statutory federal income tax rate follows schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport scrap metal foreign markets charges incurred charters 9296 7943 3309 1997 1996 1995 respectively 1993 company signed fiveyear timecharter agreement one vessel agreement guarantees ship owner residual market value 2500 end timecharter company entered two additional sevenyear time charters may 1995 august 1996 two time charters renegotiated due condition vessels lower charter rates experienced shipping industry resulting 769 refund timecharter expenses related first three fiscal quarters 1996 refund recorded fourth quarter 1996 company purchased scrap metals joint venture operations totalling 13856 8513 7704 1997 1996 1995 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents rent expense 1351 1274 1315 1997 1996 1995 respectively rents scrap operations adjusted 1999 based upon changes consumer producer price indices beginning 2003 every 15 years thereafter rent adjusted market rates schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totalled 1046 816 872 1997 1996 1995 respectively transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities year ended august 31 1997 charges incurred subcharters aggregated 871 offset income 747 charges incurred subcharters totaled 3135 fiscal 1996 net 163 refund recorded fourth quarter resulting renegotiation timecharter contracts previously discussed charges offset income 3157 subcharter activity fiscal 1995 february 1996 company sold parcel land related real estate company received 585000 recognizing gain loss transaction transactions affecting property plant equipment time law firm ball janik llp director robert ball partner provides legal services company mr ball director significant shareholder secretary electrical construction company ecc electrical contractor provided electrical construction services companys new rolling mill company paid ecc 7301 1256 1996 1995 respectively payments ecc made fiscal 1997 note 8 employee benefits accordance union agreements company contributed union pension plans 2164 1782 1444 1997 1996 1995 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 1028 1268 935 1997 1996 1995 respectively schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth plans funded status components defined benefit net pension cost follows assumptions used year determining defined benefit net pension cost schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts 1991 company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows note 9 stock incentive plan september 1993 company adopted stock incentive plan employees consultants directors company plan covers 1200000 shares class common stock options tenyear term become exercisable 20 shares covered option first five anniversaries grant company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models however models developed use valuing employee stock compensation awards apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 1997 1996 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following weightedaverage assumptions fiscal years 1997 1996 riskfree interest rate 66 dividend yield 1 weightedaverage expected life options 75 years weightedaverage volatility factors expected market price companys common stock 43 46 fiscal years 1997 1996 respectively purposes pro forma disclosures estimated fair value options amortized expense options vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years companys pro forma information follows schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts summary companys stock option activity related information years ended august 31 follows exercise prices options outstanding august 31 1997 ranged 18 25 weightedaverage remaining contractual life options 84 years note 10 segment information company operates two industry segments scrap metal processing recycling minimill steel production business segments operate oregon washington california intersegment sales primarily scrap operations steel operations transferred negotiated market rate per ton eliminated consolidation segment income operations include general corporate expenses income taxes scrap operations segment sells foreign customers primarily asia resulting export sales 117861 137701 140046 1997 1996 1995 respectively 1996 sales one customer accounted 12 consolidated revenues schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 10 segment information continued schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 11 summarized financial information joint ventures summary combined operations joint ventures company partner follows company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 214 184 185 1997 1996 1995 respectively advances joint venture partnerships included noncurrent assets liabilities respectively bear interest prime rate less one percent although advances collectible demand management intend request payment foreseeable future company earned interest income 580 309 385 advances 1997 1996 1995 respectively schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 12 acquisition proler international corp november 29 1996 pic acquisition corp pic wholly owned subsidiary company acquired 4079000 shares common stock proler international corp proler representing approximately 86 outstanding shares proler 9 cash per share pursuant tender offer outstanding shares common stock proler subsequent november 30 1996 pic purchased additional 342600 shares thereby increasing ownership approximately 94 outstanding proler shares december 6 1996 company completed merger pic proler result proler became whollyowned subsidiary company result merger remaining outstanding shares proler common stock converted right receive 9 per share cash paid tender offer company borrowed funds pay proler shares existing credit facilities company accounted acquisition using purchase method accordingly purchase price allocated assets acquired liabilities assumed based fair values effective date acquisition following unaudited pro forma information presents summary consolidated results operations company proler though acquisition occurred beginning periods shown year ended august 31 1997 proler recorded provision environmental liabilities 86 million pro forma results prepared comparative purposes include certain adjustments give effect acquisition together related income tax effects purport indicative results operations actually would resulted combination effect beginning periods presented future results operations consolidated entities conjunction acquisition liabilities assumed follows fair value assets acquired 100685 cash paid stock 42456 liabilities assumed 58229 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 13 acquisition manufacturing management inc mmi march 29 1995 company purchased outstanding shares stock mmi 66000 cash company borrowed funds acquisition banks 100000 revolving line credit note 4 control mmis board directors transferred company march 17 1995 designated effective date purchase company accounted acquisition using purchase method accordingly purchase price allocated assets acquired liabilities assumed based fair values effective date acquisition goodwill aggregating 42017 recorded difference acquisition cost fair values assets acquired liabilities assumed company amortizing goodwill forty years using straightline method consolidated results operations include mmis results operations beginning march 17 1995 following supplemental pro forma information presents combined results operations company mmi though acquisition occurred beginning periods shown however pro forma information necessarily indicative results would resulted acquisition occurred beginning periods presented year ended august 31 1995 revenues 392031 net income 22601 earnings per share 286 conjunction acquisition liabilities assumed follows fair value assets acquired 95958 cash paid stock 66000 liabilities assumed 29958 schnitzer steel industries inc notes consolidated financial statements thousands except share per share amounts note 14 quarterly financial data unaudited results fourth quarter 1996 include refund timecharter expenses 769 subcharter expenses 163 related first three fiscal quarters 1996 see note 7 schnitzer steel industries inc form 10k part ii continued item 9item 8 financial statements supplementary data index consolidated financial statements schedule page report independent accountants29 consolidated balance sheet august 31 1998 199730 consolidated statement operations years ended august 31 1998 1997 199631 consolidated statement shareholders equity years ended august 31 1998 1997 199632 consolidated statement cash flows years ended august 31 1998 1997 199633 notes consolidated financial statements34 schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 1998 1997 results operations cash flows three years period ended august 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp portland oregon october 6 1998 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates scrap metal processing recycling business minimill steel production business alaska washington oregon california additionally joint ventures company participates management additional scrap collection processing facilities arizona california connecticut idaho maine massachusetts nevada new hampshire new jersey new york rhode island summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest ten joint ventures operating western eastern united states 30 interest one joint venture rhode island accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using lifo lastin firstout average cost methods property plant equipment property plant equipment recorded cost major renewals improvements capitalized expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives 20 40 years buildings 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income goodwill amortized straightline basis 40 years august 31 1998 1997 accumulated amortization aggregated 4943 3670 respectively goodwill periodically reviewed company impairments fair value may less carrying value common stock voting rights share class common stock entitled one vote share class b common stock entitled ten votes schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 1 nature business summary significant accounting policies continued earnings per share company adopted sfas 128 earnings per share specifies computation presentation disclosure requirements earnings per share eps sfas 128 replaces presentation primary fully diluted eps basic diluted eps basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps options exercise price greater average market price included computation diluted earnings per share options totaled 98 1998 interest income taxes paid company paid 6535 5093 5016 interest fiscal years 1998 1997 1996 respectively periods company paid 7440 7283 10703 income taxes fair value financial instruments cash receivables current liabilities reflected consolidated financial statements fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates reclassifications certain reclassifications prior year balances made consistent presentation current year note 2 inventories consist following august 31 1998 1997 scrap metals 28952 26897 work process 13192 24358 finished goods 44276 28109 supplies 16716 15790 103136 95154 scrap metal inventories valued lifo remainder average cost scrap metal inventories exceeded stated lifo value 5811 8039 august 31 1998 1997 respectively production accounting process utilized company record scrap inventory quantities relies significant estimates affected weight imprecisions moisture factors note 3 property plant equipment property plant equipment consist following august 31 1998 1997 land improvements 33034 32580 buildings leasehold improvements 15835 15757 machinery equipment 216649 212380 construction progress 3918 4846 269436 265563 less accumulated depreciation 126854 114427 142582 151136 capitalized interest costs associated construction 292 fiscal year 1997 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 4 longterm debt longterm debt consists following august 31 1998 company 200000 unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 1998 rates averaged 58 interest payable upon maturity advance line facility matures june 2003 time principal amounts outstanding due addition facility company additional unsecured lines credit totaling 75000 20000 committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage payments longterm debt next five fiscal years follows 1999 168 2000 192 2001 205 2002 220 2003 130333 thereafter 9286 140404 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 4 longterm debt continued february 1998 company entered interest rate swap agreements two banks purpose managing exposure adverse movements interest rates fixing cost various debt instruments company use financial instruments trading purposes party leveraged derivatives pursuant swap agreements company exchanged floating rate interest obligations 50000 notional principal amount fixed interest obligation 555 three years differential paid received interest rate agreements recognized adjustment interest expense february 1997 company entered interest rate agreement sole purpose locking interest rate planned private placement debt company subsequently decided pursuing private placement april 1997 thus recognized deferred gain agreement approximately 3 million amount included income accompanying statement operations year ended august 31 1997 june 15 1998 fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities fas 133 fas 133 effective fiscal quarters fiscal years beginning june 15 1999 fas 133 requires derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction management company anticipates due limited use derivative instruments adoption fas 133 significant effect companys results operations financial position note 5 environmental liabilities conjunction due diligence proceedings companys acquisition manufacturing management inc mmi march 1995 independent thirdparty consultant hired estimate costs cure current future potential environmental liabilities cumulative provision total costs specified consultants report included mmis statement operations prior acquisition company reserve carried companys balance sheet august 31 1998 aggregated 202 million general metals tacoma gmt subsidiary mmi owns operates scrap facility located hylebos waterway part commencement bay subject ongoing environmental investigation remediation project us environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt well 60 parties named potentially responsible parties prp investigation clean contaminated sediment along hylebos waterway gmt five prps voluntarily entered administrative order consent epa fund preremedial study sediment contamination remediation alternatives gmts share study expected completed late 1999 approximately 2 million potential liabilities cannot estimated time 1996 prior companys acquisition proler see note 12 independent thirdparty consultant engaged estimate costs cure present future environmental liabilities related prolers wholly owned joint venture properties proler recorded liability 86 million probable costs remediate wholly owned properties based upon consultants estimates increasing environmental reserve 98 million company carried aggregate reserve financial statements upon acquiring proler 81 million remained outstanding august 31 1998 also prolers joint ventures recorded additional liabilities 41 million probable costs remediate properties based upon consultants estimates 1996 prior companys acquisition proler schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 5 environmental liabilities continued 1982 1987 mri corporation mri wholly owned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigations property december 1996 added site national priorities list mri proler along several parties named prps site epa additionally proler subsidiary named identified prps several sites proler included probable costs associated site aforementioned reserve part proler acquisition company became fiftypercent owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles responsible multiyear phased remedial cleanup project involving certain environmental conditions scrap processing facility terminal island site los angeles california year 2001 remediation include limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring probable costs remediate property included aforementioned reserve note 6 income taxes provision income taxes follows schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 6 income taxes continued deferred tax assets liabilities follows upon acquisition proler company acquired net operating loss carryforwards approximately 31019 expire years 2007 2012 minimum tax credits carryforwards 742 arose prolers preacquisition years federal income tax rules utilization companys acquired net operating loss carryforwards acquired minimum tax credits proler limited future earnings proler limited approximately 2395 per year benefit net operating loss carryforwards acquired minimum tax credits recognized financial statements reasons difference effective income tax rate statutory federal income tax rate follows schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport scrap metal foreign markets charges incurred charters 6726 9296 7943 1998 1997 1996 respectively 1993 company signed fiveyear timecharter agreement one vessel expired june 1998 agreement guaranteed ship owner residual market value 2500 end timecharter upon expiration time charter company paid guaranteed residual entered additional five year time charter company accounted transaction capital lease ownership vessel transferred expiration timecharter company entered two additional sevenyear time charters may 1995 vessels august 1996 two time charters renegotiated due condition vessels lower charter rates experienced shipping industry resulting 769 refund timecharter expenses related first three fiscal quarters 1996 refund recorded fourth quarter 1996 company purchased scrap metals joint venture operations totaling 15825 13856 8513 1998 1997 1996 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents rent expense 1330 1351 1274 1998 1997 1996 respectively rents scrap operations adjusted 1999 based upon changes consumer producer price indices beginning 2003 every 15 years thereafter rent adjusted market rates schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 7 related party transactions continued transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 1223 1046 816 1998 1997 1996 respectively transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities years ended august 31 1998 1997 charges incurred subcharters aggregated 3151 871 offset income 3099 747 respectively charges incurred subcharters totaled 3135 fiscal 1996 net 163 refund recorded fourth quarter resulting renegotiation timecharter contracts previously discussed charges offset income 3157 included assets 3340 1180 notes receivable joint venture partners august 31 1998 1997 respectively interest income notes advances joint venture partnerships totaled 944 580 309 fiscal years 1998 1997 1996 respectively february 1996 company sold parcel land related real estate company received 585000 recognizing gain loss transaction transactions affecting property plant equipment time law firm ball janik llp director robert ball partner provides legal services company mr ball director significant shareholder secretary electrical construction company ecc electrical contractor provided electrical construction services companys new rolling mill company paid ecc 7301 1996 payments ecc made fiscal 1997 1998 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 8 employee benefits accordance union agreements company contributed union pension plans 2065 2164 1782 1998 1997 1996 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 1060 1028 1268 1998 1997 1996 respectively nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth change benefit obligation change plan assets funded status august 31 1998 1997 accordance sfas 132 assumptions used year determining defined benefit net pension cost schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 8 employee benefits continued 1991 company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows note 9 stock incentive plan september 1993 company adopted stock incentive plan employees consultants directors company plan covers 1200000 shares class common stock options tenyear term become exercisable 20 shares covered option first five anniversaries grant company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 9 stock incentive plan continued pro forma information fiscal years 1998 1997 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following assumptions purposes pro forma disclosures estimated fair value options amortized expense options vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years companys pro forma information follows summary companys stock option activity related information years ended august 31 follows exercise prices options outstanding august 31 1998 ranged 18 25 weightedaverage remaining contractual life options 78 years schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 10 segment information company operates two industry segments scrap metal processing recycling minimill steel production business segments operate alaska washington oregon california intersegment sales primarily scrap operations steel operations transferred negotiated market rate per ton eliminated consolidation segment income operations include general corporate expenses income taxes scrap operations segment sells foreign customers primarily asia resulting export sales 109646 117861 137701 1998 1997 1996 respectively 1996 sales one customer accounted 12 consolidated revenues schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 11 summarized financial information joint ventures summary combined operations joint ventures company partner follows company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 241 214 184 1998 1997 1996 respectively advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest prime rate less one percent although advances collectible demand management intend request payment foreseeable future schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 12 acquisition proler international corp november 29 1996 pic acquisition corp pic wholly owned subsidiary company acquired 4079000 shares common stock proler representing approximately 86 outstanding shares proler 9 cash per share pursuant tender offer outstanding shares common stock proler subsequent november 30 1996 pic purchased additional 342600 shares thereby increasing ownership approximately 94 outstanding proler shares december 6 1996 company completed merger pic proler result proler became whollyowned subsidiary company result merger remaining outstanding shares proler common stock converted right receive 9 per share cash paid tender offer company borrowed funds pay proler shares existing credit facilities company accounted acquisition using purchase method accordingly purchase price allocated assets acquired liabilities assumed based fair values effective date acquisition following unaudited pro forma information presents summary consolidated results operations company proler though acquisition occurred beginning periods shown year ended august 31 1997 proler recorded provision environmental liabilities 86 million pro forma results prepared comparative purposes include certain adjustments give effect acquisition together related income tax effects purport indicative results operations actually would resulted combination effect beginning periods presented future results operations consolidated entities conjunction acquisition liabilities assumed follows fair value assets acquired 100685 cash paid stock 42456 liabilities assumed 58229 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 13 disposal lathrop california facility may 1998 company disposed tin scrap processing facility lathrop california facility acquired part proler acquisition note 12 sale resulted gain 11 million 8 million recorded reduction cost goods sold 3 million gain sale assets note 14 quarterly financial data unaudited schnitzer steel industries inc form 10k part ii continued item 9item 8 financial statements supplementary data index consolidated financial statements schedules page report independent accountants30 consolidated balance sheet august 31 1999 199831 consolidated statement operations years ended august 31 1999 1998 199732 consolidated statement shareholders equity years ended august 31 1999 1998 199733 consolidated statement cash flows years ended august 31 1999 1998 199734 notes consolidated financial statements35 schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheet related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 1999 1998 results operations cash flows three years period ended august 31 1999 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp portland oregon october 6 1999 except note 15 november 15 1999 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts schnitzer steel industries inc consolidated statement operations thousands except per share amounts schnitzer steel industries inc consolidated statement shareholders equity thousands schnitzer steel industries inc consolidated statement cash flows thousands schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal processing recycling business cascade steel rolling mills inc subsidiary minimill steel manufacturing business companys wholly owned recycling facilities located alaska washington oregon california nevada additionally joint ventures company participates management additional metals processing recycling businesses arizona california connecticut idaho maine massachusetts nevada new hampshire new jersey new york rhode island summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest eleven joint ventures operating western eastern united states 30 interest one joint venture rhode island accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using lifo lastin firstout average cost methods see note 15 property plant equipment property plant equipment recorded cost major renewals improvements capitalized expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income goodwill amortized straightline basis 40 years august 31 1999 1998 accumulated amortization aggregated 6178 4943 respectively goodwill periodically reviewed company impairments fair value may less carrying value common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally class b common stock may converted one share class common stock schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 1 nature business summary significant accounting policies continued earnings per share basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps options exercise price greater average market price included computation diluted earnings per share options totaled 523 1999 98 1998 interest income taxes paid company paid 6951 6535 5093 interest fiscal years 1999 1998 1997 respectively fiscal 1999 company received net income tax refunds 6175 fiscal years 1998 1997 company paid 7440and 7283 respectively income taxes fair value financial instruments cash receivables current liabilities reflected consolidated financial statements fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 1 nature business summary significant accounting policies continued use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates reclassifications certain reclassifications prior year balances made consistent presentation current year note 2 inventories consist following recycled metal inventories valued lifo remainder average cost recycled metal inventories exceeded stated lifo value 1215 5811 august 31 1999 1998 respectively see note 15 production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture factors note 3 property plant equipment property plant equipment consist following schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 4 longterm debt longterm debt consists following august 31 1999 company 200000 unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 1999 rates averaged 56 interest payable upon maturity advance line facility matures june 2003 time principal amounts outstanding due february 1998 company entered interest rate swap agreements two banks purpose managing exposure adverse movements interest rates fixing cost various debt instruments company use financial instruments trading purposes party leveraged derivatives pursuant swap agreements company exchanged floating rate interest obligations 50000 notional principal amount fixed interest obligation 555 three years differential paid received interest rate agreements recognized adjustment interest expense addition facility company additional unsecured lines credit totaling 85000 20000 committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 4 longterm debt continued payments longterm debt next five fiscal years follows 2000 436 2001 217 2002 229 2003 110142 2004 222 thereafter 9016 120262 april 1999 company agreed become guarantor one joint ventures bank credit facilities agreement company may liable 10000 february 1997 company entered interest rate agreement sole purpose locking interest rate planned private placement debt company subsequently decided pursuing private placement april 1997 thus recognized deferred gain agreement approximately 3 million amount included income accompanying statement operations year ended august 31 1997 june 15 1998 fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities fas 133 fas 133 amended effective fiscal quarters fiscal years beginning june 15 2000 fas 133 requires derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction management company anticipates due limited use derivative instruments adoption fas 133 significant effect companys results operations financial position note 5 environmental liabilities conjunction due diligence proceedings companys acquisition manufacturing management inc mmi march 1995 company hired independent thirdparty consultant estimate costs cure current future potential environmental liabilities cumulative provision total costs specified consultants report included mmis statement operations prior acquisition company reserve carried companys balance sheet august 31 1999 aggregated 18200 general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing environmental investigation remediation project us environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt well 60 parties named potentially responsible parties prp investigation clean contaminated sediment along hylebos waterway gmt five prps voluntarily entered administrative order consent epa fund preremedial study sediment contamination remediation alternatives gmts share study expected completed late 1999 approximately 2000 included reserve potential liabilities cannot estimated time schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 5 environmental liabilities continued 1996 prior companys acquisition proler international corp proler company engaged independent thirdparty consultant estimate costs cure present future environmental liabilities related prolers wholly owned joint venture properties proler recorded liability 8600 probable costs remediate wholly owned properties based upon consultants estimates increasing environmental reserve 9800 company carried aggregate reserve financial statements upon acquiring proler 6560 remained outstanding august 31 1999 also prolers joint ventures recorded additional liabilities 4100 probable costs remediate properties based upon consultants estimates 1996 prior companys acquisition proler 1982 1987 mri corporation mri wholly owned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigations property december 1996 added site national priorities list mri proler along several parties named prps site epa additionally proler subsidiary named identified prps several sites proler included probable costs associated site aforementioned reserve part proler acquisition company became fiftypercent owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles responsible multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed year 2001 remediation include limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring probable costs remediate property included aforementioned reserve metals recycling llc metals scrap metals processing business locations rhode island massachusetts members metals one companys proler joint ventures metals recycling inc june 9 1999 rhode island department environmental management dem issued notice violation nov metals alleging metals violated federal state regulations relating storage management transportation hazardous waste imposed administrative penalty 718045 metals filed answer nov denied allegations requested adjudicatory hearing july 1999 dem issued nov rhode island resource recovery corporation rirrc included civil penalty 307752 relating alleged disposal hazardous waste metals landfill operated rirrc metals rirrc denied dems allegations rirrc requested adjudicatory hearing pursuant alternative coverage disposal agreement rirrc metals agreed defend indemnify rirrc regard nov late january 1999 federal state officials searched metals johnston rhode island worcester massachusetts facilities metals advised search part state criminal investigation possible violations state federal hazardous waste programs rhode island statute prohibits disposal outofstate solid waste landfill operated rirrc grand jury empanelled consider allegations proceedings commenced metals officers company believes metals substantial defenses alleged violations fiscal 1999 company engaged independent consultant review companys environmental issues perform periodic assessment remaining potential liabilities based upon additional remediation investigation certain previously established reserves eliminated result cost goods sold year ended august 31 1999 lowered 1900 reversal reserves schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 6 income taxes provision income taxes follows deferred tax assets liabilities follows acquiring proler company succeeded net operating losses nols 31018 minimum tax credits 742 arisen prolers preacquisition years use nols limited 2395 per year used expire years 2007 2012 use credits limited tax future earnings corporations constituting proler benefit nols credits recognized financial statements schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 6 income taxes continued reasons difference effective income tax rate statutory federal income tax rate follows note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport recycled metal foreign markets charges incurred charters 4580 6726 9296 1999 1998 1997 respectively 1993 company signed fiveyear timecharter agreement one vessel expired june 1998 agreement guaranteed ship owner residual market value 2500 end timecharter upon expiration time charter company paid guaranteed residual entered additional fiveyear time charter company accounted transaction capital lease ownership vessel transferred expiration timecharter company entered two additional sevenyear time charters may 1995 vessels company purchased recycled metals joint venture operations totaling 10954 15825 13856 1999 1998 1997 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 7 related party transactions continued rent expense 1554 1330 1351 1999 1998 1997 respectively rents metals recycling business adjusted 2000 based upon changes consumer producer price indices beginning 2003 every 15 years thereafter rent adjusted market rates transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 1144 1223 1046 1999 1998 1997 respectively transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities years ended august 31 1999 1998 1997 charges incurred subcharters aggregated 3305 3151 871 offset income 2921 3099 747 respectively included assets 3506 3340 1180 notes receivable joint venture partners august 31 1999 1998 1997 respectively interest income notes advances joint venture partnerships totaled 1541 944 580 fiscal years 1999 1998 1997 respectively note 8 employee benefits accordance union agreements company contributed union pension plans 1989 2065 2164 1999 1998 1997 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 1025 1060 1028 1999 1998 1997 respectively nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth change benefit obligation change plan assets funded status august 31 1999 1998 accordance sfas 132 schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 8 employee benefits continued assumptions used year determining defined benefit net pension cost schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 8 employee benefits continued 1991 company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows note 9 stock incentive plan september 1993 company adopted stock incentive plan employees consultants directors company plan covers 1200 shares class common stock options tenyear term except options granted fiscal 1999 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 1999 become fully exercisable first anniversary grant company granted certain employees lieu annual salary revisions company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 1999 1998 1997 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following assumptions schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 9 stock incentive plan continued purposes pro forma disclosures estimated fair value options amortized expense options vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years companys pro forma information follows summary companys stock option activity related information follows exercise prices options outstanding august 31 1999 ranged 12 25 weightedaverage remaining contractual life options 76 years note 10 segment information effective september 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes new standards way public enterprises report information operating segments statement also requires companies disclose information products services provided operating segments geographic areas business major customers schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 10 segment information continued company operates two industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business additionally company partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except companys equity net income joint ventures metals recycling business buys processes ferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metas processors shipment directly steel manufacturing business intersegment sales metals recycling business steel manufacturing business transferred negotiated market rate per ton eliminated consolidation steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals include two predominant operations one joint venture operates selfservice used auto parts yards company purchases substantially auto bodies come yards another joint venture industrial plant demolition contractor joint venture dismantles industrial plants performs environmental remediation sells recovered metals machinery company purchases substantially ferrous recycled metals generated joint venture information provided obtained internal information provided companys chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments assets capital expenditures shown joint ventures management use information allocate resources assess performance joint ventures revenues external customers follows schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 10 segment information continued revenues geographic area joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 7 regarding companys purchases joint ventures income operations joint ventures represents companys equity net income entities schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 10 segment information continued companys share depreciation amortization expense included determination joint ventures net income follows following summary companys total assets capital expenditures individual customer accounted greater ten percent companys consolidated revenues fiscal years 1999 1998 1997 joint ventures metals recycling business significant customers fiscal 1999 one customer accounted 17 another customer accounted 13 combined revenues joint ventures fiscal 1998 one customer accounted 17 another customer accounted 13 combined revenues fiscal 1997 individual customers accounted 13 11 10 combined revenues schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 11 summarized financial information joint ventures summary combined operations joint ventures company partner follows company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 185 241 214 1999 1998 1997 respectively advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest prime rate less one percent although advances collectible demand management intend request payment foreseeable future note 12 acquisition proler international corp november 29 1996 pic acquisition corp pic wholly owned subsidiary company acquired 4079 shares common stock proler representing approximately 86 outstanding shares 9 cash per share pursuant tender offer outstanding shares common stock proler subsequent november 30 1996 pic purchased additional 343 shares thereby increasing ownership approximately 94 outstanding proler shares december 6 1996 company completed merger pic proler result proler became whollyowned subsidiary company result merger remaining outstanding shares proler common stock converted right receive 9 per share cash paid tender offer company borrowed funds pay proler shares existing credit facilities schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 12 acquisition proler international corp continued company accounted acquisition using purchase method accordingly purchase price allocated assets acquired liabilities assumed based fair values effective date acquisition following unaudited pro forma information presents summary consolidated results operations company proler though acquisition occurred beginning period shown year ended august 31 1997 thousands revenues 364899 net income 14606 diluted earnings per share 141 year ended august 31 1997 proler recorded provision environmental liabilities 86 million pro forma results prepared comparative purposes include certain adjustments give effect acquisition together related income tax effects purport indicative results operations actually would resulted combination effect beginning periods presented future results operations consolidated entities conjunction acquisition liabilities assumed follows fair value assets acquired 100685 cash paid stock 42456 liabilities assumed 58229 note 13 disposal sale assets march 1999 cascade steel rolling mills inc sold union city california mill depot recognizing gain 1200 included income accompanying consolidated statement operations may 1998 proler disposed tin metals recycling facility lathrop california facility acquired part proler acquisition note 12 sale resulted gain 11 million 8 million recorded reduction cost goods sold 3 million gain sale assets schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 14 quarterly financial data unaudited schnitzer steel industries inc notes consolidated financial statements thousands except per share amounts note 15 subsequent event first quarter fiscal 2000 company changed method accounting recycled metals inventories lastin firstout lifo firstin firstout fifo given volatility prices quantities management believes accounting inventories using fifo method better matches revenues expenses therefore preferable addition method consistent inventory pools accordance accounting principles board 20 accounting changes upon adoption company retroactively restated prior periods applying fifo method accounting prior periods company adopted change fiscal 1999 retroactive impact would follows schnitzer steel industries inc form 10k part ii continued item 9item 8 financial statements supplementary data index consolidated financial statements schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2000 1999 results operations cash flows three years period ended august 31 2000 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company changed method accounting inventory pricewaterhousecoopers llp portland oregon september 29 2000 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal processing recycling business cascade steel rolling mills inc subsidiary minimill steel manufacturing business companys wholly owned recycling facilities located alaska washington oregon california nevada additionally joint ventures company participates management additional metals processing recycling businesses arizona california connecticut idaho illinois indiana maine massachusetts nevada new hampshire new jersey new york rhode island texas utah summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest eleven joint ventures operating western eastern united states 30 interest one joint venture rhode island accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using fifo firstin firstout average cost methods see note 2 property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income goodwill amortized straightline basis 40 years august 31 2000 1999 accumulated amortization aggregated 74 million 62 million respectively goodwill periodically reviewed company impairments fair value may less carrying value common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally class b common stock may converted one share class common stock schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies continued earnings per share basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps thousands except per share amounts options exercise price greater average market price included computation diluted earnings per share options totaled 491000 2000 523000 1999 interest income taxes paid company paid 68 million 70 million 65 million interest fiscal years 2000 1999 1998 respectively fiscal 1999 company received net income tax refunds 62 million fiscal years 2000 1998 company paid 04 million 74 million respectively income taxes fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies continued use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue title transfers typically occurs time shipment december 1999 staff accounting bulletin sab 101 released bulletin provides guidance interpretation sec regarding revenue recognition sab 101 expected material impact companys results operations sab effective companys fourth quarter fiscal 2001 note 2 inventories consist following thousands production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture factors first quarter fiscal 2000 company changed method accounting recycled metals inventories lastin firstout lifo firstin firstout fifo given volatility prices quantities management believes accounting inventories using fifo method better matches revenues expenses therefore preferable addition method consistent inventory pools accordance accounting principles board 20 accounting changes upon adoption company retroactively restated prior periods applying fifo method accounting prior periods effect accounting change net income previously reported follows thousands except per share amounts schnitzer steel industries inc notes consolidated financial statements note 3 property plant equipment operating leases property plant equipment consist following thousands company leases certain property equipment future minimum rental payments operating leases thousands 2001 510 2002 376 2003 236 2004 25 2005 6 see discussion additional leases related parties note 7 note 4 longterm debt longterm debt consists following thousands schnitzer steel industries inc notes consolidated financial statements note 4 longterm debt continued august 31 2000 company 200 million unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 2000 rates averaged 689 interest payable upon maturity advance line facility matures june 2003 time principal amounts outstanding due february 1998 company entered interest rate swap agreements two banks purpose managing exposure adverse movements interest rates fixing cost various debt instruments company use financial instruments trading purposes party leveraged derivatives pursuant swap agreements company exchanged floating rate interest obligations 50 million notional principal amount fixed interest obligation 555 three years differential paid received interest rate agreements recognized adjustment interest expense agreement expires february 2001 addition facility company additional unsecured lines credit totaling 50 million uncommitted committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage payments longterm debt next five fiscal years follows thousands june 15 1998 fasb issued statement financial accounting standards 133 accounting derivative instruments hedging activities fas 133 fas 133 amended effective fiscal quarters fiscal years beginning june 15 2000 fas 133 requires derivative instruments recorded balance sheet fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type hedge transaction management company anticipates due limited use derivative instruments adoption fas 133 significant effect companys results operations financial position note 5 environmental liabilities conjunction due diligence proceedings companys acquisition manufacturing management inc mmi march 1995 company hired independent thirdparty consultant estimate costs cure current future potential environmental liabilities cumulative provision total costs specified consultants report included mmis statement operations prior acquisition company reserve carried companys balance sheet august 31 2000 aggregated 179 million schnitzer steel industries inc notes consolidated financial statements note 5 environmental liabilities continued general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing environmental investigation remediation project us environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt well 60 parties named potentially responsible parties prp investigation clean contaminated sediment along hylebos waterway gmt five prps voluntarily entered administrative order consent epa fund preremedial study sediment contamination remediation alternatives gmts share study completed approximately 2 million included reserve potential liabilities cannot estimated time 1996 prior companys acquisition proler international corp proler company engaged independent thirdparty consultant estimate costs cure present future environmental liabilities related prolers wholly owned joint venture properties proler recorded liability 86 million probable costs remediate wholly owned properties based upon consultants estimates increasing environmental reserve 98 million company carried aggregate reserve financial statements upon acquiring proler 55 million remained outstanding august 31 2000 also prolers joint ventures recorded additional liabilities 41 million probable costs remediate properties based upon consultants estimates 1996 prior companys acquisition proler 1982 1987 mri corporation mri wholly owned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigations property december 1996 added site national priorities list mri proler along several parties named prps site epa additionally proler subsidiary named identified prps several sites proler included probable costs associated site aforementioned reserve part proler acquisition company became fiftypercent owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles responsible multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed year 2001 remediation include limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring probable costs remediate property included aforementioned reserve metals recycling llc metals scrap metals processing business locations rhode island massachusetts members metals one companys proler joint ventures metals recycling inc june 9 1999 rhode island department environmental management dem issued notice violation nov metals alleging metals violated federal state regulations relating storage management transportation hazardous waste imposed administrative penalty 07 million metals filed answer nov denied allegations requested adjudicatory hearing july 1999 dem issued nov rhode island resource recovery corporation rirrc included civil penalty 03 million relating alleged disposal hazardous waste metals landfill operated rirrc metals rirrc denied dems allegations rirrc requested adjudicatory hearing pursuant alternative coverage disposal agreement rirrc metals agreed defend indemnify rirrc regard nov schnitzer steel industries inc notes consolidated financial statements note 5 environmental liabilities continued january 1999 federal state officials searched metals johnston rhode island worcester massachusetts facilities metals advised search part state criminal investigation possible violations state federal hazardous waste programs rhode island statute prohibits disposal outofstate solid waste landfill operated rirrc grand jury empanelled consider allegations proceedings commenced metals officers company believes metals substantial defenses alleged violations fiscal 1999 company engaged independent consultant review companys environmental issues perform periodic assessment remaining potential liabilities based upon additional remediation investigation certain previously established reserves eliminated result cost goods sold year ended august 31 1999 lowered 19 million reversal reserves note 6 income taxes provision income taxes follows thousands deferred tax assets liabilities follows thousands schnitzer steel industries inc notes consolidated financial statements note 6 income taxes continued acquiring proler company acquired net operating losses nols totaling 31 million minimum tax credits 07 million arisen prolers preacquisition years federal tax law limits companys annual use nols credits respective annual limit exceeds actual use taxable year unused nols credits may carried forward years used credits may carried forward indefinitely nols expire years 2007 2012 used limit annual use nols 24 million benefit nols credits recognized financial statements august 31 1999 prior federal tax law made ultimate realization benefit uncertain previous federal tax rules limited use proler nols offset taxable income acquired proler entities new rules allow company use proler nols offset taxable income sources recent changes federal tax law described reduced uncertainty sufficiently enable company recognize year ended august 31 2000 tax benefit 86 million nols carried forward earlier taxable years benefit remaining 225 million nols remains unrecognized august 31 2000 reasons difference effective income tax rate statutory federal income tax rate follows note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport recycled metal foreign markets charges incurred charters 94 million 46 million 67 million 2000 1999 1998 respectively 1993 company signed fiveyear timecharter agreement one vessel expired june 1998 agreement guaranteed ship owner residual market value 25 million end timecharter upon expiration time charter company paid guaranteed residual entered additional fiveyear time charter company accounted transaction capital lease vessel sold fiscal 2000 resulted 10 million loss see note 12 company entered two additional sevenyear time charters may 1995 vessels schnitzer steel industries inc notes consolidated financial statements note 7 related party transactions continued company purchased recycled metals joint venture operations totaling 147 million 110 million 158 million 2000 1999 1998 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents thousands rent expense 14 million 16 million 13 million 2000 1999 1998 respectively rent metals recycling businesss portland facility adjusted 2003 every 15 years thereafter market rates 2008 every five years thereafter except year market rate adjustment rent adjusted based consumer producer price indices transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 11 million 11 million 12 million 2000 1999 1998 respectively transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities years ended august 31 2000 1999 1998 charges incurred subcharters aggregated 03 million 33 million 32 million offset income 02 million 29 million 31 million respectively included assets 22 million 23 million 33 million notes receivable joint venture partners august 31 2000 1999 1998 respectively company records interest income certain notes advances totaled 22 million 15 million 09 million fiscal years 2000 1999 1998 respectively schnitzer steel industries inc notes consolidated financial statements note 8 employee benefits accordance union agreements company contributed union pension plans 23 million 20 million 21 million fiscal 2000 1999 1998 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 11 million 10 million 11 million fiscal 2000 1999 1998 respectively nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth change benefit obligation change plan assets funded status august 31 2000 1999 accordance sfas 132 thousands schnitzer steel industries inc notes consolidated financial statements note 8 employee benefits continued assumptions used year determining defined benefit net pension cost components net periodic pension benefit cost thousands company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows thousands note 9 stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 1200000 shares class common stock options tenyear term except options granted fiscal 1999 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 1999 became fully exercisable first anniversary grant company granted certain employees lieu annual salary revisions schnitzer steel industries inc notes consolidated financial statements note 9 stock incentive plan continued company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 2000 1999 1998 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following assumptions purposes pro forma disclosures estimated fair value options amortized expense options vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years companys pro forma information follows thousands except per share amounts schnitzer steel industries inc notes consolidated financial statements note 9 stock incentive plan continued summary companys stock option activity related information follows thousands except per share amounts exercise prices options outstanding august 31 2000 ranged 12 25 weightedaverage remaining contractual life options 74 years note 10 segment information effective september 1 1998 company adopted statement financial accounting standards 131 disclosures segments enterprise related information sfas 131 sfas 131 establishes new standards way public enterprises report information operating segments statement also requires companies disclose information products services provided operating segments geographic areas business major customers company operates two industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business additionally company partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except companys equity net income investment advances joint ventures metals recycling business buys processes ferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business intersegment sales metals recycling business steel manufacturing business transferred negotiated market rate per ton eliminated consolidation schnitzer steel industries inc notes consolidated financial statements note 10 segment information continued steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals include two predominant operations one joint venture operates selfservice used auto parts yards company purchases substantially auto bodies come yards another joint venture industrial plant demolition contractor joint venture dismantles industrial plants performs environmental remediation sells recovered metals machinery company purchases substantially ferrous recycled metals generated joint venture information provided obtained internal information provided companys chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments assets capital expenditures shown joint ventures management use information allocate resources assess performance joint ventures revenues external customers follows thousands revenues geographic area thousands schnitzer steel industries inc notes consolidated financial statements note 10 segment information continued joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 7 regarding companys purchases joint ventures income operations joint ventures represents companys equity net income entities companys share depreciation amortization expense included determination joint ventures net income follows schnitzer steel industries inc notes consolidated financial statements note 10 segment information continued following summary companys total assets capital expenditures fiscal year 2000 one customer accounted 15 companys consolidated revenues individual customer accounted greater ten percent companys consolidated revenues fiscal years 1999 1998 joint ventures metals recycling business significant customers fiscal 2000 one customer accounted 22 combined revenues joint ventures fiscal 1999 one customer accounted 17 another customer accounted 13 combined revenues fiscal 1998 individual customers accounted 17 13 combined revenues note 11 summarized financial information joint ventures summary combined operations joint ventures company partner follows schnitzer steel industries inc notes consolidated financial statements note 11 summarized financial information joint ventures continued company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 02 million fiscal years 2000 1999 1998 advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest prime rate less one percent although advances collectible demand management intend request payment foreseeable future note 12 disposal sale assets fiscal 2000 company outside board members approved sale related party ship used company export recycled metal sale resulted 10 million loss fiscal 1999 cascade steel rolling mills inc sold union city california mill depot recognizing gain 12 million included income accompanying consolidated statement operations fiscal 1998 proler disposed tin metals recycling facility lathrop california facility acquired part acquisition proler international corp sale resulted gain 11 million 08 million recorded reduction cost goods sold 03 million gain sale assets note 13 quarterly financial data unaudited thousands except per share amounts schnitzer steel industries inc schedule ii valuation qualifying accounts years ended august 31 thousands report independent accountants financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements referred report dated september 29 2000 appearing form 10k also included audit financial statement schedules listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon september 29 2000 schnitzer steel industries inc form 10k part ii continued item 9item 8 financial statements supplementary data index consolidated financial statements schedules report independent accountants consolidated balance sheet august 31 2001 2000 consolidated statement operations years ended august 31 2001 2000 1999 consolidated statement shareholders equity years ended august 31 2001 2000 1999 consolidated statement cash flows years ended august 31 2001 2000 1999 notes consolidated financial statements schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations shareholders’ equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2001 2000 results operations cash flows three years period ended august 31 2001 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp portland oregon september 28 2001 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal processing recycling business cascade steel rolling mills inc subsidiary minimill steel manufacturing business company’s wholly owned recycling facilities located alaska washington oregon california nevada additionally joint ventures company participates management additional metals processing recycling businesses arizona california connecticut idaho illinois indiana maine massachusetts nevada new hampshire new jersey new york rhode island texas utah summary significant accounting policies principles consolidation consolidated financial statements include accounts company wholly owned subsidiaries company subsidiaries holds 50 interest ten joint ventures 30 interest one accounted using equity method intercompany transactions balances eliminated inventories stated lower cost market cost determined using fifo firstin firstout average cost methods see note 2 property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 10 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses included income longlived assets company evaluates recoverability longlived assets include property plant equipment identifiable intangible assets goodwill periodically accordance provisions statement financial accounting standards 121 sfas 121 company assesses longlived assets impairment lowest level identifiable cash flows whenever events changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends determined impairment loss occurred loss would recognized period incurred impairment would measured based projected discounted cash flow method using discount rate commensurate risk inherent company’s current business model october 3 2001 fasb issued statement financial accounting standards 144 “accounting impairment disposal longlived assets” sfas 144 sfas 144 superceded sfas 121 sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 “reporting results operations reporting effects disposal segment business sfas 144 develops one accounting model longlived assets disposed sale sfas 144 requires longlived assets disposed sale measured lower book value fair value less cost sell additionally sfas 144 expands scope discontinued operations include components entity operations 1 distinguished rest entity 2 eliminated ongoing operations entity disposal transaction sfas 144 effective company financial statements issued beginning september 1 2002 company believes adoption standard material effect financial statements goodwill amortized straightline basis 40 years august 31 2001 2000 accumulated amortization aggregated 87 million 74 million respectively goodwill periodically reviewed company impairments fair value may less carrying value july 2001 financial accounting standards board fasb issued statements financial accounting standards nos 141 142 sfas 141 sfas 142 “business combinations” “goodwill intangible assets” sfas 141 replaces apb 16 eliminates poolingofinterests accounting prospectively also provides guidance purchase accounting related recognition intangible assets accounting negative goodwill sfas 142 changes accounting goodwilll amortization method impairment approach sfas 142 goodwill tested annually whenever events circumstances occur indicating goodwill might impaired sfas 141 142 effective business combinations completed june 30 2001 upon adoption sfas 142 amortization goodwill recorded business combinations consummated prior july 1 2001 cease intangible assets acquired prior july 1 2001 meet criteria recognition sfas 141 reclassified goodwill companies required adopt sfas 142 fiscal years beginning december 15 2001 company adopt sfas 142 september 1 2002 beginning fiscal 2003 connection adoption sfas 142 company required perform transitional goodwill impairment assessment company yet determined impact standards results operations financial position common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally class b common stock may converted one share class common stock earnings per share basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps thousands except per share amounts options exercise price greater average market price included computation diluted earnings per share options totaled 1021000 2001 491000 2000 interest income taxes paid company paid 51 million 68 million 70 million interest fiscal years 2001 2000 1999 respectively fiscal 1999 company received net income tax refunds 62 million fiscal years 2001 2000 company paid 14 million 04 million respectively income taxes fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices company’s investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonability assured title recycled metals finished steel products transfers upon shipment december 1999 securities exchange commission sec issued staff accounting bulletin 101 sab 101 “revenue recognition financial statements” amended sab 101a sab 101b required adopted company fourth quarter year ended august 31 2001 sab 101 codifies sec’s views regarding recognition revenues company adopted sab 101 effective september 1 2001 however impact company’s consolidated financial position consolidated results operations immaterial environmental costs estimated future costs known environmental remediation requirements accrued undiscounted basis probable company incurred liability related costs reasonably estimated range amounts established amount within range better another minimum amount range recorded recoveries environmental remediation costs parties recorded assets collection probable new accounting pronouncement july 2001 fasb issued statement financial accounting standards 143 sfas 143 “accounting asset retirement obligations” sfas 143 requires entities record fair value liability asset retirement obligation period incurred liability initially recorded entity required capitalize cost increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 adopted company effective september 1 2002 company yet determined impact standard results operations financial position note 2 inventories consist following thousands production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture factors first quarter fiscal 2000 company changed method accounting recycled metals inventories lastin firstout lifo firstin firstout fifo given volatility prices quantities management believes accounting inventories using fifo method better matches revenues expenses therefore preferable addition method consistent inventory pools accordance accounting principles board 20 “accounting changes” upon adoption company retroactively restated prior periods applying fifo method accounting prior periods effect accounting change net income previously reported follows thousands except per share amounts note 3 property plant equipment operating leases property plant equipment consist following thousands company leases certain property equipment future minimum rental payments operating leases thousands see discussion additional leases related parties note 7 note 4 longterm debt longterm debt consists following thousands august 31 2001 company 200 million unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 2001 rates averaged 389 interest payable upon maturity advance line facility matures june 2003 time principal amounts outstanding due addition facility company additional unsecured lines credit totaling 40 million uncommitted committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage company compliance covenants august 31 2001 payments longterm debt next five fiscal years thereafter follows thousands note 5 environmental liabilities federal state environmental regulatory agencies investigating potential contamination 55 mile stretch willamette river portland oregon referred portland harbor december 2000 us environmental protection agency epa named portland harbor superfund site however precise nature extent cleanup site parties involved process followed cleanup yet determined oregon department environmental quality deq requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor deq contacted schnitzer investment corp sic related party company leases metals recycling deep water terminal facility portland oregon requested sic perform voluntary preliminary investigation property sic agreed perform investigation property company obligated lease sic bear costs relating investigation remediation property also crawford street corporation subsidiary company owns property adjacent portland harbor requested deq perform voluntary preliminary investigation property cost investigation properties expected material estimate made cost remediation accordingly accrual remediation established august 31 2001 company acquired manufacturing management inc mmi march 1995 environmental reserve 250 million included mmi’s balance sheet prior acquisition company reserve carried company’s balance sheet august 31 2001 aggregated 177 million general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing environmental investigation remediation project us environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt well 60 parties named potentially responsible parties prps investigation clean contaminated sediment along hylebos waterway gmt five prps voluntarily entered administrative order consent epa fund preremedial study sediment contamination remediation alternatives although study complete company paid share study variety uncertainties regarding cleanup site impact company’s ability estimate future potential liabilities final plan remediation hylebos waterway yet agreed additionally significant uncertainties exist regarding company’s share costs remediate site environmental liabilities include company’s estimate liabilities related site based information currently available 1996 prior company’s acquisition proler international corp proler recorded liability 98 million probable costs remediate wholly owned properties company carried aggregate reserve financial statements upon acquiring proler 52 million remained outstanding august 31 2001 also proler’s joint ventures recorded additional liabilities 41 million probable costs remediate properties 1996 prior company’s acquisition proler 1982 1987 mri corporation mri wholly owned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigations property december 1996 added site “national priorities list” mri proler along several parties named prps site epa proler included probable costs associated site aforementioned reserve additionally proler subsidiary named identified prps several sites part proler acquisition company became fiftypercent owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles responsible multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed year 2002 remediation include limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring probable costs remediate property included aforementioned reserve metals recycling llc metals scrap metals processing business locations rhode island massachusetts members metals one company’s proler joint ventures metals recycling inc june 9 1999 rhode island department environmental management dem issued notice violation nov metals alleging metals violated federal state regulations relating storage management transportation hazardous waste imposed administrative penalty 07 million metals filed answer nov denied allegations requested adjudicatory hearing july 1999 dem issued nov rhode island resource recovery corporation rirrc included civil penalty 03 million relating alleged disposal hazardous waste metals landfill operated rirrc metals rirrc denied dems allegations rirrc settled dem rirrc metals discussing possible contribution metals rirrc respect settlement january 1999 federal state officials searched metals johnston rhode island worcester massachusetts facilities metals advised search part state criminal investigation possible violations state federal hazardous waste programs rhode island statute prohibits disposal outofstate solid waste landfill operated rirrc grand jury empanelled consider allegations proceedings commenced metals officers company believes metals substantial defenses alleged violations company considers various factors estimating environmentalliabilities adjustments liabilities made additional information becomes available affects estimated costs remediate factors company considers recognition measurement environmental liabilities include following • current regulations time reserve established course cleanup specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility remediation fiscal year ended august 31 1999 company lowered cost goods sold 19 million reversal environmental reserves related various properties note 6 income taxes provision income taxes follows thousands deferred tax assets liabilities follows thousands reasons difference effective income tax rate statutory federal income tax rate follows federal tax law places annual limits acquiring corporation’s use acquired corporation’s net operating losses nols credits unused nols credits carried forward future years proler acquired 1996 nols 314 million minimum tax credits 07 law limits company’s use proler nols annual 24 million extent unused expire years 2007 2012 similar limitations apply proler minimum tax credits though carried forward indefinitely proler acquired pre1999 federal tax law placed restriction company’s use nols could used reduce taxable income acquired proler entities made ultimate realization nols uncertain valuation allowance established offset entire nol deferred tax asset 314 million constraint company recognized 4 million tax benefit release valuation allowance prior fiscal 2000 1999 change federal tax law however allows company use remaining annual 24 million nol increments reduce taxable income sources acquired proler entities similar change liberalized use minimum tax credits company believed likely would utilize portion proler nol amounts 85 million fiscal 2000 24 million fiscal 2001 accordingly released valuation allowance recognized corresponding tax benefit tax benefit remaining 201 million remains unrecognized august 31 2001 note 7 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses company charters several vessels related companies transport recycled metal foreign markets number vessels chartered varies year depending availability vessels charges incurred charters 135 million 94 million 46 million 2001 2000 1999 respectively 1993 company signed fiveyear timecharter agreement one vessel expired june 1998 agreement guaranteed ship owner residual market value 25 million end timecharter upon expiration time charter company paid guaranteed residual entered additional fiveyear time charter company accounted transaction capital lease vessel sold fiscal 2000 resulted 10 million loss see note 12 company entered two additional sevenyear time charters may 1995 vessels company purchased recycled metals joint venture operations totaling 121 million 147 million 110 million 2001 2000 1999 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents thousands rent expense 17 million 14 million 16 million 2001 2000 1999 respectively rent metals recycling business’s portland facility adjusted 2003 every 15 years thereafter market rates 2008 every five years thereafter except year market rate adjustment rent adjusted based consumer producer price indices transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 11 million last three years transactions affecting income expense vessels discussed periodically subchartered third parties case related shipping agency company acts company’s agent collection income payment expenses related subcharter activities fiscal 2001 subcharted activity years ended august 31 2000 1999 charges incurred subcharters aggregated 03 million 33 million offset income 02 million 29 million respectively included assets 17 million 22 million notes receivable joint venture partners august 31 2001 2000 respectively company records interest income certain notes advances joint ventures income totaled 20 million 22 million 15 million fiscal years 2001 2000 1999 respectively note 8 employee benefits accordance union agreements company contributed union pension plans 26 million 23 million 20 million fiscal 2001 2000 1999 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 11 million 11 million 10 million fiscal 2001 2000 1999 respectively certain nonunion employees company also maintains defined benefit pension plan company funded maximum contribution deductible federal income tax purposes following table sets forth change benefit obligation change plan assets funded status august 31 2001 2000 accordance sfas 132 employer’s disclosure pensions postretirement benefits thousands assumptions used year determining defined benefit net pension cost components net periodic pension benefit cost thousands company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows thousands trust fund assets experienced stock market gains losses included income expense fiscal 2001 2000 company recognized gains losses totaling 07 million 09 million respectively gain loss recognized fiscal 1999 company acquired proler assumed liability deferred compensation payable certain exemployees proler august 31 2001 2000 remaining liability aggregated 07 million 11 million respectively amounts included longterm liabilities accompanying consolidated balance sheet note 9 stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 1200000 shares class common stock options tenyear term except options granted fiscal 1999 2001 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 1999 became fully exercisable first anniversary grant options granted fiscal 2001 become exercisable follows 33 one year date grant 66 two years date grant 100 two onehalf years date grant vesting periods options varied standard company granted certain employees lieu annual salary revisions company records stockbased compensation provisions accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 “accounting stockbased compensation” sfas 123 requires use option valuation models apb 25 exercise price company’s employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 2001 2000 1999 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following assumptions purposes pro forma disclosures estimated fair value options amortized expense options’ vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years company’s pro forma information follows thousands except per share amounts summary company’s stock option activity related information follows thousands except per share amounts exercise prices options outstanding august 31 2001 ranged 1200 2500 weightedaverage remaining contractual life options 71 years fiscal 2001 company also issued 64196 options consultant options fully vested september 15 2001 expire september 15 2005 exercise price 1742 per share company recorded expense 02 million fiscal 2001 related transaction note 10 segment information company operates two industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business additionally company partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except company’s equity net income investment advances joint ventures metals recycling business buys processes ferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business intersegment sales metals recycling business steel manufacturing business transferred negotiated market rate per ton eliminated consolidation steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals include two predominant operations one joint venture operates selfservice used auto parts yards company purchases substantially auto bodies come yards another joint venture industrial plant demolition contractor joint venture dismantles industrial plants performs environmental remediation sells recovered metals machinery company purchases substantially ferrous recycled metals generated joint venture information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments assets capital expenditures shown joint ventures management use information allocate resources assess performance joint ventures’ revenues external customers follows thousands revenues geographic area thousands joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 7 regarding company’s purchases joint ventures income operations joint ventures represents company’s equity net income entities company’s share depreciation amortization expense included determination joint ventures’ net income follows following summary company’s total assets capital expenditures fiscal years 2001 2000 one customer accounted 10 15 company’s consolidated revenues respectively individual customer accounted greater ten percent company’s consolidated revenues fiscal year 1999 joint ventures metals recycling business significant customers fiscal 2001 single customer accounted 10 combined revenues joint ventures fiscal 2000 one customer accounted 22 combined revenues joint ventures fiscal 1999 one customer accounted 17 another customer accounted 13 combined revenues note 11 summarized financial information joint ventures summary combined operations joint ventures company partner follows company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 01 million 2001 02 million fiscal years 2000 1999 advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest prime rate less two percent note 12 disposal sale assets fiscal 2000 company outside board members approved sale related party ship used company export recycled metal sale resulted 10 million loss fiscal 1999 cascade steel rolling mills inc sold union city california mill depot recognizing gain 12 million included income accompanying consolidated statement operations note 13 quarterly financial data unaudited thousands except per share amounts schedule ii valuation qualifying accounts see excel spreadsheet schnitzer steel industries inc schedule ii valuation qualifying accounts years ended august 31 2001 2000 1999 thousands report independent accountants financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements referred report dated september 28 2001 appearing form 10k also included audit financial statement schedule listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon september 28 schnitzer steel industries inc form 10k item 9item 8 financial statements supplementary data index consolidated financial statements schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2002 2001 results operations cash flows three years period ended august 31 2002 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp portland oregon october 1 2002 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement schnitzer steel industries inc notes consolidated financial statements note 1nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal processing recycling business cascade steel rolling mills inc subsidiary minimill steel manufacturing business companys whollyowned recycling facilities located alaska washington oregon california additionally joint ventures company participates management additional metals processing recycling businesses arizona california connecticut idaho illinois indiana maine massachusetts new hampshire new jersey new york rhode island texas utah summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries company subsidiaries holds 50 interest ten joint ventures 30 interest one accounted using equity method intercompany transactions balances eliminated cash equivalents cash equivalents include shortterm securities original maturity date 90 days less inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecision moisture production yields factors property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 15 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating income longlived assets company evaluates recoverability longlived assets include property plant equipment identifiable intangible assets goodwill periodically accordance provisions statement financial accounting standards 121 sfas 121 company assesses longlived assets impairment lowest level identifiable cash flows whenever events changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends determined impairment loss occurred loss would recognized period incurred impairment would measured based projected discounted cash flow method using discount rate commensurate risk inherent companys current business model october 3 2001 fasb issued statement financial accounting standards 144 accounting impairment disposal longlived assets sfas 144 sfas 144 superceded sfas 121 sfas 144 applies longlived assets including discontinued operations consequently amends accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business sfas 144 develops one accounting model longlived assets disposed sale sfas 144 requires longlived assets disposed sale measured lower book value fair value less cost sell additionally sfas 144 expands scope discontinued operations include components entity operations 1 distinguished rest entity 2 eliminated ongoing operations entity disposal transaction sfas 144 effective company financial statements issued beginning september 1 2002 company believes adoption standard material effect financial statements goodwill fiscal years 2002 goodwill amortized straightline basis 40 years august 31 2002 2001 accumulated amortization aggregated 94 million 87 million respectively july 2001 financial accounting standards board fasb issued statements financial accounting standards nos 141 142 sfas 141 sfas 142 business combinations goodwill intangible assets sfas 141 replaces apb 16 eliminates poolingofinterests accounting prospectively also provides guidance purchase accounting related recognition intangible assets accounting negative goodwill sfas 142 changes accounting goodwill amortization method impairment approach sfas 142 goodwill tested annually whenever events circumstances occur indicating goodwill might impaired sfas 141 142 effective business combinations completed june 30 2001 upon adoption sfas 142 amortization goodwill recorded business combinations consummated prior july 1 2001 cease intangible assets acquired prior july 1 2001 meet criteria recognition sfas 141 reclassified goodwill companies required adopt sfas 142 fiscal years beginning december 15 2001 company adopt sfas 142 september 1 2002 required sfas 142 goodwill intangible assets indefinite lives longer amortized instead measured impairment least annually events circumstances indicate impairment exists result elimination amortization expense decrease approximately 12 million annually beginning quarter ended november 30 2002 required sfas 142 company perform impairments tests goodwill indefinitelived intangible assets adoption date thereafter impairments tests performed annually whenever events circumstances indicate value goodwill indefinitelived intangible assets might impaired connection sfas 142 indefinitelived intangible assets including goodwill impairment test company utilize required twostep method determine impairment exists adoption date company still evaluating effect change operating results common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock earnings per share basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps thousands except per share amounts options exercise price greater average market price included computation diluted earnings per share would antidilutive options totaled 585900 2002 1021000 2001 491000 2000 interest income taxes paid company paid 24 million 51 million 68 million interest fiscal years 2002 2001 2000 respectively fiscal 2002 company received tax refunds 05 million fiscal years 2001 2000 company paid 14 million 04 million respectively income taxes fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title recycled metals finished steel products transfers upon shipment shipping costs shipping costs billed customers recorded revenue related costs included cost sales revenues cost goods sold fiscal 2002 prior years reclassified appropriate line item environmental costs estimated future costs known environmental remediation requirements accrued undiscounted basis probable company incurred liability related costs reasonably estimated range amounts established amount within range better another minimum amount range recorded recoveries environmental remediation costs parties recorded assets collection probable reclassifications certain prior year amounts reclassified conform fiscal year 2002 presentation changes impact previously reported results operations shareholders equity new accounting pronouncement july 2001 fasb issued statement financial accounting standards 143 sfas 143 accounting asset retirement obligations sfas 143 requires entities record fair value liability asset retirement obligation period incurred liability initially recorded entity required capitalize cost increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 adopted company effective september 1 2002 company yet determined impact standard results operations financial position may 2002 fasb issued sfas 145 sfas 145 rescission fas nos 4 44 64 amendment fas 13 technical corrections among things sfas 145 rescinds various pronouncements regarding early extinguishment debt allows extraordinary accounting treatment early extinguishment provisions accounting principles board opinion 30 reporting results operationsreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions met sfas 145 provisions regarding early extinguishment debt generally effective fiscal years beginning may 15 2002 company believe adoption statement material impact consolidated financial statements july 2002 fasb issued sfas 146 accounting impairment disposal longlived assets obligations associated disposal activities sfas 146 addresses differences accounting longlived assets operations segments disposed sfas 121 apb 30 accounting costs associated disposal activities including restructuring activities emerging issues task force eitf issue 943 sfas 146 effective disposal activities december 31 2002 early application encouraged company believe adoption statement material impact consolidated financial statements note 2inventories inventories consist following thousands production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture production yields factors first quarter fiscal 2000 company changed method accounting recycled metals inventories lastin firstout lifo firstin firstout fifo given volatility prices quantities management believes accounting inventories using fifo method better matches revenues expenses therefore preferable addition method consistent inventory pools accordance accounting principles board 20 accounting changes upon adoption company retroactively restated prior periods applying fifo method accounting prior periods note 3property plant equipment operating leases property plant equipment consist following thousands depreciation expense operations 167 million fiscal 2002 168 million fiscal 2001 164 million fiscal 2000 company leases certain property equipment future minimum rental payments operating leases thousands see discussion additional leases related parties note 8 note 4impairment nonrecurring charges fourth quarter fiscal 2002 metals recycling business discontinued operations two businesses providing adequate return terminated fixedprice barge contract affreightment determined cost effective company recognized charge 48 million including 04 million write property plant equipment 24 million write goodwill 10 million write assets 10 million payment terminate barge contract revenue discontinued operations fiscal 2002 2001 2000 16 million 26 million 21 million respectively operating results defined operating income loss taxes losses 08 million 06 million 03 million fiscal 2002 2001 2000 respectively second quarter fiscal 2002 company sold nonstrategic steel forging business part 1995 metals recycling business acquisition recorded loss 08 million sale also quarter company recorded loss 15 million related early termination two vessel charter agreements related company see note 8 related party transactions fiscal 2002 2001 2000 revenue closed steel forging business 04 million 14 million 17 million respectively operating results fiscal 2002 2001 2000 defined operating income loss taxes losses 01 million 01 million income 03 million respectively fiscal 2000 company outside board members approved sale related party ship used company export recycled metal sale resulted 10 million loss note 5longterm debt longterm debt consists following thousands august 31 2002 company 200 million unsecured revolving credit facility banks individual advances outstanding line bear interest floating rates august 31 2002 rates averaged 237 interest payable upon maturity advance line facility matures june 2003 time principal amounts outstanding due management intends replace bank credit facility new facility management believes ability refinance facility based upon companys financial position preliminary discussions various banks participate current facility addition facility company additional unsecured lines credit totaling 40 million uncommitted committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage company compliance covenants august 31 2002 also fiscal 2002 company paid state oregon energy conservation loan take advantage lower interest rates payments longterm debt next five fiscal years thereafter follows thousands note 6environmental liabilities portland harbor december 2000 united states environmental protection agency epa named portland harbor 55 mile stretch willamette river portland oregon superfund site companys metals recycling deep water terminal facility portland oregon located adjacent portland harbor crawford street corporation company subsidiary also owns property adjacent portland harbor epa identified 69 potentially responsible parties prps including company crawford street corporation operate sites adjacent portland harbor superfund site company leases metals recycling deep water terminal facility schnitzer investment corp sic related party obligated lease sic bear costs relating investigation remediation property precise nature extent cleanup portland harbor parties involved process followed cleanup yet determined unclear whether extent company crawford street corporation liable environmental costs damages associated superfund site also unclear whether natural resource damage claims third party contribution damages claims asserted company crawford street corporation participated certain preliminary portland harbor study efforts parties consent order entered epa prps remedial investigationfeasibility study however company could become liable share costs study later stage proceedings separately oregon department environmental quality deq requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company crawford street corporation deq investigation focused controlling current releases contaminants willamette river rather cleanup past releases company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site owned crawford street corporation deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices bmps sufficient effectively provide source control avoid release contaminants sites proposed deq implementation bmps resolution investigation cost investigations associated properties cost employment source control bmps expected material estimate currently possible none made cost remediation accordingly accrual remediation portland harbor companys adjacent properties established august 31 2002 manufacturing management inc 1994 manufacturing management inc mmi recorded reserve estimated cost cure certain environmental liabilities reserve carried companys financial statements mmi acquired 1995 august 31 2002 aggregated 171 million general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing environmental investigation remediation project united states environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt 60 parties named potentially responsible parties prps investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders uaos gmt another party proceed remedial design remedial action rdra head hylebos two parties proceed rdra balance waterway anticipated uaos converted specific voluntary consent decrees following negotiations among epa gmt prps epa take additional action prps issuance uaos require company change previously recorded estimate environmental liabilities site significant uncertainties continue exist regarding total cost remediate site well companys share costs nevertheless companys estimate liabilities related site based information currently available natural resource damage trustees commencement bay asserted claims gmt prps within hylebos waterway area alleged damage natural resources march 2002 trustees delivered draft settlement proposal gmt others trustees suggested methodology resolving dispute indicate proposed damages cost amounts june 2002 gmt responded trustees draft settlement proposal various corrections comments twenty participants unknown time whether extent gmt liable natural resource damages companys previously recorded environmental liabilities include estimate companys potential liability claims washington state department ecology named gmt along number parties potentially liable parties plps site referred tacoma metals gmt operated site lease prior 1982 property owner current operator taken lead role performing remedial investigation feasibility study rifs site rifs completed parties currently involved mediation settlement process address cost allocations companys previously recorded environmental liabilities include estimate companys potential liability site mmi also named prp two thirdparty sites allegedly disposed transformers one site mmi entered settlement agreed pay 825000 towards remediation site remediation site completed subject five year monitoring program site yet subject significant remedial investigation mmi named prp several sites agreed de minimis settlements addition matters discussed companys environmental reserve includes amounts potential future cleanup sites mmi conducted business allegedly disposed materials proler 1996 prior companys acquisition proler international corp proler recorded liability probable costs remediate whollyowned properties company carried aggregate reserve financial statements upon acquiring proler 40 million remained outstanding august 31 2002 1977 1987 mri corporation mri whollyowned subsidiary proler operated tin shredding detinning facility tampa florida 1989 1992 epa conducted preliminary site investigations property december 1996 added site national priorities list mri proler along several parties named prps site epa march 2002 mri paid epa 375000 pursuant voluntary consent decree full settlement prolers obligations respect remediation site related action mri transferred property another prp agreed perform remediation indemnify mri proler liability 375000 payment covered companys existing environmental liability reserve part proler acquisition company became 50 owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles conduct multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed end calendar year 2002 remediation includes limited excavation treatment contaminated soils paving installation stormwater management system construction noise barrier perimeter wall around facility groundwater monitoring hnps balance sheet august 31 2002 included accrued liability remaining estimated costs remediate property metals recycling llc metals scrap metals processing business locations rhode island massachusetts members metals one companys proler joint ventures metals recycling inc june 9 1999 rhode island department environmental management dem issued notice violation nov metals alleging metals violated federal state regulations relating storage management transportation hazardous waste dem imposed administrative penalty 718000 metals filed answer nov denied allegations requested adjudicatory hearing july 1999 dem issued nov rhode island resource recovery corporation rirrc included civil penalty 308000 relating alleged disposal hazardous waste metals landfill operated rirrc settled matter dem response rirrcs claim metals contribution rirrc metals agreed settlement metals pay rirrc 175000 january 1999 federal state officials searched metals johnston rhode island worcester massachusetts facilities metals advised search part state criminal investigation possible violations state federal hazardous waste programs rhode island statute prohibits disposal outofstate solid waste landfill operated rirrc grand jury empanelled consider allegations issued indictment august 30 2002 metals storing hazardous waste without permit causing transportation hazardous waste without permit transporting hazardous waste without permit operating solid waste management facility without license metals pleaded guilty counts intends contest states allegations vigorously march 15 2002 dem issued nov metals johnston rhode island facility alleging violations provisions rhode island clean air act regulations promulgated thereunder seeking impose financial penalties 11 million metals april 5 2002 metals filed answer request hearing denied liability alleged violations discovery pending metals results operations past years included accruals probable costs remediate settle mentioned environmental situations additionally proler joint venture sites potential environmental cleanup issues identified estimated cleanup costs associated sites accrued joint ventures company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs remediate factors company considers recognition measurement environmental liabilities include following •current regulations time reserve established course cleanup specify standards acceptable remediation •information site becomes available site studied remediated •the professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations •technologies available used remediation •the number financial condition potentially responsible parties extent responsibility remediation note 7income taxes provision income taxes follows thousands deferred tax assets liabilities follows thousands reasons difference effective income tax rate statutory federal income tax rate follows 1during 2000 response allegations world trade organization wto federal tax benefit conferred foreign sales corporations fsc constituted illegal trade subsidy congress enacted legislation replace fsc rules extraterritorial income exclusion eie taxation scheme company adopted new eie rules export sales made october 1 2000 company found rules provide tax benefit comparable fsc rules would provided wto noted comparability since charged eie tax benefit also constitutes illegal trade subsidy date tax legislation passed address latest allegation federal tax law places annual limits acquiring corporations use acquired corporations net operating losses nols credits unused nols credits carried forward future years proler acquired 1996 nols 314 million minimum tax credits 07 million law limits companys use proler nols annual 24 million extent unused nols expire years 2007 2012 similar limitations apply proler minimum tax credits though carried forward indefinitely proler acquired pre1999 federal tax law placed restriction companys use nols could used reduce taxable income acquired proler entities situation made ultimate realization nols uncertain valuation allowance established offset entire nol deferred tax asset 314 million constraint company recognized 04 million tax benefit release valuation allowance prior fiscal 2000 1999 change federal tax law however allowed company use remaining annual 24 million nol increments reduce taxable income sources acquired proler entities similar change liberalized use minimum tax credits company believed likely would utilize portion proler nol amount 85 million fiscal 2000 24 million fiscal 2001 fiscal 2002 accordingly released valuation allowance recognized corresponding tax benefit tax benefit remaining 177 million remains unrecognized august 31 2002 fiscal 2002 determined company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent company california franchise income tax liability credits excess tax liability carried forward indefinitely note 8related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses periodically company charters vessels related companies market rates transport recycled metal foreign markets number vessels chartered varies year depending availability vessels charges incurred charters 47 million 135 million 94 million 2002 2001 2000 respectively 1995 company signed sevenyear timecharter agreements two vessels scheduled expire july 2002 due part world economic slowdown 2002 ocean freight rates declined sharply result second quarter fiscal 2002 company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates lease terminations resulted loss 15 million second quarter fiscal 2002 primary reason entering number companys joint ventures secure supply recyclable metal metals recycling business company purchased recycled metals joint venture operations prices approximate market purchases joint ventures totaled 104 million 121 million 147 million 2002 2001 2000 respectively company leases certain land buildings related real estate company operating leases following table summarizes lease terms annual rents future minimum rents thousands rent expense 19 million 17 million 14 million 2002 2001 2000 respectively accordance lease agreement dated september 1988 rent metals recycling businesss portland facility adjusted 2003 every 15 years thereafter market rates 2008 every five years thereafter except year market rate adjustment rent adjusted based consumer producer price indices transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 10 million 2002 11 million fiscal years 2001 2000 transactions affecting income expense historically vessels discussed periodically subchartered third parties case related shipping agency company acts companys agent collection income payment expenses related subcharter activities fiscal 2002 fiscal 2001 subchartered activity year ended august 31 2000 charges incurred subcharters aggregated 03 million offset income 02 million related party charter agreements expired fiscal 2002 included assets 283 million 304 million notes receivable joint venture businesses august 31 2002 2001 respectively fiscal 2002 company converted 283 million advances auto dismantling joint venture note receivable note dated february 22 2002 matures march 1 2009 interest prime rate less 2 payable monthly principal payments due quarterly amount 25 joint ventures net income recently ended quarter outstanding principal interest due maturity balance advances joint venture reclassified august 31 2001 consistent presentation current year company records interest income note certain advances joint ventures income totaled 05 million 20 million 22 million fiscal years 2002 2001 2000 respectively note 9employee benefits accordance union agreements company contributed union pension plans 23 million 26 million 23 million fiscal 2002 2001 2000 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 11 million fiscal year 2002 2001 2000 certain nonunion employees company also maintains defined benefit pension plan following table sets forth change benefit obligation change plan assets funded status august 31 2002 2001 accordance sfas 132 employers disclosure pensions postretirement benefits thousands assumptions used year determining defined benefit net pension cost components net periodic pension benefit cost thousands company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows thousands trust fund assets experience stock market gains losses included income expense fiscal 2002 2001 2000 company recognized gains losses totaling 04 million 07 million 09 million respectively company acquired proler assumed liability deferred compensation payable certain exemployees proler august 31 2002 2001 remaining liability aggregated 03 million 07 million respectively amounts included longterm liabilities accompanying consolidated balance sheet note 10stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 2400000 shares class common stock options tenyear term except options granted fiscal 1999 2001 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 1999 became fully exercisable first anniversary grant options granted fiscal 2001 become exercisable follows 33 one year date grant 66 two years date grant 100 two onehalf years date grant vesting periods options varied standard company granted certain employees lieu annual salary revisions company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 2002 2001 2000 regarding net income earnings per share required sfas 123 determined company accounted employee stock options fair value method statement fair value awards estimated date grant using blackscholes option pricing model following assumptions purposes pro forma disclosures estimated fair value options amortized expense options vesting periods effects results operations earnings per share expected indicative effects results operations earnings per share future years companys pro forma information follows thousands except per share amounts summary companys stock option activity related information follows thousands except per share amounts exercise prices options outstanding august 31 2002 ranged 1200 2500 weightedaverage remaining contractual life options 62 years fiscal 2001 company also issued 64196 options consultant options fully vested september 15 2001 expire september 15 2005 exercise price 1742 per share company recorded expense 02 million fiscal 2001 related transaction note 11segment information company operates two industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business additionally company partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except companys equity net income investment advances joint ventures metals recycling business buys processes ferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business intersegment sales metals recycling business steel manufacturing business transferred negotiated market rate per ton eliminated consolidation steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals include two predominant operations one joint venture operates selfservice used auto parts yards company purchases substantially auto bodies come yards another joint venture industrial plant demolition contractor joint venture dismantles industrial plants performs environmental remediation sells recovered metals machinery company purchases substantially ferrous recycled metals generated joint venture information provided obtained internal information provided companys chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments assets capital expenditures shown joint ventures management use information allocate resources assess performance joint ventures revenues external customers follows thousands revenues geographic area thousands joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 8 regarding companys purchases joint ventures fiscal 2002 company reported 71 million impairment nonrecurring charges related metals recycling business segment amount shown separately allow reader financial statements better understand operating results income operations joint ventures represents companys equity net income entities companys share depreciation amortization expense included determination joint ventures net income follows following summary companys total assets capital expenditures fiscal years 2002 2001 2000 one customer accounted 9 10 15 companys consolidated revenues respectively joint ventures metals recycling business significant customers fiscal 2002 one customer accounted 11 combined revenues joint ventures fiscal 2001 single customer accounted 10 combined revenues joint ventures fiscal 2000 one customer accounted 22 combined revenues joint ventures note 12summarized financial information joint ventures summary combined operations joint ventures company partner follows company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 01 million fiscal years 2002 2001 02 million fiscal year 2000 advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest note 13quarterly financial data unaudited thousands except per share amounts schedule iivaluation qualifying accounts years ended august 31 2002 2001 2000 thousands report independent accountants financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements referred report dated october 1 2002 appearing form 10k also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon october 1 2002 item 9item 8 financial statements supplementary data index consolidated financial statements schedules page report independent accountants43 consolidated balance sheets august 31 2003 200244 consolidated statement operations years ended august 31 2003 2002 200145 consolidated statement shareholders equity years ended august 31 2003 2002 200146 consolidated statement cash flows years ended august 31 2003 2002 200147 notes consolidated financial statements48 schedule ii valuation qualifying accounts73 report independent accountants financial statement schedule74 schedules exhibits omitted information applicable required report independent accountants board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations shareholders equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2003 2002 results operations cash flows three years period ended august 31 2003 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed footnotes consolidated financial statements effective september 1 2002 company adopted statement financial accounting standards 142 goodwill intangible assets pricewaterhousecoopers llp portland oregon october 1 2003 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal recycling business selfservice used auto parts business cascade steel rolling mills inc subsidiary minimill steel manufacturing business companys whollyowned recycling facilities located alaska washington oregon california additionally joint ventures company participates management additional metals processing recycling businesses arizona california connecticut idaho illinois indiana maine massachusetts new hampshire new jersey new york rhode island texas utah summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries company subsidiaries holds 50 interest nine joint ventures 30 interest one accounted using equity method intercompany transactions balances eliminated basis presentation note 3 notes consolidated financial statements describes acquisition occurred february 14 2003 statement financial accounting standards 141 sfas 141 business combinations acquisition considered step acquisition due fact company significant joint venture interest acquired business number years additionally since acquisition occurred year company elected include consolidated results though occurred beginning fiscal 2003 thus 2003 statement operations balance sheet statement cash flows adjusted consolidate acquisition september 1 2002 also acquired businesses consolidated companys previous interest business form separate reporting segment called auto parts business financial statement information reported companys form 10q quarter ended november 30 2002 restated additionally consolidation accounting requires company adjust earnings ownership interests reporting period fiscal 2003 net income reduced 18 million minority interests net income taxes representing share income attributable various continuing minority partners business also fiscal 2003 net income reduced 25 million preacquisition interests net income taxes representing share income attributable former joint venture partner prior acquisition financial results acquired business periods prior fiscal 2003 continue accounted using equity method included joint venture businesses reporting segment cash equivalents cash equivalents include shortterm securities original maturity date 90 days less inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecision moisture production yields factors property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 15 years equipment leasehold improvements amortized schnitzer steel industries inc notes consolidated financial statements estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating income longlived assets statement financial accounting standards 142 sfas 142 goodwill intangible assets requires intangibles finite useful lives reviewed impairment accordance statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets september 2002 company adopted sfas 144 supersedes statement financial accounting standards 121 sfas 121 accounting impairment longlived assets longlived assets disposed accounting principles board opinion 30 reporting results operationreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions sfas 144 establishes single accounting model longlived assets disposed sale whether previously held used newly acquired also broadens presentation discontinued operations include disposal transactions company assesses longlived assets impairment lowest level identifiable cash flows whenever changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends events changes circumstances occur company assesses recoverability longlived assets determining whether carrying value assets recovered discounted expected future cash flow future discounted cash flow less carrying amount assets company recognizes impairment loss based excess carrying amount fair value assets accordance sfas 144 goodwill effective september 1 2002 company adopted statement financial accounting standards 142 goodwill intangible assets sfas 142 statement changed accounting goodwill indefinitelived intangible assets amortization approach impairmentonly approach required transitional accounting provisions sfas 142 company completed steps second quarter fiscal 2003 identify measure goodwill impairment two reporting units existed time adoption metals recycling business steel manufacturing business reporting units measured impairment comparing implied fair value reporting units goodwill carrying amount goodwill historical earnings used basis project future earnings determine whether impairment goodwill existed reporting units result evaluation company determined goodwill associated steel manufacturing business impaired company recorded noncash impairment charge entire 983000 remaining goodwill effective september 1 2002 reported cumulative effect change accounting principle consolidated statement operations goodwill deductible tax purposes thus amount tax effected implementation sfas 142 required use judgments estimates assumptions determination fair value impairment amounts related required testing prior adoption sfas 142 company historically evaluated goodwill impairment comparing entity level unamortized balance goodwill projected undiscounted cash flows result indicated impairment future company perform impairments tests annually whenever events circumstances indicate value goodwill indefinitelived intangible assets might impaired schnitzer steel industries inc notes consolidated financial statements following table presents reconciliation reported net income per share sfas 142 effect periods presented thousands except per share amounts year ended august 31 2003 2002 2001 reported net income 43201 6553 7919 goodwill amortization net tax 1269 1251 adjusted net income 43201 7822 9170 reported basic income per share 232 036 042 goodwill amortization net tax 007 adjusted basic income per share 232 043 049 reported diluted income per share 220 035 042 goodwill amortization net tax 007 adjusted diluted income per share 220 042 049 changes carrying amount goodwill year ending august 31 2003 follows thousands metals steel recycling manufacturing auto parts business total balance year ending august 31 2002 audited 34771 983 35754 acquisition note 3 72438 impairment charge 983 balance august 31 2003 34771 72438 107209 common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock earnings per share july 23 2003 companys board directors approved twoforone stock split effected 100 share dividend classes common stock par value 100 per share shareholders received one share common stock every share owned share dividend payable august 14 2003 shareholders record july 24 2003 fiscal 2002 2001 common stock outstanding adjusted reflect stock dividend basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps giving effect share dividend referred thousands except per share amounts schnitzer steel industries inc notes consolidated financial statements options exercise price greater average market price included computation diluted earnings per share would antidilutive options totaled 178000 2003 1171800 2002 2042000 2001 company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations method compensation expense stock incentive plans determined using intrinsic value method accordingly exercise price equals market price date grant compensation expense recognized company stock options issued employees consultants directors december 31 2002 fasb issued statement financial accounting standards 148 sfas 148 accounting stockbased compensation transition disclosure amends statement financial accounting standards 123 sfas 123 accounting stockbased compensation sfas 148 provides alternative methods transition voluntary change fair value method accounting stockbased compensation addition sfas 148 requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results time company elected adopt annual interim disclosure requirements sfas 148 interest income taxes paid company paid 15 million 24 million 51 million interest fiscal years 2003 2002 2001 respectively fiscal years 2003 2001 company paid 172 million 14 million income taxes respectively fiscal 2002 company received tax refunds 05 million schnitzer steel industries inc notes consolidated financial statements fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metals finished steel products transfers upon shipment retail sales revenues recognized customers pay salvaged parts shipping costs billed customers recorded revenue related costs included cost sales environmental costs estimated future costs known environmental remediation requirements accrued undiscounted basis probable company incurred liability related costs reasonably estimated range amounts established amount within range better another minimum amount range recorded recoveries environmental remediation costs parties recorded assets collection probable reclassifications certain prior year amounts reclassified conform fiscal year 2003 presentation changes impact previously reported results operations shareholders equity new accounting pronouncements july 2001 fasb issued statement financial accounting standards 143 sfas 143 accounting asset retirement obligations sfas 143 requires entities record fair value liability asset retirement obligation period incurred liability initially recorded entity required capitalize cost increasing carrying amount related longlived asset time liability accreted present value period capitalized cost depreciated useful life related asset sfas 143 effective fiscal years beginning june 15 2002 adopted company effective september 1 2002 adoption statement material impact consolidated financial statements may 2002 fasb issued sfas 145 sfas 145 rescission fas nos 4 44 64 amendment fas 13 technical corrections among things sfas 145 rescinds various pronouncements regarding early extinguishment debt allows extraordinary accounting treatment early extinguishment provisions accounting principles board opinion 30 reporting results operations reporting effects disposal segment business extraordinary unusual infrequently occurring events transactions met sfas 145 provisions regarding early extinguishment debt generally effective fiscal years beginning may 15 2002 adoption statement material impact consolidated financial statements june 2002 fasb issued sfas 146 accounting costs associated exit disposal activities standard requires companies recognize costs associated exit disposal activities incurred rather schnitzer steel industries inc notes consolidated financial statements date commitment exit disposal plan costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity statement applied prospectively exit disposal activities initiated december 31 2002 adoption statement material impact consolidated financial statements april 2003 fasb issued sfas 149 amendment statement 133 derivative instruments hedging activities sfas 149 sfas 149 amends clarifies accounting derivative instruments including certain derivative instruments embedded contracts hedging activities sfas 133 particular sfas 149 clarifies circumstances contract initial net investment meets characteristics derivative contains financing component warrants special reporting statement cash flows sfas 149 generally effective contracts entered modified june 30 2003 expected material impact companys financial position results operations may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity establishes standards financial instruments characteristics liabilities equity instruments classified balance sheet requirements sfas 150 generally state financial instruments give issuer choice settling obligation variable number securities settling obligation transfer assets mandatorily redeemable security classified liability balance sheet august 31 2003 company instruments within scope sfas 150 november 2002 fasb issued fasb interpretation 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others fin 45 fin 45 requires upon issuance guarantee guarantor must recognize liability fair value obligation assumed guarantee fin 45 also requires additional disclosures guarantor interim annual financial statements obligations associated guarantees issued recognition provisions fin 45 effective guarantees issued modified december 31 2002 adoption interpretation material impact consolidated financial statements january 2003 fasb issued fasb interpretation 46 consolidation variable interest entities fin 46 fin 46 requires variable interest entity consolidated company subject majority risk loss variable interest entitys activities entitled receive majority entitys residual returns fin 46 also requires disclosures variable interest entities company required consolidate significant variable interest consolidation requirements fin 46 apply immediately variable interest entities created january 31 2003 existing entities first fiscal year interim period beginning june 15 2003 company determined relationships entities meet definition variable interest entity note 2 inventories consist following thousands august 31 2003 2002 recycled metals 21115 13432 work process 8254 6495 finished goods 19912 25245 supplies 11862 12745 61143 57917 schnitzer steel industries inc notes consolidated financial statements production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture production yields factors note 3 business combinations february 14 2003 companys whollyowned subsidiary norprop inc norprop closed acquisition stock pick pull auto dismantling inc companys 50 partner picknpull auto dismantlers california general partnership joint venture membership interests picknpull auto dismantlers stockton llc stockton cost acquisition consisted 714 million cash paid seller closing 33 million debt assumed immediately paid 06 million acquisition costs addition norprop assumed approximately 125 million debt owed joint venture company bringing total purchase price 878 million 842 million net sellers 36 million share joint ventures cash hand closing joint venture stores together stockton store one countrys leading selfservice used auto parts networks 23 store locations 17 northern california two nevada one texas utah illinois indiana purchase price acquisition allocated tangible intangible identifiable assets liabilities assumed based estimate fair values certain tangible net assets real estate valued independent third parties equipment valued company management excess aggregate purchase price fair value identifiable net assets acquired approximately 706 million recognized goodwill approximately 37 million goodwill existed joint ventures balance sheet prior acquisition companys 18 million share amount shown separately accordance equity method accounting therefore total increase goodwill related acquisition 724 million additionally connection acquisition company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter 2003 probable reasonably estimable future remediation costs auto parts business store locations environmental proceedings pending sites initial purchase price subject terms purchase agreement provides purchase price adjustment one year closing based upon calendar year 2002 2003 earnings interest taxes depreciation amortization ebitda acquired auto parts business defined purchase agreement contingent future adjustment may increase decrease initial purchase price 12 million purchase price allocation prepared preliminary basis purchase price allocation subject changes purchase price due contingent future adjustment mentioned following summary estimated fair values assets acquired liabilities assumed date acquisition millions property plant equipment 133 tangible assets 26 assets 54 liabilities 41 goodwill 706 total 878 goodwill 706 million represents excess purchase price fair value net tangible assets acquired accordance sfas 142 goodwill amortized tested impairment least annually following table prepared pro forma basis fiscal 2003 2002 though auto parts business acquired beginning period presented including estimated impact certain adjustments interest expense millions except per share amounts schnitzer steel industries inc notes consolidated financial statements year ended august 31 2003 2002 net revenues 4969 4023 income cumulative effect change accounting principle 467 114 net income 457 114 net income per share basic 245 062 diluted 233 061 pro forma results necessarily indicative would occurred acquisitions effect periods presented addition intended projection future results reflect synergies might achieved combining operations note 4 property plant equipment operating leases property plant equipment consist following thousands august 31 2003 2002 machinery equipment 222604 242243 land improvements 50348 37831 buildings leasehold improvements 70861 14932 construction progress 10351 2467 354164 297473 less accumulated depreciation 212940 185714 141224 111759 depreciation expense operations 193 million fiscal 2003 167 million fiscal 2002 168 million fiscal 2001 company leases certain property equipment future minimum rental payments operating leases thousands year amount 2004 4894 2005 4232 2006 2885 2007 1804 2008 1236 thereafter 834 rent expense 36 million 11 million 14 million fiscal years 2003 2002 2001 respectively see discussion additional leases related parties note 9 schnitzer steel industries inc notes consolidated financial statements note 5 impairment nonrecurring charges second quarter fiscal 2003 company accrued 21 million environmental liabilities relating acquisition auto parts business refer note 3 fourth quarter fiscal 2002 metals recycling business discontinued operations two businesses providing adequate return terminated fixedprice barge contract affreightment determined cost effective company recognized charge 48 million including 04 million write property plant equipment 24 million write goodwill 10 million write assets 10 million payment terminate barge contract revenue discontinued operations fiscal 2002 2001 16 million 26 million respectively operating results defined operating income loss taxes losses 08 million 06 million fiscal 2002 2001 respectively second quarter fiscal 2002 company sold nonstrategic steel forging business part 1995 metals recycling business acquisition recorded loss 08 million sale also quarter company recorded loss 15 million related early termination two vessel charter agreements related company see note 9 related party transactions fiscal 2002 2001 revenue closed steel forging business 04 million 14 million respectively operating results fiscal 2002 2001 defined operating income loss taxes losses 01 million periods note 6 longterm debt longterm debt consists following thousands august 31 2003 2002 bank unsecured revolving credit facilities 79000 60000 taxexempt economic development revenue bonds due january 2022 interest payable monthly variable rate 095 august 31 2003 secured letter credit 7700 565 825 total longterm debt 87265 68525 less portion due within one year 220 60220 longterm debt less current portion 87045 8305 may 2003 company entered agreement refinance revolving bank credit facility new facility 150 million unsecured matures may 2006 bears interest varying interest rates august 31 2003 rates outstanding borrowings averaged 26 interest payable varying dates exceed maturity advance line schnitzer steel industries inc notes consolidated financial statements addition facility company additional unsecured line credit totaling 20 million uncommitted committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage company compliance covenants august 31 2003 payments longterm debt next five fiscal years thereafter follows thousands year amount 2004 220 2005 244 2006 79071 2007 30 2008 thereafter 7700 87265 note 7 environmental liabilities portland harbor december 2000 united states environmental protection agency epa named portland harbor 55 mile stretch willamette river portland oregon superfund site companys metals recycling deep water terminal facility portland oregon located adjacent portland harbor crawford street corporation company subsidiary also owns property adjacent portland harbor epa identified 69 potentially responsible parties prps including company crawford street corporation operate sites adjacent portland harbor superfund site company leases metals recycling deep water terminal facility schnitzer investment corp sic related party obligated lease sic bear costs relating investigation remediation property precise nature extent cleanup portland harbor parties involved process followed cleanup yet determined unclear whether extent company crawford street corporation liable environmental costs damages associated superfund site also unclear whether natural resource damage claims third party contribution damages claims asserted company crawford street corporation participated certain preliminary portland harbor study efforts parties consent order entered epa prps lower willamette group remedial investigationfeasibility study however company could become liable share costs study later stage proceedings separately oregon department environmental quality deq requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company crawford street corporation deq investigations company crawford street sites focused controlling current releases contaminants willamette river company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site owned crawford street corporation deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices bmps sufficient effectively provide source control avoid release contaminants sites proposed deq implementation bmps resolution investigation cost investigations associated properties cost employment source control bmps expected material estimate currently possible none made cost remediation schnitzer steel industries inc notes consolidated financial statements accrual remediation portland harbor companys adjacent properties established august 31 2003 manufacturing management inc 1994 manufacturing management inc mmi recorded reserve estimated cost cure certain environmental liabilities reserve carried companys financial statements mmi acquired 1995 august 31 2003 aggregated 156 million general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing remediation project united states environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt 60 parties named potentially responsible parties prps investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders uaos gmt another party proceed remedial design remedial action rdra head hylebos two parties proceed rdra balance waterway anticipated uaos soon converted specific voluntary consent decrees epa take additional action prps issuance uaos require company change previously recorded estimate environmental liabilities site significant uncertainties continue exist regarding total cost remediate site well companys share costs nevertheless companys estimate liabilities related site based information currently available natural resource damage trustees commencement bay asserted claims gmt prps within hylebos waterway area alleged damage natural resources march 2002 trustees delivered draft settlement proposal gmt others trustees suggested methodology resolving dispute indicate proposed damages cost amounts june 2002 gmt responded trustees draft settlement proposal various corrections comments twenty participants unknown time whether extent gmt liable natural resource damages companys previously recorded environmental liabilities include estimate companys potential liability claims washington state department ecology named gmt along number parties potentially liable parties plps site referred tacoma metals gmt operated site lease prior 1982 property owner current operator taken lead role performing remedial investigation feasibility study rifs site rifs completed parties currently involved mediation settlement process address cost allocations companys previously recorded environmental liabilities include estimate companys potential liability site mmi also named prp two thirdparty sites allegedly disposed transformers one site mmi entered settlement paid 825000 towards remediation site remediation site completed subject five year monitoring program site yet subject significant remedial investigation mmi named prp several sites agreed de minimis settlements addition matters discussed companys environmental reserve includes amounts potential future cleanup sites mmi conducted business allegedly disposed materials proler 1996 prior companys acquisition proler international corp proler recorded liability probable costs remediate whollyowned properties company carried aggregate reserve financial statements upon acquiring proler 35 million remained outstanding august 31 2003 schnitzer steel industries inc notes consolidated financial statements part proler acquisition company became 50 owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles pola conduct multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed 2002 hnp waiting final certification pola regulatory agencies overseeing cleanup remediation included excavation offsite disposal contaminated soils paving groundwater monitoring environmentally protective actions included installation stormwater management system construction noise barrier perimeter wall around substantial portion facility metals recycling llc metals scrap metals processing business locations rhode island massachusetts members metals one companys proler joint ventures izzo group inc june 9 1999 rhode island department environmental management dem issued notice violation nov metals alleging metals violated federal state regulations relating storage management transportation hazardous waste seeking impose administrative penalty 07 million metals filed answer nov denied allegations requested adjudicatory hearing january 1999 federal state officials searched metals johnston rhode island worcester massachusetts facilities metals advised search part state criminal investigation possible violations state federal hazardous waste programs rhode island statute prohibits disposal outofstate solid waste landfill operated rhode island resource recovery corporation rirrc grand jury empanelled consider allegations issued indictment august 30 2002 metals storing hazardous waste without permit operating hazardous waste disposal facility without permit causing transportation hazardous waste without permit causing transportation hazardous waste without manifest operating solid waste management facility without license metals pleaded guilty counts vigorously contested states allegations settlement discussions dem rhode island attorney generals office settle civil nov criminal charges held august 1999 dem issued nov rirrc included civil penalty 03 million relating alleged disposal hazardous waste metals landfill operated rirrc settled matter dem response rirrcs claim metals contribution rirrc metals agreed settlement metals paid rirrc 02 million 2003 march 15 2002 dem issued nov metals johnston rhode island facility alleging violations provisions rhode island clean air act regulations promulgated thereunder seeking impose administrative penalties 11 million metals april 5 2002 metals filed answer request hearing denied liability alleged violations august 2003 metals dem agreed settlement matter providing payment metals reduced fine 07 million payable 2003 2007 reduced 03 million payable 2003 2004 metals installs electric engines converting diesel metals results operations past years included accruals probable costs remediate settle mentioned environmental situations additionally proler joint venture sites potential environmental cleanup issues identified estimated cleanup costs associated sites accrued joint ventures connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs remediate factors company considers recognition measurement environmental liabilities include following schnitzer steel industries inc notes consolidated financial statements current regulations time reserve established course cleanup specify standards acceptable remediation information site becomes available site studied remediated professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations technologies available used remediation number financial condition potentially responsible parties extent responsibility remediation note 8 income taxes provision income taxes follows thousands year ended august 31 2003 2002 2001 current federal 13363 508 318 state 3011 686 610 deferred federal 1051 1436 2325 state 521 1536 148 17946 1094 3401 deferred tax assets liabilities follows thousands august 31 2003 2002 california enterprise zone credit carryforward 200 amt carryforward 374 529 segment held sale 176 29 inventory valuation methods 2897 2170 employee benefit accruals 906 891 state income tax 323 147 net current deferred tax assets 4524 3966 california enterprise zone credit carryforward 1500 accelerated depreciation basis differences 44409 42010 environmental liabilities 8711 8430 net operating loss carryforwards credits 6090 6928 1105 1220 27003 23932 deferred tax asset valuation allowance 6090 6928 net noncurrent deferred tax liabilities 33093 30860 schnitzer steel industries inc notes consolidated financial statements reasons difference effective income tax rate statutory federal income tax rate follows year ended august 31 2003 2002 2001 federal statutory rate 35 34 foreign sales corporationextraterritorial income exclusion 1 11 7 5 state taxes net credit 5 11 7 state taxes californian enterprise zone 22 proler nols 1 10 7 amortization goodwill 11 3 1 3 2 effective tax rate 27 14 30 1 2000 response allegations world trade organization wto federal tax benefit conferred foreign sales corporations fsc constituted illegal trade subsidy congress enacted legislation replace fsc rules extraterritorial income exclusion eti taxation scheme company adopted new eti rules export sales made october 1 2000 company found rules provide tax benefit comparable fsc rules would provided wto since alleged eti also illegal trade subsidy tax legislation passed address latest allegation part 1996 acquisition proler international corp proler company acquired 314 million federal net operating loss carryforwards nols company recognized immediate tax benefit nols instead company set offsetting 314 million valuation allowance ultimate use nols uncertain given thencurrent federal tax law proscription applying nols taxable income postacquisition income generated proler change federal tax law 1999 however allowed annual 24 million nol applied taxable income sources proler due change tax law company released annual 24 million valuation allowance recognized corresponding 08 million tax benefit fiscal years 2001 2002 2003 major reason companys effective tax rates lower statutory rates years remaining balance unused nols stands 153 million august 31 2003 expire fiscal years 2007 2012 used company also acquired 07 million credits part proler acquisition nols valuation allowance set offset credits ultimate use made likely subsequent liberalization federal tax law part valuation allowance yet released credits likely used nols used expire credits carried forward indefinitely fiscal 2002 company qualified 21 million enterprise zone tax credits state california credits used offset california state income taxes extent corporation consolidated group california franchise income tax liability credits excess tax liability carried forward indefinitely credits combined release 24 valuation allowance pertaining nols major reasons companys effective tax rate 14 fiscal 2002 well statutory rate 34 schnitzer steel industries inc notes consolidated financial statements note 9 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold operating expenses periodically company charters vessels related companies market rates transport recycled metal foreign markets number vessels chartered varies year depending availability vessels 1995 company signed sevenyear timecharter agreements two vessels scheduled expire july 2002 due part world economic slowdown 2002 ocean freight rates declined sharply result second quarter fiscal 2002 company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates lease terminations resulted loss 15 million second quarter fiscal 2002 charges incurred open market longterm time charters 19 million 47 million 135 million 2003 2002 2001 respectively primary reason entering number companys joint ventures secure supply recyclable metal metals recycling business company purchased recycled metals joint venture operations prices approximate market purchases joint ventures totaled 50 million 104 million 121 million 2003 2002 2001 respectively company leases certain land buildings schnitzer investment corp landlord related real estate company operating leases following table summarizes lease terms annual rents future minimum rents thousands lease current location expirations annual rent metals recycling business portland facility marine terminal 2063 1834 administrative offices 2014 319 minimum year rents 2004 2127 2005 2215 2006 2225 2007 2235 2008 2245 thereafter 103089 rent expense 21 million 19 million 17 million 2003 2002 2001 respectively accordance lease agreement dated september 1988 rent metals recycling businesss portland facility adjusted 2003 adjusted every 15 years thereafter market rates 2003 adjustment based analysis market rates performed independent experts consultations independent counsel approved majority companys independent directors 2008 every five years thereafter except year market rate adjustment rent adjusted based consumer producer price indices schnitzer steel industries inc notes consolidated financial statements august 2003 company entered new agreement landlord lease administrative offices conjunction reconfiguration space occupies rent according new agreement based analysis market rates performed independent experts consultations independent counsel approved majority companys independent directors august 2003 company leased property upon sacramento operation located landlord upon expiration lease august 2003 company purchased property landlord purchase price 11 million determined independent appraisal approved majority companys independent directors transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 09 million 10 million 11 million 2003 2002 2001 respectively transactions affecting income expense included assets 11 million 283 million notes receivable joint venture businesses august 31 2003 2002 respectively fiscal 2002 company converted 283 million advances selfservice auto parts dismantling joint venture note receivable note dated february 22 2002 scheduled maturity march 1 2009 conjunction companys acquisition picknpull note eliminated consolidation see note 3 company recorded interest income notes certain advances joint ventures income totaled 01 million 05 million 20 million fiscal years 2003 2002 2001 respectively note 10 employee benefits accordance union agreements company contributed union pension plans 25 million 23 million 26 million fiscal 2003 2002 2001 respectively multiemployer plans consequently company unable determine relative portion estimate future liability plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 12 fiscal 2003 11 million fiscal 2002 2001 certain nonunion employees company also maintains defined benefit pension plan following table sets forth change benefit obligation change plan assets funded status august 31 2003 2002 accordance sfas 132 employers disclosure pensions postretirement benefits thousands schnitzer steel industries inc notes consolidated financial statements august 31 2003 2002 change benefit obligation benefit obligation beginning year 7662 6693 service cost 792 754 interest cost 549 501 actuarial loss 1053 500 transfers 19 benefits paid 475 767 benefit obligation end year 9581 7662 change plan assets fair value plan assets beginning year 6656 5873 actual return plan assets 514 872 employer contribution 1690 2441 transfers 2 19 benefits paid 475 767 fair value plan assets end year 8387 6656 funded status plan assets less benefit obligation 1193 1006 unrecognized actuarial gain loss 3543 2590 unrecognized prior service cost 45 50 prepaid accrued benefit cost 2395 1634 assumptions used year determining defined benefit net pension cost august 31 2003 2002 2001 weighted average discount rate 63 70 expected rate investment return 80 90 expected rate compensation increase 38 40 components net periodic pension benefit cost thousands year ended august 31 2003 2002 2001 service cost 792 754 690 interest cost 549 501 442 expected return plan assets 541 537 576 amortization past service cost 4 recognized actuarial loss 126 24 net periodic pension benefit cost 930 746 560 company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows thousands schnitzer steel industries inc notes consolidated financial statements august 31 2003 2002 2001 restricted trust fund 1540 1191 1562 deferred compensation expense 374 347 182 longterm pension liability 2570 2174 1705 pension cost 273 305 236 trust fund assets experience stock market gains losses included income expense fiscal 2003 2002 2001 company recognized gains losses totaling 04 million 04 million 07 million respectively company acquired proler assumed liability deferred compensation payable certain exemployees proler august 31 2003 2002 2001 remaining liability aggregated 01 million 03 million 07 million respectively amounts included longterm liabilities accompanying consolidated balance sheet note 11 stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 4800000 shares class common stock options tenyear term except options granted fiscal 1999 2001 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 1999 became fully exercisable first anniversary grant options granted fiscal 2001 become exercisable follows 33 one year date grant 66 two years date grant 100 two onehalf years date grant vesting periods options varied standard company granted certain employees lieu annual salary revisions company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations alternative method accounting exists statement financial accounting standards 123 accounting stockbased compensation sfas 123 requires use option valuation models apb 25 exercise price companys employee stock options equaled market price underlying stock date grant compensation expense recognized pro forma information fiscal years 2003 2002 2001 regarding net income earnings per share required sfas 123 amended statement financial accounting standards 148 sfas 148 accounting stockbased compensation transition disclosure determined company accounted employee stock options fair value method fair value awards estimated date grant using blackscholes option pricing model following assumptions year ended august 31 2003 2002 2001 riskfree interest rate 37 47 48 dividend yield 10 weighted average expected life options 70 years 70 years 70 years volatility 35 40 43 schnitzer steel industries inc notes consolidated financial statements compensation expense companys stock options recognized based upon estimated fair value grant date fair value methodology allowed sfas 123 amended sfas 148 companys net income net income per share would follows thousands except earnings per share year ended august 31 2003 2002 2001 reported net income 43201 6553 7919 stock compensation expense net tax 830 786 739 pro forma net income 42371 5767 7180 reported basic income per share 232 036 042 pro forma basic income per share 227 032 038 reported diluted income per share 220 035 042 pro forma diluted income per share 216 031 038 summary companys stock option activity related information follows thousands except per share amounts exercise prices options outstanding august 31 2003 ranged 675 1800 weightedaverage remaining contractual life options 66 years fiscal 2001 company also issued 128392 options consultant options fully vested september 15 2001 expire september 15 2005 exercise price 871 per share fiscal 2003 consultant exercised 97120 options company recorded expense 02 million fiscal 2001 related transaction schnitzer steel industries inc notes consolidated financial statements note 12 segment information company operates three industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business selfservice used auto parts auto parts business additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except companys equity net income investment advances joint ventures metals recycling business buys processes ferrous nonferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products auto parts business purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including metals recycling business note 3 describes acquisition occurred february 14 2003 statement financial accounting standards 141 sfas 141 business combinations acquisition considered step acquisition due fact company significant joint venture interest acquired business number years additionally since acquisition occurred year company elected include consolidated results though occurred beginning fiscal 2003 thus 2003 statement operations balance sheet statement cash flows adjusted consolidate acquisition september 1 2002 financial results acquired businesses periods prior fiscal 2003 continue accounted using equity method included joint venture businesses reporting segment intersegment sales metals recycling business steel manufacturing business auto parts business metals recycling business transferred negotiated market rates per ton intercompany sales tend produce intercompany profits eliminated finished products ultimately sold third parties joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals industrial plant demolition contractors joint ventures dismantle industrial plants perform environmental remediation sell recovered metals machinery company purchases substantially ferrous recycled metals generated joint ventures information provided obtained internal information provided companys chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments assets capital expenditures shown joint ventures management use information allocate resources assess performance schnitzer steel industries inc notes consolidated financial statements schnitzer steel industries inc notes consolidated financial statements joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 9 regarding companys purchases joint ventures fiscal 2003 company reported 21 milllion impairment nonrecurring charges related auto parts business segment amount shown separately allow reader financial statements better understand operating results see note 5 income operations joint ventures represents companys equity net income entities companys share depreciation amortization expense included determination joint ventures net income follows schnitzer steel industries inc notes consolidated financial statements following summary companys total assets capital expenditures fiscal years 2003 2001 one customer accounted 21 10 companys consolidated revenues respectively fiscal 2002 single customer accounted 10 consolidated revenues fiscal 2003 2002 2001 sales china aggregated 23 24 19 respectively consolidated revenues fiscal 2002 one customer accounted 11 combined revenues joint ventures respectively fiscal 2003 2001 single customer accounted 10 combined revenues joint ventures note 13 summarized financial information joint ventures summary combined operations joint ventures company partner follows year ended august 31 2003 2002 thousands current assets 150461 130284 noncurrent assets 132390 126252 282851 256536 current liabilities 87418 79740 noncurrent liabilities 8917 35894 partners equity 186516 140902 282851 256536 schnitzer steel industries inc notes consolidated financial statements year ended august 31 2003 2002 2001 thousands revenues 877266 686881 609344 income operations 52162 39833 13526 net income taxes 50464 39824 19477 company performs administrative services provides operation maintenance management information systems joint ventures administrative charges totaled 01 million fiscal years 2003 2002 2001 advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest note 14 quarterly financial data unaudited thousands except per share amounts fiscal year 2003 first second third fourth revenues 906671 124659 127944 153596 income operations 87711 13174 22028 24812 net income 28912 8409 15028 16873 diluted earnings per share3 021 045 078 084 fiscal year 2002 first second third fourth revenues 76834 78362 95363 100089 income operations 3490 1164 4842 2657 net income loss 2044 1054 3367 2196 diluted earnings per share 011 006 019 012 fiscal year 2001 first second third fourth revenues 87036 87849 77046 70900 income operations 3004 3856 2215 5994 net income 1355 2105 1465 2994 diluted earnings per share 007 011 008 016 1 differences amounts previously reported due acquisition picknpull occurred companys second fiscal quarter 2003 reflected consolidated results transaction occurred september 1 2002 see notes 1 3 schnitzer steel industries inc notes consolidated financial statements 2 second fiscal quarter 2003 company recorded noncash impairment charge 10 million related implementation sfas 142 goodwill intangible assets effected september 1 2002 reported cumulative effect change accounting principle consolidated statement operations net income restated due change 2 diluted earnings per share adjusted reflect share dividend occurred august 14 2003 schedule ii valuation qualifying accounts years ended august 31 2003 2002 2001 thousands report independent accountants financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements referred report dated october 1 2003 appearing form 10k also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon october 1 2003 schnitzer steel industries inc form 10k item 9item 8 financial statements supplementary data index consolidated financial statements schedules page report independent registered public accounting firm41 consolidated balance sheets august 31 2004 200342 consolidated statement operations years ended august 31 2004 2003 200243 consolidated statement shareholders equity years ended august 31 2004 2003 200244 consolidated statement cash flows years ended august 31 2004 2003 200245 notes consolidated financial statements46 schedule ii valuation qualifying accounts70 report independent registered public accounting firm financial statement schedule71 schedules exhibits omitted information applicable required report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income retained earnings cash flows present fairly material respects financial position schnitzer steel industries subsidiaries august 31 2004 2003 results operations cash flows three years period ended august 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp portland oregon november 23 2004 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metal recycling business selfservice used auto parts business cascade steel rolling mills inc subsidiary minimill steel manufacturing business companys facilities located primarily western united states canada joint ventures metals recycling business strong presence eastern united states summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries company subsidiaries holds 50 interest nine joint ventures 30 interest one accounted using equity method intercompany transactions balances eliminated basis presentation note 3 notes consolidated financial statements describe acquisition occurred february 14 2003 statement financial accounting standards 141 sfas 141 business combinations acquisition considered step acquisition due fact company significant joint venture interest acquired business number years additionally since acquisition occurred fiscal 2003 company elected include consolidated results though occurred beginning fiscal 2003 thus 2003 statement operations balance sheet statement cash flows adjusted consolidate acquisition september 1 2002 also acquired businesses consolidated companys previous interest business form separate reporting segment called auto parts business additionally consolidation accounting requires company adjust earnings ownership interests reporting period fiscal 2003 net income reduced 25 million preacquisition interests net income taxes representing share income attributable former joint venture partner prior acquisition financial results acquired business periods prior fiscal 2003 continue accounted using equity method included joint venture businesses reporting segment cash equivalents cash equivalents include shortterm securities original maturity date 90 days less inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecision moisture production yields factors property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 15 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating income schnitzer steel industries inc notes consolidated financial statements longlived assets statement financial accounting standards 142 sfas 142 goodwill intangible assets requires intangibles finite useful lives reviewed impairment accordance statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets september 2002 company adopted sfas 144 supersedes statement financial accounting standards 121 sfas 121 accounting impairment longlived assets longlived assets disposed accounting principles board opinion 30 reporting results operationreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions sfas 144 establishes single accounting model longlived assets disposed sale whether previously held used newly acquired also broadens presentation discontinued operations include disposal transactions company assesses longlived assets impairment lowest level identifiable cash flows whenever changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends events changes circumstances occur company assesses recoverability longlived assets determining whether carrying value assets recovered undiscounted expected future cash flows future undiscounted cash flows less carrying amount assets company recognizes impairment loss based excess carrying amount fair value assets accordance sfas 144 goodwill effective september 1 2002 company adopted statement financial accounting standards 142goodwill intangible assets sfas 142 statement changed accounting goodwill indefinitelived intangible assets amortization approach impairmentonly approach required transitional accounting provisions sfas 142 company completed steps second quarter fiscal 2003 identify measure goodwill impairment two reporting units existed time adoption metals recycling business steel manufacturing business reporting units measured impairment comparing implied fair value reporting units goodwill carrying amount goodwill historical earnings used basis project future earnings determine whether impairment goodwill existed reporting units result evaluation company determined goodwill associated steel manufacturing business impaired company recorded noncash impairment charge entire 983000 remaining goodwill effective september 1 2002 reported cumulative effect change accounting principle consolidated statement operations goodwill deductible tax purposes thus amount tax affected implementation sfas 142 required use judgments estimates assumptions determination fair value impairment amounts related required testing prior adoption sfas 142 company historically evaluated goodwill impairment comparing entity level unamortized balance goodwill projected undiscounted cash flows result indicated impairment company performs impairment tests annually whenever events circumstances indicate value goodwill indefinitelived intangible assets might impaired following table presents companys intangible assets related lives millions august 31 2004 life years goodwill 1312 indefinite trade name 08 indefinite noncompete agreement 20 6 years schnitzer steel industries inc notes consolidated financial statements following table presents reconciliation reported net income per share sfas 142 effect periods presented thousands except per share amounts year ended august 31 2004 2003 2002 reported net income 111181 43201 6553 goodwill amortization net tax 1269 adjusted net income 111181 43201 7822 reported basic net income per share 371 155 024 goodwill amortization net tax 005 adjusted basic net income per share 371 155 029 reported diluted net income per share 358 147 023 goodwill amortization net tax 004 adjusted diluted net income per share 358 147 027 changes carrying amount goodwill year ending august 31 2004 follows thousands metals recycling auto parts business total beginning year balance 34771 72438 107209 picknpull business 10812 canadian acquisition 13157 balance august 31 2004 34771 96407 131178 common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock earnings per share basic diluted earnings per share dividends per common share adjusted reflect onefortwo stock dividend paid march 25 2004 oneforone stock dividend paid august 14 2003 schnitzer steel industries inc notes consolidated financial statements basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps giving effect share dividend referred thousands except per share amounts options exercise price greater average market price included computation diluted earnings per share would antidilutive options totaled 267000 2003 1757700 2002 options antidilutive fiscal 2004 company records stockbased compensation provisions accounting principles board opinion 25 accounting stock issued employees apb 25 related interpretations method compensation expense stock incentive plans determined using intrinsic value method accordingly exercise price equals market price date grant compensation expense recognized company stock options issued employees directors company recorded compensation expense fiscal 2004 06 million due accelerating vesting period stock options retired employee december 31 2002 fasb issued statement financial accounting standards 148 sfas 148 accounting stockbased compensation transition disclosure amends statement financial accounting standards 123 sfas 123 accounting stockbased compensation sfas 148 provides alternative methods transition voluntary change fair value method accounting stockbased compensation addition sfas 148 requires prominent disclosures annual interim financial statements method accounting stockbased employee compensation effect method used reported results time company elected adopt annual interim disclosure requirements sfas 148 schnitzer steel industries inc notes consolidated financial statements interest income taxes paid company paid 23 million 15 million 24 million interest expense fiscal years 2004 2003 2002 respectively fiscal years 2004 2003 company paid 503 million 172 million income taxes respectively fiscal 2002 company received tax refunds 05 million fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices companys investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metals finished steel products transfers upon shipment based either cif fob terms retail sales auto parts business revenues recognized customers pay salvaged parts wholesale products shipped customer location substantially companys ferrous export sales recycled metal made letters credit minimizing credit risk however domestic ferrous recycled metal sales nonferrous sales finished steel generally made open account historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized shipping costs billed customers recorded revenue related costs included cost sales allowance doubtful accounts company evaluates collectibility accounts notes advances receivable based combination factors cases management aware circumstances may impair specific customers ability meet financial obligations company management records specific allowance amounts due reduces net recognized receivable amount reasonably believe collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends environmental costs estimated future costs known environmental remediation requirements accrued undiscounted basis probable company incurred liability related costs reasonably estimated range amounts established amount within range better another minimum amount range recorded recoveries environmental remediation costs parties recorded assets realization claim recovery deemed probable reasonably estimable reclassifications certain prior year amounts reclassified conform fiscal year 2004 presentation changes impact previously reported results operations shareholders equity new accounting pronouncements january 2003 fasb revised fasb interpretation 46 consolidation variable interest entities fin 46r fin 46r requires variable interest entity consolidated company subject majority schnitzer steel industries inc notes consolidated financial statements risk loss variable interest entitys activities entitled receive majority entitys residual returns fin 46r also requires disclosures variable interest entities company required consolidate significant variable interest consolidation requirements fin 46r apply immediately variable interest entities created january 31 2003 existing entities first fiscal year interim period beginning june 15 2003 company determined relationships entities meet definition variable interest entity note 2 inventories consist following thousands august 31 2004 2003 recycled metals 34551 21115 work process 10045 8254 finished goods 23808 19912 supplies 11763 11862 80167 61143 production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture production yields factors note 3 business combinations canadian acquisition march 8 2004 company whollyowned subsidiary pnp auto parts canada co acquired assets leased sites three selfservice used auto parts stores calgary edmonton alberta kelowna british columbia sheppard holdings ltd calgary alberta canada affiliates three stores currently operate name pick part acquisition expands geographic scope auto parts business canadian market part strategy grow business north america acquisition completed third quarter fiscal 2004 purchase price 137 million results operations three stores reflected consolidated results company beginning 2004 third fiscal quarter total purchase price 132 million related goodwill information related goodwill refer note 1 consolidated financial statements picknpull business combination february 14 2003 companys whollyowned subsidiary norprop inc norprop closed acquisition stock pick pull auto dismantling inc companys 50 partner picknpull auto dismantlers california general partnership joint venture membership interests picknpull auto dismantlers stockton llc stockton cost acquisition consisted 714 million cash paid seller closing 33 million debt assumed immediately paid 06 million acquisition costs 05 million tax related expenses addition norprop assumed approximately 125 million debt owed joint venture company two additional payments made fiscal 2004 first payment 47 million made fiscal quarter ended november 30 2003 result amendment purchase agreement second final payment 71 million made fiscal quarter ended february 29 2004 related purchase price adjustment one year closing based upon calendar year 2002 2003 earnings interest taxes depreciation amortization ebitda acquired auto parts business total purchase price 1001 million 965 million net sellers 36 million share joint ventures cash hand closing schnitzer steel industries inc notes consolidated financial statements following summary estimated fair values assets acquired liabilities assumed date acquisition millions property plant equipment 133 identified intangible assets 37 assets 54 liabilities 38 goodwill 815 total 1001 goodwill 815 million represents excess purchase price fair value net tangible identified intangible assets acquired result tax election filed jointly company seller substantially deductible tax purposes 15year period also approximately 18 million goodwill existed joint ventures balance sheet prior acquisition shown separately accordance equity method accounting therefore total increase goodwill related acquisition 833 million accordance sfas142 goodwill amortized tested impairment least annually note 4 property plant equipment operating leases property plant equipment consist following thousands august 31 2004 2003 machinery equipment 258028 262698 land improvements 49080 50631 buildings leasehold improvements 30655 30485 construction progress 16995 10351 354758 354165 less accumulated depreciation 216320 212941 net property plant equipment 138438 141224 depreciation expense operations 197 million 193 million 167 million fiscal years 2004 2003 2002 respectively company leases certain property equipment future minimum rental payments operating leases thousands year amount 2005 4920 2006 3560 2007 2356 2008 1748 2009 945 thereafter 2207 rent expense 67 million 36 million 11 million fiscal years 2004 2003 2002 respectively see discussion additional leases related parties note 9 schnitzer steel industries inc notes consolidated financial statements note 5 impairment nonrecurring charges fiscal 2002 companys portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues docks substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 35 million recorded fourth quarter fiscal 2004 writeoff renovation costs incurred prior suspension connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites company recorded impairment nonrecurring charges 71 million fiscal 2002 company recorded nonrecurring charges 19 million early termination fixedprice alaska barge contract affreightment management determined cost effective alaska barge contract charge included 09 million writeoff note receivable 10 million payment terminate contract also impairment charge 18 million recorded elimination unprofitable carcrushing business impairment charge 11 million recorded closure underperforming yard reno nevada nonrecurring charges 15 million recorded loss early termination two vessel charter contracts related company terminated leases order take advantage market rates 7 8 per ton lower allin contracted rates see note 9 related party transactions shipping cost savings result contract termination totaled approximately 20 million additionally loss 08 million recorded sale nonstrategic steel forging business note 6 longterm debt longterm debt consists following thousands august 31 2004 2003 bank unsecured revolving credit facilities 60000 79000 taxexempt economic development revenue bonds due january 2022 interest payable monthly variable rate 126 august 31 2004 secured letter credit 7700 326 565 total longterm debt 68026 87265 less portion due within one year 225 220 longterm debt less current portion 67801 87045 may 2003 company entered agreement refinance revolving bank credit facility 150 million unsecured matures may 2006 bears interest varying interest rates august 31 2004 rates outstanding borrowings averaged 27 interest payable varying dates exceed maturity advance line credit facility contains provision whereby company may upon obtaining consent bank group extend terms agreement one year may 2007 company provided notice intention request extension bank group agreed request extension subject company providing standard representations warranties may 2006 original maturity date company currently anticipates able provide required representations warranties agreement extended schnitzer steel industries inc notes consolidated financial statements addition facility company additional unsecured line credit totaling 20 million outstanding borrowings unsecured line credit august 31 2004 committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage company compliance covenants august 31 2004 payments longterm debt next five fiscal years thereafter follows thousands year amount 2005 225 2006 60071 2007 30 2008 2009 thereafter 7700 68026 note 7 environmental liabilities contingencies portland harbor december 2000 united states environmental protection agency epa named portland harbor 55 mile stretch willamette river portland oregon superfund site companys metals recycling deep water terminal facility portland oregon located adjacent portland harbor crawford street corporation company subsidiary also owns property adjacent portland harbor epa identified 69 potentially responsible parties prps including company crawford street corporation operate sites adjacent portland harbor superfund site company leases metals recycling deep water terminal facility schnitzer investment corp sic related party obligated lease sic bear costs relating investigation remediation property precise nature extent cleanup portland harbor parties involved process followed cleanup yet determined unclear whether extent company crawford street corporation liable environmental costs damages associated superfund site also unclear whether natural resource damage claims third party contribution damages claims asserted company crawford street corporation participated certain preliminary portland harbor study efforts parties consent order entered epa prps lower willamette group remedial investigationfeasibility study however company could become liable share costs study later stage proceedings separately oregon department environmental quality deq requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company crawford street corporation deq investigations company crawford street sites focused controlling current releases contaminants willamette river company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site owned crawford street corporation deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices bmps sufficient effectively provide source control avoid release contaminants sites proposed deq implementation bmps resolution investigation cost investigations associated properties cost employment source control bmps expected material august 31 2004 however 03 million accrued studies related schnitzer steel industries inc notes consolidated financial statements pending six mile portland working harbor willamette river sediment superfund site estimate currently possible none made cost remediation portland harbor companys adjacent properties manufacturing management inc 1994 manufacturing management inc mmi recorded reserve estimated cost cure certain environmental liabilities reserve carried companys financial statements mmi acquired 1995 august 31 2004 aggregated 151 million general metals tacoma gmt subsidiary mmi owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing remediation project united states environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt 60 parties named potentially responsible parties prps investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders uaos gmt another party proceed remedial design remedial action rdra head hylebos two parties proceed rdra balance waterway issuance uaos require company change previously recorded estimate environmental liabilities site uoa head hylebos waterway converted voluntary consent decree may 2004 pursuant gmt party agreed remediate head hylebos waterway consent decree finalized entered court september 2004 time approximately 70 million settlement funds previously collected epa prps became available reimbursement remediation costs incurred gmt party may 31 2004 company recorded 35 million current assets representing companys share expected epa reimbursements expectation contributions prps amount previously taken account reduction companys reserve environmental liabilities company also recorded 35 million increase environmental liabilities two phases cleanup hylebos waterway first phase intertidal bank remediation conducted 2003 early 2004 second phase dredging head hylebos waterway began july 15 2004 approximately 117500 cubic yards estimated 310000 cubic yards total removed october 30 2004 dredging inwater work scheduled completed fiscal 2005 gmt party may pursue legal actions nonsettling nonperforming prps recover additional amounts may applied head hylebos remediation costs significant uncertainties continue exist regarding total cost remediate site well companys share costs nevertheless companys estimate liabilities related site based information currently available natural resource damage trustees commencement bay asserted claims gmt prps within hylebos waterway area alleged damage natural resources march 2002 trustees delivered draft settlement proposal gmt others trustees suggested methodology resolving dispute indicate proposed damages cost amounts june 2002 gmt responded trustees draft settlement proposal various corrections comments twenty participants unknown time whether extent gmt liable natural resource damages companys previously recorded environmental liabilities include estimate companys potential liability claims washington state department ecology named gmt along number parties potentially liable parties plps site referred tacoma metals gmt operated site lease prior 1982 property owner current operator taken lead role performing remedial investigation feasibility study rifs site rifs completed parties currently involved mediation settlement process address cost allocations companys previously recorded environmental liabilities include estimate companys potential liability site schnitzer steel industries inc notes consolidated financial statements mmi also named prp two thirdparty sites allegedly disposed transformers one site mmi entered settlement paid 825000 towards remediation site remediation site completed subject five year monitoring program site yet subject significant remedial investigation mmi named prp several sites agreed de minimis settlements addition matters discussed companys environmental reserve includes amounts potential future cleanup sites mmi conducted business allegedly disposed materials proler 1996 prior companys acquisition proler international corp proler recorded liability probable costs remediate whollyowned properties company carried aggregate reserve financial statements upon acquiring proler 34 million remained outstanding august 31 2004 part proler acquisition company became 50 owner hugo neuproler company hnp agreed part 1996 lease renewal port los angeles pola conduct multiyear phased remedial cleanup project involving certain environmental conditions metals recycling facility terminal island site los angeles california completed 2002 hnp waiting final certification pola regulatory agencies overseeing cleanup remediation included excavation offsite disposal contaminated soils paving groundwater monitoring environmentally protective actions included installation stormwater management system construction noise barrier perimeter wall around substantial portion facility additionally proler joint venture sites potential environmental cleanup issues identified estimated cleanup costs associated sites accrued joint ventures connection acquisition auto parts business company conducted environmental due diligence investigation based upon new information obtained investigation joint venture accrued 21 million environmental liabilities second quarter fiscal 2003 remediation costs auto parts businesss store locations environmental proceedings pending sites company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs remediate factors company considers recognition measurement environmental liabilities include following current regulations time reserve established course cleanup specify standards acceptable remediation information site becomes available site studied remediated professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations technologies available used remediation number financial condition potentially responsible parties extent responsibility remediation contingencies company hugo neu corporation hnc 50 members hugo neu schnitzer global trade llc hnsgt joint venture engaged global brokering recycled metals hnc manages daytoday activities hnsgt january 2004 hnc advised company would charge hnsgt 1 commission hnsgts recycled metal sales began deducting commissions reasonable reimbursement hncs costs may appropriate company responded 1 commission excessive hnc authority unilaterally impose commissions hnsgt company yet commenced litigation dispute fiscal 2004 company estimated 50 share disputed commissions totaled 25 million recording operating income joint ventures company excluded joint venture expenses excess disputed commissions companys estimate reasonable reimbursements schnitzer steel industries inc notes consolidated financial statements recently company practice paying commissions purchasing managers customers connection export sales recycled ferrous metals far east company recently advised practice may raise questions possible violations us foreign laws practice stopped thereafter audit committee advised conducted preliminary compliance review november 18 2004 recommendation audit committee board directors authorized audit committee engage independent counsel conduct thorough independent investigation directed existence results investigation voluntarily reported us department justice securities exchange commission company cooperate fully agencies investigation expected affect companys previously reported financial results including reported consolidated financial statements company cannot predict results investigation whether company employees subject penalties remedial actions following completion investigation note 8 income taxes provision benefit income taxes follows thousands year ended august 31 2004 2003 2002 current federal 50231 13363 508 state 5322 3011 686 foreign 586 deferred federal 5865 1051 1436 state 395 521 1536 income tax provision 50669 17946 1094 deferred tax assets liabilities follows thousands august 31 2004 2003 current deferred tax assets liabilities california enterprise zone credit carryforward 700 200 amt carryforward 374 segment held sale 176 inventory valuation methods 3359 2897 employee benefit accruals 1052 906 state income tax 272 323 net current deferred tax assets 5383 4524 noncurrent deferred tax assets liabilities california enterprise zone credit carryforward 550 1500 accelerated depreciation basis differences 40548 44409 amt carryforward 742 environmental liabilities 8599 8711 net operating loss carryforwards credits 4569 6090 1204 1105 24884 27003 deferred tax asset valuation allowance 6090 net noncurrent deferred tax liabilities 24884 33093 schnitzer steel industries inc notes consolidated financial statements reasons difference effective income tax rate statutory federal income tax rate follows year ended august 31 2004 2003 2002 federal statutory rate 35 34 extraterritorial income exclusion 3 11 7 state taxes net credit 2 5 11 state taxes california enterprise zone credit 22 proler nols 4 1 10 amortization goodwill 11 1 3 effective tax rate 31 27 14 companys effective tax rate 31 fiscal 2004 lower 35 federal statutory tax rate two primary reasons first company continues benefit federal tax laws extraterritorial income exclusion eti effect taxing export sales lesser rate comparable domestic sales estimated eti benefit year ended august 31 2004 approximately 3 secondly reduced tax rate benefited release nol valuation reserves part 1996 acquisition proler international inc company succeeded federal income tax net operating loss nols minimum tax credit carryforwards accordance generally accepted accounting principles gaap valuation reserves established nols credits management uncertain whether companys future taxable income tax would sufficient use part uncertainty regarding use nols stemmed two federal tax law constraints one limiting use 24 million year requiring used 2011 management would assess continuing need valuation reserves fiscal year would release extent uncertainty regarding use judged mitigated fiscal years 2003 2002 management released valuation reserves 08 million fiscal 2004 however management released remaining 61 million balance reserves determined likely future taxable income tax would sufficient absorb remaining nols 153 million credits 07 million determination based upon number factors including profitability trends industry fundamentals recent profitable acquisitions reversal effect cash flows affected present future use nols taxable income credits tax effective tax rates fiscal 2004 2003 higher fiscal 2002 company qualified 21 million california enterprise zone credits fiscal 2002 credits used offset california state income taxes extent corporation consolidated group california franchise income tax liability taxable income apportionable zone credits excess tax liability carried forward indefinitely company qualified additional minor amounts credits fiscal 2004 2003 schnitzer steel industries inc notes consolidated financial statements note 9 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting cost goods sold historically company chartered vessels related companies market rates transport recycled metal foreign markets number vessels chartered varied year depending availability vessels december 2003 related party exited shipping business consequently relationship ended charter fees paid related party fiscal 2004 however charter fees paid related party 19 million 98 million fiscal 2003 2002 respectively primary reason entering number companys joint ventures secure supply recyclable metal metals recycling business company purchased recycled metals joint venture operations prices approximate market purchases joint ventures totaled 97 million 50 million 104 million 2004 2003 2002 respectively company leases certain land buildings schnitzer investment corp landlord related real estate company operating leases following table summarizes lease terms annual rents future minimum rents thousands lease current location expirations annual rent metals recycling business portland facility marine terminal 2063 1834 administrative offices 2014 381 minimum year rents 2005 2147 2006 2225 2007 2235 2008 2245 2009 2255 thereafter 100834 rent expense 22 million 21 million 19 million 2004 2003 2002 respectively accordance lease agreement dated september 1988 rent metals recycling businesss portland facility adjusted 2003 adjusted every 15 years thereafter market rates adjustment results increase rent 2008 every five years thereafter except year market rate adjustment rent adjusted based consumer producer price indices transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 06 million 09 million 10 million 2004 2003 2002 respectively transactions affecting income expense included assets 10 million 11 million notes receivable joint venture businesses august 31 2004 2003 respectively schnitzer steel industries inc notes consolidated financial statements note 10 employee benefits primary actuarial assumptions determined follows expected longterm rate return plan assets based estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate assumed discount rate used discount future benefit obligations back todays dollars us discount rate measurement date august 31 rate sensitive changes interest rates decrease discount rate would increase obligation expense expected rate compensation increase used develop benefit obligations using projected pay retirement rate represents average longterm salary increases influenced compensation policies increase rate would increase obligation expense defined benefit pension plans certain nonunion employees company maintains defined benefit pension plan asset value plan based market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 thousands 2004 2003 change benefit obligation benefit obligation beginning year 9580 7662 service cost 936 792 interest cost 607 549 actuarial loss 548 1053 transfers 447 benefits paid 779 475 benefit obligation end year 11339 9581 change plan assets fair value plan assets beginning year 8387 6656 actual return plan assets 717 514 employer contribution 1228 1690 transfers 447 2 benefits paid 779 475 fair value plan assets end year 10000 8387 funded status plan assets less benefit obligation 1339 1193 unrecognized actuarial loss 3893 3543 unrecognized prior service cost 41 45 net amount recognized 2595 2395 schnitzer steel industries inc notes consolidated financial statements components net periodic pension benefit cost august 31 thousands 2004 2003 service cost 936 792 interest cost 607 549 expected return plan assets 692 541 amortization past service cost 5 4 recognized actuarial loss 172 126 net periodic pension benefit cost 1028 930 weightedaverage assumptions used determine pension benefit obligations august 31 2004 2003 discount rate 600 625 rate compensation increase 300 325 weightedaverage assumptions used determine net periodic pension benefit cost years ended august 31 2004 2003 discount rate 625 630 expected longterm return plan assets 800 rate compensation increase 325 380 determine expected longterm rate return pension plan assets consider current expected asset allocations well historical expected returns various categories plan assets apply expected rate return market related value assets reduces underlying variability assets apply expected return amortize gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees plan asset allocations companys asset allocation pension plan based primary goal maximizing investment returns longterm time company invested diversified portfolio provide balance returns risk effort quantify allocation company established target guideline used determining investment mix table shows companys target allocation range along actual allocations august 31 target actual 2004 actual 2003 equity 75100 61 59 fixed income 025 39 41 total 100 contributions company expects contribute 11 million defined benefit pension plan fiscal 2005 schnitzer steel industries inc notes consolidated financial statements estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid benefits 2005 496 2006 402 2007 284 2008 1245 2009 1059 20102013 7936 defined contribution plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 14 million 12 million 11 million fiscal 2004 2003 2002 respectively multiemployer pension plans accordance collective bargaining agreements company contributed multiemployer pension plans 31 million 25 million 23 million fiscal 2004 2003 2002 respectively company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company unable determine relative portion estimate future liability plans company learned fourth quarter 2004 one multiemployer plans would meet erisa minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service certain relief minimum funding standard cannot determine whether relief granted absent relief plans contributing employers required make additional contributions pay excise tax may equal exceed full amount deficiency company estimates share required additional contribution 2004 plan year approximately 11 million accrued amount fiscal 2004 benefits company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund deferred compensation expense classified assets status plan summarized follows august 31 thousands 2004 2003 restricted trust fund 1663 1540 deferred compensation expense 278 374 longterm pension liability 2172 2570 pension cost 351 273 trust fund assets stock market gains losses included income expense fiscal 2004 2003 company recognized gains totaling 02 million 04 million respectively losses 04 million fiscal 2002 schnitzer steel industries inc notes consolidated financial statements note 11 stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 7200000 shares class common stock options tenyear term except options granted fiscal 2001 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 2001 become exercisable follows 33 one year date grant 66 two years date grant 100 two onehalf years date grant vesting periods options varied standard company granted certain employees lieu annual salary revisions pro forma information fiscal years 2004 2003 2002 regarding net income earnings per share determined company accounted employee stock options fair value method per share weighted average grant date fair value awards determined applying blackscholes option pricing model 1266 782 636 years ended august 31 2004 2003 2002 respectively using following assumptions year ended august 31 2004 2003 2002 riskfree interest rate 38 37 47 dividend yield 10 weighted average expected life options 70 years 70 years 70 years volatility 43 35 40 compensation expense companys stock options recognized based upon estimated fair value grant date fair value methodology allowed sfas 123 amended sfas 148 companys net income net income per share would follows thousands except earnings per share year ended august 31 2004 2003 2002 reported net income 111181 43201 6553 stock compensation expense net tax 371 830 786 pro forma net income 110810 42371 5767 reported basic net income per share 371 155 024 pro forma basic net income per share 370 151 021 reported diluted net income per share 358 147 023 pro forma diluted net income per share 357 144 020 schnitzer steel industries inc notes consolidated financial statements summary companys stock option activity related information follows thousands except per share amounts following table summarizes information options outstanding august 31 2004 note 12 segment information company operates three industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business selfservice used auto parts auto parts business additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except companys equity net income investment advances joint ventures metals recycling business buys processes ferrous nonferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business schnitzer steel industries inc notes consolidated financial statements steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products auto parts business purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including metals recycling business note 3 describes acquisition occurred february 14 2003 intersegment sales metals recycling business steel manufacturing business auto parts business metals recycling business transferred negotiated market rates per ton intercompany sales tend produce intercompany profits eliminated finished products ultimately sold third parties joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals industrial plant demolition contractors joint ventures dismantle industrial plants perform environmental remediation sell recovered metals machinery company purchases substantially ferrous recycled metals generated joint ventures information provided obtained internal information provided companys chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments year ended august 31 2004 2003 2002 revenues external customers thousands metals recycling business 456302 308553 221811 auto parts business 81518 65225 steel manufacturing business 271293 191861 166586 intersegment revenues 120893 68773 37749 consolidated revenues 688220 496866 350648 joint ventures revenues external customers follows thousands year ended august 31 2004 2003 2002 joint ventures metals recycling business processing 1038373 616958 480157 brokering 489030 251431 144962 joint venture suppliers metals 12644 8877 61762 1540047 877266 686881 schnitzer steel industries inc notes consolidated financial statements revenues geographic area thousands year ended august 31 2004 2003 2002 metals recycling business asia 322574 223490 164512 north america 133728 85063 57299 sales steel manufacturing business 112198 61052 37730 sales external customers 344104 247501 184081 auto parts business north america 81518 65225 sales metals recycling business 8695 7721 sales external customers 72823 57504 steel manufacturing business north america 271293 191861 166586 interdivision sales 19 sales external customers 271293 191861 166567 consolidated revenues 688220 496866 350648 joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 9 regarding companys purchases joint ventures year ended august 31 2004 2003 2002 thousands operating income loss metals recycling business 77319 35781 11535 auto parts business 26804 21968 steel manufacturing business 24636 2522 5718 joint ventures metals recycling business 61672 24827 13766 joint venture suppliers metals 101 406 5624 corporate expense eliminations 19950 8763 8282 impairment nonrecurring charges 3500 2100 7100 consolidated operating income 166880 68785 9825 schnitzer steel industries inc notes consolidated financial statements see note 5 regarding additional discussion impairment nonrecurring charges operating income joint ventures represents companys equity net income entities year ended august 31 2004 2003 2002 thousands depreciation amortization expense metals recycling business 6532 6052 8903 auto parts business 4802 4017 steel manufacturing business 8582 8915 9368 corporate expense eliminations 487 457 360 consolidated depreciation amortization expense 20403 19441 18631 companys share depreciation amortization expense included determination joint ventures net income follows year ended august 31 2004 2003 2002 thousands joint ventures metals recycling business 6724 6539 6542 joint venture suppliers metals 260 286 1132 following summary companys total assets capital expenditures year ended august 31 2004 2003 2002 thousands total assets metals recycling business 157386 136137 119088 auto parts business 130585 105283 steel manufacturing business 119653 113384 122036 investment advances joint ventures metals recycling business 179081 115924 90433 joint venture suppliers recycled metal 3764 3124 6006 corporate 15504 14042 67443 605973 487894 405006 capital expenditures metals recycling business 12598 16176 5962 auto parts business 3822 2932 steel manufacturing business 4967 2496 3182 corporate 805 192 425 22192 21796 9569 schnitzer steel industries inc notes consolidated financial statements fiscal years 2004 2003 one customer accounted 12 21 companys consolidated revenues respectively fiscal 2002 single customer accounted 10 consolidated revenues sales foreign countries significant part business schedule identifies foreign countries sales exceed 10 consolidated revenues year ended august 31 2004 2003 2002 sales china 13 23 24 sales south korea 21 10 9 fiscal 2002 one customer accounted 11 combined revenues joint ventures fiscal 2004 2003 single customer accounted 10 combined revenues joint ventures note 13 summarized financial information joint ventures summary combined operations joint ventures company partner follows year ended august 31 2004 2003 thousands current assets 266612 150461 noncurrent assets 136202 132390 402814 282851 current liabilities 84385 87418 noncurrent liabilities 10838 8917 partners equity 307591 186516 402814 282851 year ended august 31 2004 2003 2002 thousands revenues 1540435 877266 686881 operating income 147405 52162 39833 net income taxes 131855 50464 39824 advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest schnitzer steel industries inc notes consolidated financial statements note 14 quarterly financial data unaudited thousands except per share amounts fiscal year 2004 first second third fourth revenues 128376 161603 193750 204491 operating income 18105 24217 67315 57243 net income 12177 18549 42514 37941 diluted earnings per share 1 039 060 137 122 fiscal year 2003 first second third fourth revenues 90667 124659 127944 153596 operating income 8758 13297 22027 24703 net income 2891 8409 15028 16873 diluted earnings per share 1 010 030 052 056 1 diluted earnings per share adjusted reflect oneforone share dividend occurred august 14 2003 onefortwo stock dividend paid march 25 2004 schedule ii valuation qualifying accounts years ended august 31 2004 2003 2002 thousands report independent registered public accounting firm financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements referred report dated november 23 2004 appearing form 10k also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule present fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon november 23 2004 schnitzer steel industries inc form 10k item 9item 8 financial statements supplemental data index consolidated financial statements schedules page management’s report internal control financial reporting report independent registered public accounting firm consolidated balance sheets august 31 2005 2004 consolidated statement operations years ended august 31 2005 2004 2003 consolidated statement shareholders’ equity years ended august 31 2005 2004 2003 consolidated statement cash flows years ended august 31 2005 2004 2003 notes consolidated financial statements schedule ii valuation qualifying accounts report independent registered public accounting firm financial statement schedule schedules exhibits omitted information applicable required management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance recording transactions necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management assessed effectiveness company’s internal control financial reporting august 31 2005 making assessment management used criteria set forth committee sponsoring organizations treadway commission coso internal control integrated framework based assessment management determined company’s internal control financial reporting effective august 31 2005 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited management’s assessment effectiveness company’s internal control financial reporting august 31 2005 effectiveness internal control financial reporting august 31 2005 stated report included herein john carter gregory j witherspoon president chief executive officer interim chief financial officer november 14 2005 november 14 2005 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc completed integrated audit schnitzer steel industries’s 2005 consolidated financial statements internal control financial reporting august 31 2005 audits 2004 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2005 2004 results operations cash flows three years period ended august 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s annual report internal control financial reporting appearing item 8 company maintained effective internal control financial reporting august 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting august 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon november 14 2005 schnitzer steel industries inc consolidated balance sheet thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement operations thousands except per share amounts accompanying notes integral part statement schnitzer steel industries inc consolidated statement shareholders’ equity thousands accompanying notes integral part statement schnitzer steel industries inc consolidated statement cash flows thousands accompanying notes integral part statement schnitzer steel industries inc notes consolidated financial statements note 1 nature business summary significant accounting policies nature business schnitzer steel industries inc company operates metals recycling business selfservice used auto parts business minimill steel manufacturing business august 31 2005 company’s facilities located primarily western united states canada summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned majorityowned subsidiaries august 31 2005 company subsidiaries held 50 interest nine joint ventures 30 interest one accounted using equity method intercompany transactions balances eliminated see note 14 regarding termination certain joint ventures october 2005 basis presentation note 3 notes consolidated financial statements describes acquisition occurred february 14 2003 statement financial accounting standards 141 sfas 141 “business combinations” acquisition considered “step” acquisition due fact company significant joint venture interest acquired business number years additionally since acquisition occurred fiscal 2003 company elected include consolidated results though occurred beginning fiscal 2003 thus 2003 statement operations statement cash flows adjusted consolidate acquisition september 1 2002 acquired businesses consolidated company’s previous interest business form separate reporting segment called auto parts business additionally consolidation accounting requires company adjust earnings ownership interests reporting period fiscal 2003 net income reduced 25 million preacquisition interests net income taxes representing share income attributable former joint venture partner prior acquisition cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less inventories stated lower cost market cost determined using average cost method production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecision moisture production yields factors property plant equipment property plant equipment recorded cost major renewals improvements capitalized substantially expenditures maintenance repairs charged operations incurred depreciation determined principally using straightline method estimated useful lives approximately 20 40 years buildings approximately 3 years equipment leasehold improvements amortized estimated useful lives property remaining lease term whichever less assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating income schnitzer steel industries inc notes consolidated financial statements longlived assets statement financial accounting standards 142 sfas 142 “goodwill intangible assets” requires intangibles finite useful lives reviewed impairment accordance statement financial accounting standards 144 sfas 144 “accounting impairment disposal longlived assets” september 2002 company adopted sfas 144 supersedes statement financial accounting standards 121 sfas 121 “accounting impairment longlived assets longlived assets disposed of” accounting principles board opinion 30 “reporting results operationreporting effects disposal segment business extraordinary unusual infrequently occurring events transactions” sfas 144 establishes single accounting model longlived assets disposed sale whether previously held used newly acquired also broadens presentation discontinued operations include disposal transactions company assesses longlived assets impairment lowest level identifiable cash flows whenever changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends events changes circumstances occur company assesses recoverability longlived assets determining whether carrying value assets recovered undiscounted expected future cash flows future undiscounted cash flows less carrying amount assets company recognizes impairment loss based excess carrying amount fair value assets accordance sfas 144 goodwill effective september 1 2002 company adopted statement financial accounting standards 142”goodwill intangible assets” sfas 142 statement changed accounting goodwill indefinitelived intangible assets amortization approach impairmentonly approach required transitional accounting provisions sfas 142 company completed steps second quarter fiscal 2003 identify measure goodwill impairment two reporting units existed time adoption metals recycling business steel manufacturing business reporting units measured impairment comparing implied fair value reporting units’ goodwill carrying amount goodwill historical earnings used basis project future earnings determine whether impairment goodwill existed reporting units result evaluation company determined goodwill associated steel manufacturing business impaired company recorded noncash impairment charge entire 983000 remaining goodwill effective september 1 2002 reported “cumulative effect change accounting principle” consolidated statement operations goodwill deductible tax purposes thus amount tax affected implementation sfas 142 required use judgments estimates assumptions determination fair value impairment amounts related required testing prior adoption sfas 142 company historically evaluated goodwill impairment comparing entity level unamortized balance goodwill projected undiscounted cash flows result indicated impairment company performs impairment tests annually whenever events circumstances indicate value goodwill indefinitelived intangible assets might impaired company evaluates goodwill operating segment level lowest level discrete financial information available management regularly reviews operating results selected costs statistics used evaluate goodwill typically related pricing volumes goods sold costs percentage revenues cyclicality inherent company’s industries following table presents company’s intangible assets related lives schnitzer steel industries inc notes consolidated financial statements changes carrying amount goodwill year ending august 31 follows thousands common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock earnings dividends per share basic diluted earnings per share dividends per common share adjusted reflect onefortwo stock dividend paid march 25 2004 oneforone stock dividend paid august 14 2003 basic eps computed based upon weighted average number common shares outstanding period diluted eps reflects potential dilution would occur securities contracts issue common stock exercised converted common stock following represents reconciliation basic eps diluted eps giving effect stock dividends referred thousands except per share amounts schnitzer steel industries inc notes consolidated financial statements options exercise price greater average market price included computation diluted earnings per share would antidilutive options totaled 267000 fiscal 2003 options antidilutive fiscal 2005 2004 interest income taxes paid company paid 10 million 23 million 15 million interest expense fiscal years 2005 2004 2003 respectively fiscal years 2005 2004 2003 company paid 766 million 503 million 172 million income taxes respectively fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities quoted prices company’s investments joint ventures accounted equity method reasonable estimate fair value could made without incurring excessive costs use estimates financial statement preparation financial statements accordance generally accepted accounting principles requires company make estimates assumptions affect reported amounts disclosures financial statements actual results could differ estimates revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metals finished steel products transfers upon shipment based either cost insurance freight cif free board fob terms retail sales auto parts business revenues recognized customers pay salvaged parts wholesale products shipped customer location substantially company’s ferrous export sales recycled metal made letters credit minimizing credit risk however domestic ferrous recycled metal sales nonferrous sales finished steel generally made open account historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized shipping costs billed customers recorded revenue related costs included cost sales allowance doubtful accounts company evaluates collectibility accounts notes advances receivable based combination factors cases management aware circumstances may impair specific customer’s ability meet financial obligations company management records specific allowance amounts due reduces net recognized receivable amount reasonably believe collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends environmental costs estimated future costs known environmental remediation requirements accrued undiscounted basis probable company incurred liability related costs reasonably estimated range amounts established amount within range better another minimum amount range recorded recoveries environmental remediation costs parties recorded assets realization claim recovery deemed probable reasonably estimable schnitzer steel industries inc notes consolidated financial statements reclassifications certain prior year amounts reclassified conform fiscal 2005 presentation additionally certain current year quarterly amounts reclassified see note 15 changes impact previously reported results operations shareholders’ equity new accounting pronouncements january 2003 financial accounting standards board fasb revised fasb interpretation 46 “consolidation variable interest entities” fin 46r fin 46r requires variable interest entity consolidated company subject majority risk loss variable interest entity’s activities entitled receive majority entity’s residual returns fin 46r also requires disclosures variable interest entities company required consolidate significant variable interest consolidation requirements fin 46r apply immediately variable interest entities created january 31 2003 existing entities first fiscal year interim period beginning june 15 2003 company determined relationships entities meet definition variable interest entity november 2004 fasb issued sfas 151 “inventory costs” statement clarifies accounting abnormal amounts idle facility expense freight handling costs may abnormal require treatment period charges statement effective fiscal years beginning june 15 2005 company anticipate pronouncement material impact consolidated financial statements company’s policies already consider provisions pronouncement december 2004 fasb issued sfas 153 “exchanges nonmonetary assets” statement explains exchanges nonmonetary assets measured based fair value assets exchanged statement effective fiscal years beginning june 15 2005 company anticipate pronouncement material impact consolidated financial statements december 2004 fasb finalized sfas 123r “sharedbased payment” effective first interim reporting period first fiscal year beginning june 15 2005 new standard require company expense stock options beginning first quarter fiscal 2006 company record expense using blackscholes model determine value stock options june 2005 fasb issued sfas 154 “accounting changes error corrections” statement revises reporting requirements related changes accounting principles adoption new accounting pronouncements statement effective fiscal years beginning december 15 2005 company anticipate pronouncement material impact consolidated financial statements note 2 inventories consist following thousands production accounting process utilized company record recycled metals inventory quantities relies significant estimates affected weight imprecisions moisture production yields factors schnitzer steel industries inc notes consolidated financial statements note 3 business combinations vrs acquisition january 2005 picknpull auto dismantlers whollyowned subsidiary company acquired assets leased sites four selfservice used auto parts stores st louis kansas city missouri columbus ohio virginia beach virginia vehicle recycling solutions llc certain whollyowned subsidiaries “vrs” total acquisition cost 222 million consisted cash purchase price 188 million 06 million acquisition expenses additional environmental reserves recorded result due diligence 28 million total purchase price 200 million related goodwill st louis kansas city columbus stores increase company’s existing midwest store base virginia beach store provides picknpull eastern presence giving ability expand along east coast four new stores operated picknpull name increase total number stores 30 company’s auto parts business segment results operations four stores acquisition date reflected consolidated results company’s auto parts business canadian acquisition march 8 2004 company whollyowned subsidiary pnp auto parts canada co acquired assets leased sites three selfservice used auto parts stores calgary edmonton alberta kelowna british columbia sheppard holdings ltd calgary alberta canada affiliates acquisition expands geographic scope auto parts business canadian market part strategy grow business north america acquisition completed third quarter fiscal 2004 purchase price 137 million results operations three stores reflected consolidated results company beginning 2004 third fiscal quarter total purchase price 132 million related goodwill july 2005 minority interest shareholders three stores exercised option sell shares company recorded additional 02 million goodwill related transaction information related goodwill refer note 1 consolidated financial statements picknpull business combination february 14 2003 company’s whollyowned subsidiary norprop inc “norprop” closed acquisition “acquisition” stock pick pull auto dismantling inc company’s 50 partner picknpull auto dismantlers california general partnership “joint venture” membership interests picknpull auto dismantlers stockton llc “stockton” cost acquisition consisted 714 million cash paid seller closing 33 million debt assumed immediately paid 06 million acquisition costs 05 million tax related expenses addition norprop assumed approximately 125 million debt owed joint venture company two additional payments made fiscal 2004 first payment 47 million made fiscal quarter ended november 30 2003 result amendment purchase agreement second final payment 71 million made fiscal quarter ended february 29 2004 related purchase price adjustment one year closing based upon calendar year 2002 2003 earnings interest taxes depreciation amortization ebitda acquired auto parts business total purchase price 1001 million 965 million net seller’s 36 million share joint venture’s cash hand closing following summary estimated fair values assets acquired liabilities assumed date acquisition millions property plant equipment 133 identified intangible assets 37 assets 54 liabilities 38 goodwill 815 total 1001 schnitzer steel industries inc notes consolidated financial statements goodwill 815 million represents excess purchase price fair value net tangible identified intangible assets acquired result tax election filed jointly company seller substantially deductible tax purposes 15year period also approximately 18 million goodwill existed joint venture’s balance sheet prior acquisition shown separately accordance equity method accounting therefore total increase goodwill related acquisition 833 million accordance sfas142 goodwill amortized tested impairment least annually note 4 property plant equipment operating leases property plant equipment consist following thousands depreciation expense operations 204 million 197 million 193 million fiscal years 2005 2004 2003 respectively company leases certain property equipment future minimum rental payments operating leases thousands rent expense 81 million 67 million 36 million fiscal years 2005 2004 2003 respectively see discussion additional leases related parties note 9 note 5 impairment charges fiscal 2002 company’s portland oregon metals recycling facility embarked dock loading facility renovation suspended fiscal 2003 issues dock’s substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 35 million recorded fourth quarter fiscal 2004 writeoff renovation costs incurred prior suspension schnitzer steel industries inc notes consolidated financial statements note 6 longterm debt longterm debt consists following thousands august 31 2005 company committed unsecured bank credit facility totaling 150 million maturing may 2006 bearing interest varying interest rates interest payable varying dates exceed maturity advance line borrowings outstanding credit facility august 31 2005 see note 14 regarding amended restated credit agreement entered november 2005 addition facility company additional unsecured line credit totaling 20 million outstanding borrowings unsecured line credit august 31 2005 committed bank credit facilities borrowings contain financial covenants including covenants related net worth interest coverage leverage company compliance covenants august 31 2005 payments longterm debt next five fiscal years thereafter follows thousands note 7 environmental liabilities contingencies company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues factors company considers recognition measurement environmental liabilities include following · current regulations time reserve established course cleanup specify standards acceptable remediation · information site becomes available site studied remediated · professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations · technologies available used remediation schnitzer steel industries inc notes consolidated financial statements · number financial condition potentially responsible parties extent responsibility remediation metals recycling business connection acquisitions metals recycling business segment 1996 company carried financial statements reserves environmental liabilities previously recorded acquired companies reserves evaluated quarterly according company policy august 31 2005 environmental reserves metals recycling business aggregated 180 million hylebos waterway remediation general metals tacoma gmt subsidiary company owns operates metals recycling facility located state washington hylebos waterway part commencement bay subject ongoing remediation project united states environmental protection agency epa comprehensive environmental response compensation liability act cercla gmt 60 parties named potentially responsible parties prps investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders uaos gmt another party proceed remedial design remedial action rdra head hylebos two parties proceed rdra balance waterway uao head hylebos waterway converted voluntary consent decree 2004 pursuant gmt party agreed remediate head hylebos waterway two phases remediation head hylebos waterway first phase intertidal bank remediation conducted 2003 early 2004 second phase dredging head hylebos waterway began july 15 2004 fiscal 2005 company paid remediation costs 159 million related hylebos dredging resulted reduction environmental liability company’s cost estimates based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company recorded environmental charges 135 million fiscal 2005 primarily account additional estimated costs complete work second dredging season total reserve site 106 million august 31 2005 company party filed complaint united states federal district court western washington dredge contractor recover damages significant portion increased costs second dredging season complete project however generally accepted accounting principles allow company recognize benefits recoveries receipt probable reasonably estimated gmt party pursuing settlement negotiations legal actions nonsettling nonperforming prps recover additional amounts may applied head hylebos remediation costs fiscal 2005 company recovered 07 million four nonperforming prps expectation contributions prps amount previously taken account reduction company’s reserve environmental liabilities company recorded 07 million increase environmental liabilities connection recoveries uncertainties continue exist regarding total cost remediate site well company’s share costs nevertheless company’s estimate liabilities related site based information currently available natural resource damage trustees commencement bay asserted claims gmt prps within hylebos waterway area alleged damage natural resources march 2002 trustees delivered draft settlement proposal gmt others trustees suggested methodology resolving dispute indicate proposed damages cost amounts june 2002 gmt responded trustees’ draft settlement proposal various corrections comments twenty participants unknown time whether extent gmt liable natural resource damages company’s previously recorded environmental liabilities include estimate company’s potential liability claims schnitzer steel industries inc notes consolidated financial statements portland harbor december 2000 united states environmental protection agency epa named portland harbor 55 mile stretch willamette river portland oregon superfund site company’s metals recycling deep water terminal facility portland oregon located adjacent portland harbor crawford street corporation company subsidiary also owns property adjacent portland harbor epa identified 69 prps including company crawford street corporation operate sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined unclear whether extent company crawford street corporation liable environmental costs damages associated superfund site also unclear whether extent natural resource damage claims third party contribution damages claims asserted company crawford street corporation participated certain preliminary portland harbor study efforts parties consent order entered epa prps lower willamette group remedial investigationfeasibility study however company crawford street corporation could become liable share costs study later stage proceedings separately oregon department environmental quality deq requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company crawford street corporation deq investigations company crawford street sites focused controlling current releases contaminants willamette river company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site owned crawford street corporation deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices bmps provide effective source control avoid release contaminants sites proposed deq implementation bmps resolution investigation cost investigations associated properties cost employment source control bmps expected material estimate currently possible none made cost remediation portland harbor company’s adjacent properties metals recycling business sites number years prior company’s 1996 acquisition proler international corp proler operated industrial waste landfill texas proler utilized dispose auto shredder residue one operations august 2002 proler entered texas commission environmental quality tceq voluntary cleanup program vcp toward pursuit vcp certificate completion former landfill site fiscal 2005 tceq issued conditional certificate completion requiring company perform ongoing groundwater monitoring annual inspections maintenance reporting result resolution issue company reduced reserve related site 16 million fiscal 2005 second quarter fiscal 2005 connection negotiation separation termination company’s metals recycling joint ventures hugo neu corporation see note 14 company conducted environmental due diligence investigation certain joint venture businesses proposed acquire result investigation company identified certain environmental risks accrued 26 million share estimated costs remediate risks environmental proceedings pending sites charge included “operating income joint ventures” accompanying consolidated statement income washington state department ecology named gmt along number parties potentially liable parties plps site referred tacoma metals gmt operated site lease prior 1982 property owner current operator taken lead role performing remedial investigation feasibility study rifs site company’s previously recorded environmental liabilities include estimate company’s potential liability site schnitzer steel industries inc notes consolidated financial statements company subsidiary also named prp another thirdparty site allegedly disposed automobile shredder residue site yet subject significant remedial investigation addition matters discussed company’s environmental reserve includes amounts potential future cleanup sites company acquired subsidiaries conducted business allegedly disposed materials auto parts business fiscal 2003 fiscal 2005 company completed three acquisitions businesses auto parts business segment time acquisition company conducts environmental due diligence investigation related locations involved acquisition result environmental due diligence investigations company records reserve estimated cost cure certain environmental liabilities reserve evaluated quarterly according company policy august 31 2005 reserve aggregated 55 million environmental proceedings pending sites discussed january 6 2004 auto parts business served notice violation nov general permit requirements diesel powered car crushers rancho cordova sacramento locations sacramento metropolitan air quality management district smaqmd since receiving nov sacramento rancho cordova locations converted diesel powered car crushers electric powered company settled matter resulted payment fine smaqmd company’s fourth fiscal quarter 2005 settlement amount less 06 million company previously reserved matter contingencies company past practice making improper payments purchasing managers customers asia connection export sales recycled ferrous metals company stopped practice advised raised questions possible violations us foreign laws thereafter audit committee advised conducted preliminary compliance review november 18 2004 recommendation audit committee board directors authorized audit committee engage independent counsel conduct thorough independent investigation board directors also authorized directed existence results investigation voluntarily reported us department justice doj securities exchange commission sec company cooperate fully agencies audit committee notified doj sec independent investigation engaged outside counsel assist independent investigation instructed outside counsel fully cooperate doj sec provide agencies information obtained result independent investigation august 23 2005 company received sec formal order investigation related independent investigation audit committee continuing independent investigation company including audit committee continues cooperate fully doj sec investigations audit committee doj sec expected affect company’s previously reported financial results including reported 10k however probable sec doj impose penalties company result investigations company unable estimate either timing amount range penalties company made provision penalties financial statements company cannot predict results aforementioned investigations whether company employees subject disgorgement remedial actions following completion investigations company hugo neu corporation “hnc” 50 members hugo neu schnitzer global trade llc “hnsgt” joint venture engaged global trading recycled metals hnc managed daytoday activities hnsgt january 2004 hnc advised company would charge hnsgt 1 commission hnsgt’s recycled metal sales began deducting commissions reasonable reimbursement hnc’s costs might appropriate company responded 1 commission excessive hnc authority unilaterally impose commissions hnsgt august 31 2005 company estimated 50 share disputed commissions totaled 63 million recording operating income joint ventures company excluded joint venture expenses excess disputed commissions company’s estimate reasonable reimbursements part separation termination company’s joint ventures hnc discussed note 14 company agreed release claim reimbursement excess commissions amount accrued claim treated purchase price purchase accounting transaction schnitzer steel industries inc notes consolidated financial statements note 8 income taxes provision benefit income taxes follows thousands deferred tax assets liabilities follows thousands reasons difference effective income tax rate statutory federal income tax rate follows schnitzer steel industries inc notes consolidated financial statements tax rate 353 fiscal 2005 approximates 35 federal statutory tax rate state tax expense offset federal tax law’s extraterritorial income exclusion eti benefit export sales effect taxing export sales lesser rate comparable domestic sales reason tax rate fiscal 2005 higher fiscal 2004 fiscal 2004 benefited release valuation allowances previously offset federal income tax net operating loss “nols” minimum tax credit carryforwards accompanied earlier acquisition accordance generally accepted accounting principles valuation allowances established nols credits management uncertain whether company’s future taxable income tax would sufficient use part uncertainty regarding use nols stemmed two federal tax law constraints one limiting use 24 million year requiring used 2011 management would assess continuing need valuation allowances fiscal year would release extent uncertainty regarding use judged mitigated fiscal years 2004 2003 management released valuation reserves 61 million 08 million respectively fiscal 2004 release attributable management’s determination likely future taxable income tax would sufficient absorb remaining nols 153 million credits 07 million determination based upon number factors profitability trends industry fundamentals recent profitable acquisitions reversal effect cash flows affected present future use nols taxable income credits tax note 9 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes transactions affecting revenues fiscal 2005 company sold one shipment recycled metals one joint ventures 90 million company historically sold recycled metals joint ventures transactions affecting cost goods sold historically company chartered vessels related companies market rates transport recycled metal foreign markets number vessels chartered varied year depending availability vessels december 2003 related party exited shipping business consequently relationship ended charter fees paid related party fiscal 2004 2005 however charter fees paid related party 19 million fiscal 2003 company purchased recycled metals joint venture operations prices approximate market purchases joint ventures totaled 139 million 97 million 50 million fiscal 2005 2004 2003 respectively company’s portland oregon metals recycling facility operated property leased schnitzer investment corp sic related party since 1972 term lease extended 2063 annual rent approximately 18 million subject periodic adjustment 2004 sic began marketing property sale company deemed location property strategic operations company purchased property may 2005 20 million transaction approved company’s audit committee accordance company’s policy related party transactions schnitzer steel industries inc notes consolidated financial statements company leases administrative offices sic operating leases expire 2013 current annual rent 04 million following table summarizes future minimum rents thousands leases related party rent expense administrative offices portland metals recycling facility 17 million 22 million 21 million fiscal 2005 2004 2003 respectively transactions affecting selling administrative expenses company performs administrative services provides operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled 05 million 06 million 09 million fiscal 2005 2004 2003 respectively transactions affecting income expense included assets 08 million 10 million notes receivable joint venture businesses august 31 2005 2004 respectively note 10 employee benefits primary actuarial assumptions determined follows · expected longterm rate return plan assets based estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate · assumed discount rate used discount future benefit obligations back today’s dollars us discount rate measurement date august 31 rate sensitive changes interest rates decrease discount rate would increase obligation expense · expected rate compensation increase used develop benefit obligations using projected pay retirement rate represents average longterm salary increases influenced compensation policies increase rate would increase obligation expense schnitzer steel industries inc notes consolidated financial statements defined benefit pension plans certain nonunion employees company maintains defined benefit pension plan asset value plan based market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 components net periodic pension benefit cost august 31 weightedaverage assumptions used determine pension benefit obligations august 31 discount rate 575 600 rate compensation increase 300 schnitzer steel industries inc notes consolidated financial statements weightedaverage assumptions used determine net periodic pension benefit cost years ended august 31 determine expected longterm rate return pension plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company applies expected rate return market related value assets reduces underlying variability assets company applies expected return company amortizes gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees plan asset allocations company’s asset allocation pension plan based primary goal maximizing investment returns longterm time company invested diversified portfolio provide balance returns risk effort quantify allocation company’s plan committee established target guideline used determining investment mix table shows company’s target allocation range along actual allocations august 31 contributions company expects contribute 12 million defined benefit pension plan fiscal 2006 estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid thousands defined contribution plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 11 million 14 million 12 million fiscal 2005 2004 2003 respectively schnitzer steel industries inc notes consolidated financial statements multiemployer pension plans accordance collective bargaining agreements company contributed multiemployer pension plans 28 million 31 million 25 million fiscal 2005 2004 2003 respectively company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company learned fiscal 2004 one multiemployer plans steel manufacturing business would meet erisa minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service certain relief minimum funding standard irs tentatively responded indicating willingness consider granting relief provided plan’s contributing employers including company agree increased contributions increased contributions estimated average 6 per year compounded annually plan reaches funded status required irs increases would based company’s current contribution level plan approximately 17 million per year based commitments majority employers participating plan make increased contributions plan trustees proceeded relief request awaiting formal approval irs absent relief irs plan’s contributing employers required make additional contributions pay excise tax may equal exceed full amount deficiency company estimated share required additional contribution 2004 plan year approximately 11 million accrued amount fiscal 2004 company accrue additional amounts fiscal 2005 based company’s belief probable irs grant relief benefits company adopted nonqualified supplemental retirement plan certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund classified assets pension liability classified longterm liabilities status plan summarized follows august 31 thousands trust fund assets stock market gains losses included income expense fiscal 2005 2004 2003 company recognized gains totaling 03 million 02 million 04 million respectively fiscal 2005 company contributed 05 million plan contributions made fiscal 2004 2003 note 11 stock incentive plan company adopted stock incentive plan employees consultants directors company plan covers 7200000 shares class common stock options tenyear term except options granted fiscal 2001 2005 become exercisable 20 shares covered option first five anniversaries grant options granted fiscal 2001 become exercisable follows 33 one year date grant 66 two years date grant 100 two onehalf years date grant vesting periods options varied standard company granted certain employees lieu annual salary revisions options granted fiscal 2005 21250 options become exercisable one year grant date 18500 options become exercisable may 19 2006 schnitzer steel industries inc notes consolidated financial statements company records stockbased compensation provisions accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations method compensation expense stock incentive plans determined using intrinsic value method accordingly exercise price equals market price date grant compensation expense generally recognized company stock options issued employees directors company recorded compensation expense fiscal 2005 2004 10 million 06 million respectively due accelerating vesting period stock options retiring employees pro forma information fiscal years 2005 2004 2003 regarding net income earnings per share determined company accounted employee stock options fair value method per share weighted average grant date fair value awards granted determined applying blackscholes option pricing model 1237 1266 360 years ended august 31 2005 2004 2003 respectively using following assumptions fair value based method applied measuring stock compensation expense pro forma effect net income per share would follows thousands except earnings per share company obtains income tax benefit related stock issued employees stock options plans recorded additional paidin capital therefore benefit income tax provision income tax purposes company deduct amount employee would report ordinary income deduction allowed year employee exercises stock option fiscal 2005 company recorded tax benefit employee stock option plans 142 million deducting planning deduct original amended returns amount employees would report ordinary income schnitzer steel industries inc notes consolidated financial statements summary company’s stock option activity related information follows thousands except per share amounts following table summarizes information options outstanding august 31 2005 note 12 segment information company operates three industry segments metal processing recycling metals recycling business minimill steel manufacturing steel manufacturing business selfservice used auto parts auto parts business additionally company noncontrolling partner joint ventures either metals recycling business see note 14 suppliers unprocessed metals company also considers separate segments managed separately joint ventures accounted using equity method operating information provided related joint ventures shown separately consolidated information except company’s equity net income investment advances joint ventures metals recycling business buys processes ferrous nonferrous metals sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metals processors shipment directly steel manufacturing business schnitzer steel industries inc notes consolidated financial statements steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products auto parts business purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including metals recycling business note 3 describes acquisition occurred february 14 2003 intersegment sales metals recycling business steel manufacturing business auto parts business metals recycling business transferred negotiated market rates per ton intercompany sales tend produce intercompany profits eliminated finished products ultimately sold third parties joint ventures metals recycling business also engaged buying processing selling primarily ferrous metal recycled metals sold foreign domestic steel mills joint venture suppliers metals industrial plant demolition contractors joint ventures dismantle industrial plants perform environmental remediation sell recovered metals machinery company purchases substantially ferrous recycled metals generated joint ventures information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments joint ventures’ revenues external customers follows thousands schnitzer steel industries inc notes consolidated financial statements revenues geographic area thousands joint ventures metals recycling business maintain revenues geographic area would impracticable provide disclosure sales joint venture suppliers metals made customers united states see note 9 regarding company’s purchases joint ventures see note 7 regarding additional discussion environmental matters operating income joint ventures represents company’s equity net income entities schnitzer steel industries inc notes consolidated financial statements company’s share depreciation amortization expense included determination joint ventures’ net income follows following summary company’s total assets capital expenditures fiscal years 2005 2004 2003 one customer accounted 13 12 21 company’s consolidated revenues respectively sales foreign countries significant part business schedule identifies foreign countries company’s sales exceed 10 consolidated revenues fiscal 2005 2004 2003 single customer accounted 10 combined revenues joint ventures schnitzer steel industries inc notes consolidated financial statements note 13 summarized financial information joint ventures summary combined operations joint ventures company partner follows advances joint venture partnerships company included noncurrent assets liabilities certain advances bear interest note 14 subsequent events september 30 2005 company acquired greenleaf auto recyclers llc ‘greenleaf’ five store properties previously leased greenleaf certain greenleaf debt obligations greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops greenleaf currently operates 22 locations throughout united states total consideration acquisition 44 million subject postclosing adjustments september 30 2005 company hugo neu corporation hnc certain subsidiaries closed transaction separate terminate metals recycling joint venture relationships following steps taken relating dissolution relationships · company acquired 50 interests prolerized new england company “pne” certain joint ventures based massachusetts new hampshire maine owned hnc result joint ventures became whollyowned company gained control metals recycling llc “mrl” joint venture based rhode island 60 membership interests owned pne · hnc acquired company’s 50 interests joint ventures based new jersey new york california result joint ventures became whollyowned subsidiaries hnc schnitzer steel industries inc notes consolidated financial statements · hugo neu schnitzer global trade llc global trade joint venture engaged primarily scrap metal trading redeemed company’s 50 membership interest global trade exchange assets liabilities global trade’s trading business purchases ferrous metals russia certain baltic countries global trade retained trading business operating outside russia baltic countries · company acquired hnc’s metals recycling business hawaii · company received 523 million cash consideration subject postclosing adjustments · company received hnc noncompete agreement bars hnc buying scrap metal certain areas russia baltic region fiveyear period ending june 8 2010 · company hnc certain affiliates entered number related agreements governing among things employee transitional issues benefit plans scrap sales transitional services · company hnc certain affiliates executed delivered mutual global releases october 31 2005 company purchased substantially assets regional recycling llc regional 655 million cash assumption certain liabilities regional operates 10 metals recycling facilities located states georgia alabama process ferrous nonferrous scrap metals without use shredders consideration recently acquired businesses funded company’s existing cash balances credit facility company expects record estimated environmental liabilities result due diligence performed connection acquisitions november 8 2005 company entered amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto restated agreement provides fiveyear 400 million revolving loan maturing november 2010 agreement prior restatement provided 150 million revolving loan maturing may 2006 november 8 2005 outstanding borrowings revolving loan totaled 50 million interest outstanding indebtedness restated agreement based company’s option either libor plus spread 0625 125 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 addition commitment fees payable unused portion credit facility rates 015 025 based pricing grid tied company’s leverage ratio restated agreement contains various representations warranties events default financial covenants including covenants requiring maintenance minimum fixed charge coverage ratio maximum leverage ratio schnitzer steel industries inc notes consolidated financial statements note 15 quarterly financial data unaudited thousands except per share amounts 1 diluted earnings per share adjusted reflect onefortwo stock dividend paid march 25 2004 2 revenues expenses related certain sales one company’s subsidiaries reclassified changes impact previously reported operating income net income shareholders’ equity schedule ii valuation qualifying accounts years ended august 31 2005 2004 2003 thousands report independent registered public accounting firm financial statement schedule board directors shareholders schnitzer steel industries inc audits consolidated financial statements management’s assessment effectiveness internal control financial reporting effectiveness internal control financial reporting referred report dated november 14 2005 appearing august 31 2005 form 10k schnitzer steel industries inc also included audit financial statement schedule listed item 15a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp portland oregon november 14 2005 schnitzer steel industries inc form 10k item 9item 8 financial statements supplementary data schedules exhibits omitted information applicable required management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal controls financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2006 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited management’s assessment effectiveness company’s internal control financial reporting august 31 2006 effectiveness internal control financial reporting august 31 2006 effectiveness internal control financial reporting august 31 2006 stated report included herein report independent registered public accounting firm board directors shareholders schnitzer steel industries inc completed integrated audits schnitzer steel industries inc’s 2006 2005 consolidated financial statements internal control financial reporting august 31 2006 audit 2004 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2006 2005 results operations cash flows three years period ended august 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company adopted sfas 123r “sharebased payment” september 1 2005 internal control financial reporting also opinion management’s assessment included accompanying management’s annual report internal control financial reporting company maintained effective internal control financial reporting august 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting august 31 2006 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon november 9 2006 schnitzer steel industries inc consolidated balance sheets see notes consolidated financial statements schnitzer steel industries inc consolidated statements operations see notes consolidated financial statements schnitzer steel industries inc consolidated statements shareholders’ equity see notes consolidated financial statements schnitzer steel industries inc consolidated statements cash flows see notes consolidated financial statements schnitzer steel industries inc notes consolidated financial statements note 1 nature operations schnitzer steel industries inc “company” leading recycler scrap metal supplier used auto parts manufacturer recycled steel products 100 years experience unique vertical integration company able deliver quality products competitive prices additionally company’s global marketing offices company able market distribute recycled metal worldwide company operates three business segments include metals recycling business auto parts business steel manufacturing business metals recycling business purchases collects trades brokers processes recycles metal operating one largest metals recycling businesses united states auto parts business one country’s leading self service full service used auto parts networks additionally auto parts business supplier autobodies metals recycling business processes autobodies sellable recycled metal steel manufacturing business purchases recycled metal metals recycling business uses minimill process recycled metal finished steel products company provides solution variety products end life cycle vertically integrated business including resale used auto parts procuring autobodies metal products manufacturing finished steel products august 31 2006 company’s facilities located primarily united states canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries august 31 2006 2005 company held 50 interest five nine joint ventures respectively accounted equity method significant intercompany account balances transactions profits eliminated use estimates preparation financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies intangible asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 13 million 12 million august 31 2006 august 31 2005 respectively schnitzer steel industries inc notes consolidated financial statements continued restricted cash august 2006 connection expected settlement investigations united states department justice staff us securities exchange commission “sec” company deposited custody account 8 million interest amount deposited accrues benefit company recognized interest income earned october 2006 deposited funds released sec upon completion settlement see note 11 accounts receivable net accounts receivable represent amounts due customers product broker sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors cases management aware circumstances may impair specific customer’s ability meet financial obligations company management records specific allowance amounts due reduces net recognized receivable amount reasonably believe collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends allowance doubtful accounts 1 million less 1 million august 31 2006 2005 respectively inventories stated lower cost market cost determined principally using average cost method production accounting process utilized company record recycled metal inventory quantities relies significant estimates affected weight imprecision moisture production yields factors property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized repairs maintenance costs expensed incurred capitalized interest fiscal 2006 1 million fiscal 2005 2004 capitalized interest assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized estimated useful lives property remaining lease term whichever less august 31 2006 useful lives used depreciation amortization follows impairment longlived assets company assesses longlived assets impairment lowest level identifiable cash flows whenever changes circumstances indicate carrying amount may recoverable factors company considers important could trigger impairment review include limited significant underperformance relative historical projected future operating results significant changes manner asset utilized substantial negative industry economic trends events changes circumstances occur company assesses recoverability longlived assets determining whether carrying value assets recovered undiscounted expected future cash flows future schnitzer steel industries inc notes consolidated financial statements continued undiscounted cash flows less carrying amount assets company recognizes impairment loss based excess carrying amount fair value assets adjustments carrying value longlived assets years ended august 31 2006 2005 2004 company recorded charge 4 million fourth quarter fiscal 2004 writeoff renovation costs portland oregon facility dock goodwill intangibles company accounts goodwill intangibles statement financial accounting standards sfas 142 “goodwill intangible assets” sfas 142 goodwill amortized tested impairment least annually year company tests impairment goodwill according twostep approach first step company tests impairment goodwill estimating fair values reporting units using present value future cash flows approach subject comparison reasonableness market capitalization date valuation carrying amount exceeds fair value second step goodwill impairment test performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit used first step less fair values net tangible intangible assets reporting unit carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill addition goodwill reporting unit tested impairment annual tests take place second quarter event occurs circumstances change would likely reduce fair value reporting unit carrying value selected costs statistics used evaluate goodwill typically related pricing volumes goods sold costs percentage revenues cyclicality inherent company’s industries noncompete agreements amortized lives respective agreements straightline basis company’s intangible assets indefinite lives including tradenames amortized also tested impairment least annually impairment test consists comparison fair value intangible assets carrying amount environmental liabilities company’s policy accrue environmental investigatory remediation costs identified sites undiscounted basis probable company incurred liability amount loss reasonably estimated amount liability recorded based evaluation currently available facts respect individual site includes factors existing technology presently enacted laws regulations prior experience remediation contaminated sites liabilities recorded take account claims recoveries insurance third parties assessments remediation progresses individual sites amounts recorded reviewed periodically adjusted reflect additional technical legal information becomes available august 31 2006 2005 company total reserves 41 million 24 million respectively losses probable estimable accumulated comprehensive income loss company reports comprehensive income loss consolidated statement stockholders’ equity comprehensive income loss consists net income gains losses affecting stockholders’ equity us gaap excluded net income including translation effect foreign currency assets liabilities net tax common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock schnitzer steel industries inc notes consolidated financial statements continued revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers upon shipment based either cost insurance freight “cif” free board “fob” terms substantially company’s ferrous export sales recycled metal made letters credit minimizing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account retail sales auto parts business revenues recognized customers pay parts wholesale products shipped customer location historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns see note 14 income taxes deferred tax assets may reduced valuation allowance likely portion deferred tax assets realized company’s prior tax returns may subject ongoing tax examinations internal revenue service regulatory taxing authorities liabilities associated prior income tax returns ultimately resolved audits completed statutes limitation expired believe appropriate estimates liability established tax exposures though actual audit determinations may differ materially liabilities regularly reviewed adequacy appropriateness interest income taxes paid company paid 4 million 1 million 2 million interest fiscal years 2006 2005 2004 respectively additionally fiscal years 2006 2005 2004 company paid 84 million 77 million 50 million income taxes respectively concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents account receivable derivative financial instruments used hedging activities majority cash equivalents maintained two major financial institutions balances institutions exceed fdic insurance amount 100000 august 31 2006 concentrations credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits monitoring procedures company also exposed credit loss event nonperformance counterparties foreign exchange contracts used hedging activities counterparties large international financial institutions date counterparty failed meet financial obligations us company anticipate nonperformance counterparties schnitzer steel industries inc notes consolidated financial statements continued earnings per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share computed using net income weighted average number common shares outstanding assuming dilution weighted average common shares outstanding assuming dilution includes potentially dilutive common shares outstanding period potentially dilutive common shares include assumed exercise stock options assumed vesting ltip awards using treasury stock method certain company’s stock options ltip awards excluded calculation diluted earnings per share antidilutive however could become dilutive future see note 15 earnings dividends per share derivative financial instruments manage exposure exchange risk associated accounts receivable denominated foreign currency company enters foreign currency forward contracts stabilize us dollar amount transaction maturity contracts designated hedging instruments company accounting purposes accordingly realized unrealized gains losses settled unsettled forward contracts recognized income consolidated statements operations cash settlement nonhedge derivative instruments classified investing activity consolidated statements cash flows company held foreign currency forward contracts denominated euros total notional amounts 21 million august 31 2006 fair value contracts estimated based quoted market prices contract rate comparable market rate yearend liability august 31 2006 immaterial company hold foreign currency forward contracts fiscal 2005 2004 foreign currencies company’s foreign operations local currency functional currency assets liabilities foreign operations translated us dollars period ending exchange rate amounts resulting operations translated us dollars using average exchange rates period translation adjustments reported component accumulated comprehensive income loss gains losses transactions denominated currencies functional currencies less million dollars years ended august 31 2006 2005 2004 reclassifications certain prior year amounts reclassified conform current year presentation including reclassification revenues expenses activities depreciation rental income gain disposal assets within consolidated statements operations additionally prior year amounts reclassified conform current year presentations within balance sheet changes impact previously reported net income shareholders’ equity sharebased payment effective september 1 2005 company adopted fair value recognition provisions sfas 123r requires recognition fair value stockbased compensation net income company elected utilize modified prospective transition method adopting sfas 123r therefore restated results prior periods transition method compensation expense based grant date fair value estimated accordance original provisions sfas 123 “accounting stockbased compensation” stockbased compensation awards granted prior yet vested september 1 2005 recognized company’s consolidated statements operations periods date adoption stockbased compensation expense sharebased payment awards granted september 1 2005 based schnitzer steel industries inc notes consolidated financial statements continued grant date fair value estimated accordance provisions sfas 123r stock options company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally fiveyear vesting term stock options threeyear performance period performancebased awards company estimated forfeiture rate based historical experience preceding five fiscal years prior september 1 2005 company accounted plan intrinsic value method described accounting principles board opinion 25 “accounting stock issued employees” “apb 25” company applying intrinsic value method record stockbased compensation cost consolidated statements operations exercise price stock options equaled market price underlying stock date grant company recognized liability recorded compensation expense due accelerating vesting period stock options retiring employees accordance provisions apb 25 amount 1 million per year years ended august 31 2005 2004 company provided pro forma disclosure amounts fair value method defined sfas 123 applied stockbased compensation provisions sfas 123r specifically requires continued disclosures pro forma information reporting period presented awards sharebased payments arrangements accounted intrinsic value method apb 25 following table illustrates effect net income basic diluted net income per share company applied fair value recognition provisions sfas 123r sharebased payments years ended august 31 note 3 recent accounting pronouncements november 2004 financial accounting standards board “fasb” issued sfas 151 “inventory costs amendment arb 43 chapter 4” “sfas 151” sfas 151 clarifies accounting abnormal amounts idle facility expense freight handling costs wasted material spoilage recognized current period charges also requires allocation fixed production overhead costs conversion based normal capacity production facilities sfas 151 effective inventory costs incurred fiscal years beginning june 15 2005 company adopted sfas 151 september 1 2005 material impact consolidated financial statements company’s previous policy mirrored provisions pronouncement december 2004 fasb issued sfas 153 “exchanges nonmonetary assets” “sfas 153” sfas 153 explains exchanges nonmonetary assets measured based fair value assets exchanged statement effective fiscal years beginning june 15 2005 company adopted sfas 153 fiscal 2006 material impact consolidated financial statements time adoption schnitzer steel industries inc notes consolidated financial statements continued december 2004 fasb issued sfas 123 revised 2004 “sharedbased payment” “sfas 123r” sfas 123r supersedes accounting principles board opinion 25 “accounting stock issued employees” “apb 25” amends sfas 95 “statement cash flows” “sfas 95” standard companies longer able account stockbased employee compensation using intrinsic method accordance apb 25 instead sfas 123r requires adoption fairvalue method accounting stockbased employee compensation sfas 123r effective first interim reporting period first fiscal year beginning june 15 2005 company adopted sfas 123r effective september 1 2005 company recognizes stockbased compensation expense requisite service period individual grants generally equals vesting period see note 2 summary significant accounting policies note 13 stock incentive plan march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations interpretation fasb statement 143” “fin 47” fin 47 clarifies entity required record liability financial statements fair value conditional asset retirement obligation fair value liability reasonably estimated company adopted fin 47 august 31 2006 material effect consolidated financial statements june 2005 fasb issued sfas 154 “accounting changes error corrections replacement apb 20 fasb statement 3 “sfas 154” sfas 154 replaced apb 20 “accounting changes” fasb statement 3 “reporting accounting changes interim financial statements amendment apb opinion 28” statement provides guidance accounting reporting accounting changes error corrections requires retrospective application prior period’s financial statements changes accounting principle unless would impracticable sfas 154 also redefines term “restatement” mean correction error revising previously issued financial statements statement effective fiscal years beginning december 15 2005 company intends adopt pronouncement fiscal year 2007 anticipate standard material impact consolidated financial statements february 2006 fasb issued sfas 155 “accounting certain hybrid financial instruments” effective financial instruments acquired issued beginning entity’s first fiscal year begins september 15 2006 statement amends sfas 133 “accounting derivative instruments hedging activities” fasb statement 140 “accounting transfers servicing financial assets extinguishment liabilities” “sfas 140” company intends adopt pronouncement fiscal year 2008 anticipate pronouncement material impact consolidated financial statements march 2006 fasb issued sfas 156 “accounting servicing financial assets” “sfas 156” statement amends sfas 140 respect accounting separately recognized servicing assets servicing liabilities statement effective fiscal years beginning september 15 2006 company intends adopt pronouncement fiscal year 2008 anticipate pronouncement material impact consolidated financial statements july 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 “accounting income taxes” “sfas 109” prescribes recognition threshold measurement attribute financial statement recognition disclosure tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 company required adopt fin 48 first quarter fiscal year 2008 management currently evaluating requirements interpretation yet determined impact consolidated financial statements september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value gaap expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 schnitzer steel industries inc notes consolidated financial statements continued 2007 interim periods within fiscal years earlier application encouraged provided reporting entity yet issued financial statements fiscal year including financial statements interim period within fiscal year company required adopt sfas 157 first quarter fiscal year 2008 management currently evaluating requirements sfas 157 yet determined impact company’s consolidated financial statements september 2006 fasb issued sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” sfas 158 improves financial reporting requiring employer recognize funded status defined benefit postretirement plan multiemployer plan asset liability statement financial position recognize changes funded status year changes occur comprehensive income business entity company generally required initially recognize funded status defined benefit postretirement plan provide required disclosures end fiscal year ending december 15 2006 end fiscal year 2007 company required adopt requirement measure plan assets benefit obligations august 31 2009 management currently evaluating requirements sfas 158 yet determined impact company’s consolidated financial statements september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” sab 108 issued order eliminate diversity practice surrounding public companies quantify financial statement misstatements traditionally two widelyrecognized methods quantifying effects financial statement misstatements “rollover” method “iron curtain” method new model commonly referred “dual approach” quantification errors required iron curtain rollover methods sab 108 permits existing public companies initially apply provisions either restating prior financial statements “dual approach” always used ii recording cumulative effect initially applying “dual approach” adjustments carrying values assets liabilities january 1 2006 offsetting adjustment recorded opening balance retained earnings company currently reviewing impacts pronouncement believes material impact financial statements note 4 inventories consisted following august 31 schnitzer steel industries inc notes consolidated financial statements continued note 5 property plant equipment net property plant equipment net consisted following august 31 depreciation expense property plant equipment 29 million 20 million 20 million fiscal years 2006 2005 2004 respectively note 6 investment advances joint ventures fiscal 2004 2005 september 30 2005 fiscal 2006 company investments nine joint ventures owned 50 joint venture interests joint ventures accounted equity method accounting presented separate reportable segment result hugo neu corporation “hnc” separation completed september 30 2005 see note 7 business combinations joint venture segment eliminated results two entities acquired transaction company managing well remaining five joint venture interests consolidated metals recycling business current year joint venture amounts presented separately segment reporting purposes following tables present summarized financial information company’s joint ventures company partner schnitzer steel industries inc notes consolidated financial statements continued note 7 business combinations hugo neu corporation separation termination agreement september 30 2005 company hnc certain subsidiaries closed transaction separate terminate metal recycling joint venture relationships company received following result hnc joint venture separation termination • prolerized new england company “pne” comprised joint ventures’ various interests northeast processing recycling operations primarily operate massachusetts new hampshire rhode island maine • assets related liabilities hugo neu schnitzer global trade related scrap metal business parts russia baltic region including poland denmark finland norway sweden company entered noncompete agreement hnc bars buying scrap metal certain areas russia baltic region fiveyear period ending june 8 2010 • ths recycling llc dba hawaii metals recycling company “hmr” hawaii metals recycling business previously owned 100 hnc • payment received hnc 37 million cash hnc received following result hnc joint venture separation termination • joint venture operations new york new jersey california including scrap metal processing facilities marine terminals related ancillary satellite sites interim new york city recycling contract miscellaneous assets • assets related liabilities hugo neu schnitzer global trade related russian baltic region accordance arb 51 company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning fiscal 2006 instead acquisition date businesses partially owned prior acquisition divestiture company’s interest joint ventures hnc enabled company expand metals recycling operations northeastern united states hawaii addition divestiture removed restrictions company pursuing additional acquisition opportunities purchase accounting finalized dispute exists company hnc post closing adjustments company believes adequately accrued dispute accordance sfas 141 “business combinations” purchase price assets acquired liabilities assumed separation termination agreement fair value joint venture interests given part exchange well related acquisition costs accordingly purchase price 165 million including acquisition costs 6 million upon divestiture joint venture interests 57 million gain resulted difference fair value 159 million carrying value associated disposed joint venture interests net increase gain 2 million recorded fourth quarter based final purchase accounting adjustments purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values estimated management company assistance independent appraiser excess aggregate purchase price fair value identifiable net assets acquired 56 million recognized goodwill amount 7 million existed joint ventures’ balance sheets prior separation termination shown separately company’s balance sheet part investment joint ventures addition goodwill amount 1 million schnitzer steel industries inc notes consolidated financial statements continued consolidated company’s balance sheet owned minority interests metals recycling llc “mrl” september 30 2005 therefore total increase goodwill related hnc separation termination agreement 63 million september 30 2005 following summary fair values september 30 2005 assets acquired liabilities assumed date acquisition millions greenleaf acquisition september 30 2005 company acquired greenleaf auto recyclers llc “greenleaf” five properties previously leased greenleaf certain greenleaf debt obligations greenleaf engaged business auto dismantling recycling sells products primarily collision mechanical repair shops greenleaf currently operates three wholesale sales distribution offices 15 commercial locations throughout united states acquisition greenleaf significantly expanded company’s national presence business auto dismantling recycling addition acquisition enabled company enter full service segment recycling auto parts market services commercial customers total purchase price greenleaf acquisition including acquisition costs 1 million 45 million paid cash purchase price greenleaf acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values estimated management company assistance independent appraiser excess aggregate purchase price fair values identifiable net assets acquired 5 million recognized goodwill following summary fair values assets acquired liabilities assumed date acquisition millions acquisition greenleaf stock purchase included federal net operating losses “nols” 15 million expire years 2022 2024 used company’s use nols restricted federal income tax law 1 million year schnitzer steel industries inc notes consolidated financial statements continued regional recycling acquisition october 31 2005 company purchased substantially assets regional recycling llc “regional” 69 million cash including working capital adjustment 3 million acquisition costs 500 thousand using assets acquired regional company operates nine metals recycling facilities located states georgia alabama process ferrous nonferrous scrap metal without use shredders acquisition regional provided company presence growing market southeastern united states addition acquisition regional enhanced company’s ability service domestic eventually export markets purchase price regional acquisition allocated tangible identifiable intangible assets acquired liabilities assumed based respective fair values estimated management company assistance independent appraiser excess aggregate purchase price fair values identifiable net assets acquired approximately 28 million recognized goodwill following summary fair values october 31 2005 assets acquired liabilities assumed date acquisition millions acquisition minority interest metals recycling llc part joint venture relationship hnc company indirectly owned 30 interest mrl rhode island based metal recycling business hnc minority interest owning remaining 30 40 respectively september 30 2005 company closed transaction separate terminate joint venture relationship hnc obtained hnc’s 30 ownership interest accordingly net assets mrl relating 30 ownership obtained hnc adjusted fair value date separation termination joint venture interests net assets mrl owned 40 minority interests recorded carrying value date hnc separation termination agreement including 1 million historical goodwill march 21 2006 company purchased remaining 40 minority interest mrl 25 million acquisition 40 minority interest enabled company fully leverage investments pne mrl competed geographic regions operating one business optimize facilities increase schnitzer steel industries inc notes consolidated financial statements continued market share following summary fair values assets acquired liabilities assumed acquisition date millions summary acquisitions total aggregate goodwill recognized acquisitions fiscal 2006 amounted 115 million accordance sfas 142 “goodwill intangible assets” “sfas 142” goodwill amortized tested impairment least annually goodwill recognized connection hnc separation termination regional acquisition minority interest mrl deductible tax purposes whereas goodwill recognized connection greenleaf payment consideration recently acquired businesses funded company’s existing cash balances credit facility net 37 million cash received hnc separation termination following presents details identifiable intangible assets acquired unamortized value august 31 2006 excluded table backlog intangible assets 1 million acquired connection hnc separation termination joint venture interests backlog intangible assets represent revenue gained orders placed prior acquisition backlog intangible assets writtenoff cost goods sold schnitzer steel industries inc notes consolidated financial statements continued related inventory sold year inventory related backlog intangible assets sold therefore backlog intangible asset remained august 31 2006 acquired covenant compete asset represents agreements sales broker schnitzer global exchange key employees greenleaf prior owners regional mrl acquired leasehold interests asset represents net favorable lease terms place prior acquisition acquired supply contract asset represents supply agreement ford motor company greenleaf expected continue additional five years acquired tradename asset 20 year useful life registered used protected considerable amount time indication management discontinued company performs reviews impairment purchased amortizable intangible assets whenever events changes circumstances indicate carrying amount asset may recoverable august 31 2006 management concluded indication events changes circumstances indicating carrying amount purchased intangible assets may recoverable connection hnc separation termination greenleaf regional acquisitions company conducted environmental due diligence reviews acquired assets based information obtained reviews performed first quarter fiscal 2006 conjunction purchase accounting company accrued 25 million environmental liabilities probable reasonably estimable future remediation costs acquired facilities second quarter fiscal 2006 company incurred remediation costs 1 million related acquired companies environmental proceedings pending respect facilities acquired acquisitions following table prepared pro forma basis years ended august 31 2006 2005 respectively though acquisitions hnc separation termination greenleaf regional acquisitions occurred beginning periods presented thousands except per share amounts 1 tax affected gain 35 million related hnc separation termination agreement included pro forma actual results year ended august 31 2006 pro forma results necessarily indicative would occurred acquisitions effect periods presented addition pro forma results intended projection future results reflect synergies might achieved combining operations schnitzer steel industries inc notes consolidated financial statements continued note 8 goodwill intangible assets net following table presents company’s intangible assets related lives august 31 thousands excluded table backlog intangible assets 1 million acquired connection hnc separation termination joint venture interests backlog intangible assets represent revenue gained orders placed prior acquisition backlog intangible assets writtenoff cost goods sold related inventory sold year inventory related backlog intangible assets sold therefore backlog intangible asset august 31 2006 changes carrying amount goodwill reporting segment year ending august 31 2006 follows auto parts business goodwill adjustments principally reflect translation adjustment associated canadian subsidiary whose functional currency canadian dollar schnitzer steel industries inc notes consolidated financial statements continued total intangible amortization expense year ended august 31 2006 2005 2004 2 million 1 million 1 million respectively estimated amortization expense based current intangible balances next five fiscal years beginning september 1 2006 follows thousands note 9 impairment charges fiscal 2002 company embarked dock loading facility renovation portland oregon metal recycling facility renovation suspended fiscal 2003 issues dock’s substructure detected upon review new engineering designs focused operational efficiency safety specifications impairment charge 4 million recorded fourth quarter fiscal 2004 writeoff renovation costs incurred prior suspension impairment charges recorded fiscal 2006 2005 note 10 longterm debt longterm debt consists following august 31 august 31 2006 company committed unsecured bank credit facility totaling 400 million maturing november 2010 bearing interest varying interest rates interest payable varying dates exceed maturity advance line interest outstanding indebtedness credit facility based company’s option either libor plus spread 0625 125 amount spread based pricing grid tied company’s leverage ratio higher prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 015 025 based pricing grid tied company’s leverage ratio addition facility company additional uncommitted unsecured line credit totaling 15 million outstanding borrowings unsecured line credit august 31 2006 committed bank credit facilities borrowings contain various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed coverage ratio maximum leverage ratio august 31 2006 company compliance covenants schnitzer steel industries inc notes consolidated financial statements continued principal payments longterm debt next five fiscal years thereafter follows note 11 commitments contingencies commitments company leases portion capital equipment certain facilities operating leases expire various dates december 26 2029 rent expense 13 million 8 million 7 million fiscal years 2006 2005 2004 respectively see discussion leases related parties note 16 related party transactions steel manufacturing business takeorpay natural gas contract requires minimum purchase 3500 million british thermal units “mmbtu” per day tiered pricing whether amount utilized effective april 1 2006 natural gas rate increased 785 per mmbtu 690 per mmbtu contract expires may 31 2009 steel manufacturing business also electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 table sets forth company’s future minimum obligations noncancelable operating leases unrelated parties service obligations purchase commitments august 31 2006 contingenciesenvironmental company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate schnitzer steel industries inc notes consolidated financial statements continued environmental issues factors company considers recognition measurement environmental liabilities include following • current regulations time reserve established course cleanup specify standards acceptable remediation • information site becomes available site studied remediated • professional judgment seniorlevel internal staff external consultants take account similar recent instances environmental remediation issues among considerations • technologies available used remediation • number financial condition potentially responsible parties extent responsibility remediation metals recycling business connection acquisitions metals recycling business 1995 1996 company recorded financial statements reserves environmental liabilities previously recorded acquired companies environmental reserves evaluated quarterly according company policy august 31 2006 environmental reserves metals recycling business aggregated 23 million primarily comprised reserves established recent acquisitions hylebos waterway remediation hylebos waterway remediation general metals tacoma “gmt” subsidiary company owns operates metal recycling facility located state washington hylebos waterway part commencement bay subject ongoing remediation project united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” gmt 60 parties named potentially responsible parties “prps” investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders “uaos” gmt another party “other party” proceed remedial design remedial action “rdra” head hylebos two parties proceed rdra balance waterway uao head hylebos waterway converted voluntary consent decree 2004 pursuant gmt party agreed remediate head hylebos waterway two phases remediation head hylebos waterway first phase intertidal bank remediation conducted 2003 early 2004 second phase dredging head hylebos waterway commenced july 2005 completed february 2006 fiscal 2005 company paid remediation costs 16 million related hylebos dredging resulted reduction recorded environmental liability company’s cost estimates based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company recorded environmental charges 14 million fiscal 2005 primarily account additional estimated costs complete work second dredging season fiscal 2006 company incurred remediation costs 7 million charged environmental reserves august 31 2006 environmental reserves hylebos waterway aggregated 4 million company party filed complaint united states district court western district washington dredge contractor recover damages significant portion cost runs incurred second dredging season complete project gmt party pursuing settlement negotiations legal actions nonsettling nonperforming prps recover additional amounts may applied head hylebos remediation costs fiscal 2005 company recovered 1 million four nonperforming prps amount schnitzer steel industries inc notes consolidated financial statements continued previously taken account reduction company’s reserve environmental liabilities uncertainties continue exist regarding total cost remediate site well company’s share costs nevertheless company’s estimate liabilities related site based information currently available natural resource damage trustees “trustees” commencement bay asserted claims gmt prps within hylebos waterway area alleged damage natural resources march 2002 trustees delivered draft settlement proposal gmt others trustees suggested methodology resolving dispute indicate proposed damages cost amounts june 2002 gmt responded trustees’ draft settlement proposal various corrections comments twenty participants february 2004 gmt submitted settlement proposal trustees complete settlement natural resource damage liability gmt site proposal included three primary components 1 offer perform habitat restoration project 2 reimbursement trustee past assessment costs 3 payment trustee oversight costs parties reached agreement terms settlement subject final agency approval company’s previously recorded environmental liabilities include estimate company’s potential liability claims washington state department ecology named gmt along number parties potentially liable parties “plps” site referred tacoma metals gmt operated site lease 1982 property owner current operator taken lead role performing rifs site company’s previously recorded environmental liabilities include estimate company’s potential liability site portland harbor december 2000 epa designated portland harbor 55 mile stretch willamette river portland oregon superfund site company’s metals recycling deep water terminal facility portland oregon located adjacent portland harbor epa identified least 69 prps including company crawford street corporation “csc” subsidiary company operate formerly owned operated sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined unclear whether extent company csc liable environmental costs damages associated superfund site also unclear whether extent natural resource damage claims third party contribution damages claims asserted company reserve established company csc participated certain preliminary portland harbor study efforts parties consent order entered epa prps “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” however company csc could become liable share costs study later stage proceedings separately oregon department environmental quality “deq” requested operating history information numerous persons entities conduct operations properties adjacent upland portland harbor including company csc deq investigations company csc sites focused controlling current releases contaminants willamette river company agreed voluntary remedial investigationsource control effort deq regarding portland oregon deep water terminal facility site formerly owned csc deq identified sites potential sources contaminants could released willamette river company believes improvements operations sites often referred best management practices “bmps” provide effective source control avoid release contaminants sites proposed deq implementation bmps resolution investigation additionally epa recently released made available public lwg’s “round two” data involving hundreds sediment samples taken throughout six mile harbor site company process reviewing data cost investigations remediation associated properties cost employment source control bmps reasonably estimable completion data review company schnitzer steel industries inc notes consolidated financial statements continued recorded liability estimated share costs investigation incurred lwg date liability recorded either future investigation costs remediation portland harbor fiscal 2006 company csc together approximately 27 prps participating lwg’s rifs received letters lwg one members respect participating lwg rifs potential claims past costs cost allocation reimbursement company csc declines participate continued implementation rifs possible could subject epa deq enforcement orders litigation lwg members company cooperating discussions agencies lwg continuing evaluate alleged liabilities context available technical factual legal information fiscal 2006 company incurred immaterial amounts legal fees relating portland harbor reserved approximately 1 million federal state reviews metals recycling business sites number years prior company’s 1996 acquisition proler international corp “proler” proler operated shredder onsite industrial waste landfill texas proler utilized dispose auto shredder residue “asr” operations august 2002 proler entered texas commission environmental quality “tceq” voluntary cleanup program “vcp” toward pursuit vcp certificate completion former landfill site fiscal 2005 tceq issued conditional certificate completion requiring company perform ongoing groundwater monitoring annual inspections maintenance reporting result resolution issue company reduced reserve related site 2 million fiscal 2005 fiscal 2006 company paid immaterial amounts costs relating site reserves related site august 31 2006 1 million second quarter fiscal 2005 connection negotiation separation termination agreement relating company’s metals recycling joint ventures hnc see note 7 business combinations company conducted environmental due diligence investigation certain joint venture businesses proposed acquire result investigation company identified certain environmental risks accrued 3 million share estimated costs remediate risks upon completion separation included consolidated statements operations fiscal 2005 first quarter fiscal 2006 additional 12 million recorded conjunction purchase accounting representing remaining portion environmental liabilities associated hnc separation termination agreement well regional acquisitions 2006 1 million costs incurred august 31 2006 14 million related acquisitions remains reserves total remediation complete environmental compliance proceedings pending respect sites addition matters discussed company’s environmental reserve includes amounts potential future cleanup sites company acquired subsidiaries conducted business allegedly disposed materials none material individually aggregate auto parts business fiscal 2003 first quarter fiscal 2006 company completed four acquisitions businesses auto parts business segment time acquisition company conducted environmental due diligence investigation related locations involved acquisition result environmental due diligence investigations company recorded reserve estimated cost address certain environmental matters reserve evaluated quarterly according company policy august 31 2006 environmental reserves auto parts business aggregated 18 million includes environmental reserve greenleaf acquisition environmental enforcement proceedings pending respect sites amounts charged reserves fiscal 2006 january 2004 auto parts business served notice violation “nov” general permit requirements diesel powered car crushers rancho cordova sacramento locations schnitzer steel industries inc notes consolidated financial statements continued sacramento metropolitan air quality management district “smaqmd” since receiving nov sacramento rancho cordova locations converted diesel powered car crushers electric powered company settled matter resulted payment fine smaqmd company’s fourth fiscal quarter 2005 settlement amount less 1 million company previously reserved matter steel manufacturing business steel manufacturing business’ electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content eaf dust shipped via specialized rail cars firm united states applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste steel manufacturing business operating permit issued title v clean air act amendment 1990 governs certain air quality standards permit first issued 1998 since renewed year 2007 fiscal 2006 company submitted application renewal 5year permit allows steel manufacturing business produce 900000 tons billets per year allows rolling mill production levels vary based levels emissions contingenciesother company past practice making improper payments purchasing managers nearly company’s customers asia connection export sales recycled ferrous metal company stopped practice advised 2004 raised questions possible violations us foreign laws thereafter audit committee advised conducted preliminary compliance review november 18 2004 recommendation audit committee board directors authorized audit committee engage independent counsel conduct thorough independent investigation board directors also authorized directed existence results investigation voluntarily reported us department justice “doj” “sec” company cooperate fully agencies audit committee notified doj sec independent investigation engaged outside counsel assist independent investigation instructed outside counsel fully cooperate doj sec provide agencies information obtained result independent investigation october 16 2006 company finalized settlements doj sec resolving investigation settlement company agreed deferred prosecution agreement doj “deferred prosecution agreement” agreed order issued sec instituting ceaseanddesist proceedings making findings imposing ceaseanddesist order pursuant section 21c securities exchange act 1934 “order” deferred prosecution agreement doj prosecute company meets conditions agreement period three years including among things company engage compliance consultant advise compliance officer board directors company’s compliance program order company agreed cease desist past practices subject investigation disgorge 8 million profits prejudgment interest order also contains provisions comparable deferred prosecution agreement regarding engagement compliance consultant addition settlement company’s korean subsidiary ssi international far east ltd pled guilty foreign corrupt practices act antibribery books records provisions conspiracy wire fraud charges paid fine 7 million amounts accrued fiscal 2006 investigation settlement affect company’s previously reported financial results settlement company agreed cooperate fully ongoing related doj sec investigations company incurred expenses may incur expenses connection advance funds indemnification individuals involved investigations schnitzer steel industries inc notes consolidated financial statements continued company hnc 50 members hugo neu schnitzer global trade llc “hnsgt” joint venture engaged global trading recycled metal hnc managed daytoday activities hnsgt january 2004 hnc advised company would charge hnsgt 1 commission hnsgt’s recycled metal sales began deducting commissions reasonable reimbursement hnc’s costs might appropriate company responded 1 commission excessive hnc authority unilaterally impose commissions hnsgt august 31 2005 company estimated 50 share disputed commissions totaled 6 million recording operating income joint ventures company excluded joint venture expenses excess disputed commissions company’s estimate reasonable reimbursements part separation termination company’s joint ventures hnc see note 7 business combinations company agreed release claim reimbursement excess commissions resulted reduction gain recorded upon hnc disposition note 12 employee benefits defined contribution plans company several defined contribution plans covering nonunion employees pension cost related plans totaled 2 million 1 million 1 million fiscal 2006 2005 2004 respectively increase 2005 2006 result contributions deferred contribution plans related company’s acquisitions fiscal 2006 defined benefit pension plan certain nonunion employees company maintains defined benefit pension plan may 16 2006 company formally made decision cease benefits freeze defined benefit plan effective date june 30 2006 defined benefit plan freeze qualifies plan curtailment statement financial accounting standards 88 “employers’ accounting settlements curtailments defined benefit plans termination benefits” “sfas 88” accordance sfas 88 company recognized insignificant curtailment loss equal unrecognized prior service cost associated years service longer expected rendered result curtailment schnitzer steel industries inc notes consolidated financial statements continued asset value plan based market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 components net periodic pension benefit cost august 31 weightedaverage assumptions used determine pension benefit obligations august 31 schnitzer steel industries inc notes consolidated financial statements continued weightedaverage assumptions used determine net periodic pension benefit cost years ended august 31 determine expected longterm rate return pension plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company applies expected rate return market related value assets reduces underlying variability assets company applies expected return company amortizes gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees average remaining service period 148 years actuarial assumptions primary actuarial assumptions determined follows • expected longterm rate return plan assets based estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate • assumed discount rate used discount future benefit obligations back today’s dollars us discount rate reflective yield rates longterm investment grade corporate bonds around august 31 valuation date test reasonableness performed comparing results obtained applying discounts derived spot rate developed citigroup pension yield curve august 31 2006 yearbyyear expected benefit payments liabilities determined single rate method within 3 determined yield curve method rate sensitive changes interest rates decrease discount rate would increase obligation expense • expected rate compensation increase used develop benefit obligations using projected pay retirement rate represents average longterm salary increases influenced compensation policies increase rate would increase obligation expense effective june 30 2006 company ceased accrual benefits plan expected rate future compensation increase longer applicable calculating benefit obligations plan asset allocations company’s asset allocation pension plan based primary goal maximizing investment returns longterm time company invested diversified portfolio provide balance returns risk effort quantify allocation company’s plan committee established target guideline used determining investment mix table shows company’s target allocation range along actual allocations august 31 schnitzer steel industries inc notes consolidated financial statements continued table exhibits accumulated benefit obligation measured august 31 contributions company expects make contributions defined benefit pension plan fiscal 2007 plan frozen june 30 2006 estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid thousands multiemployer pension plans accordance collective bargaining agreements company contributed multiemployer pension plans 3 million per year fiscal 2006 2005 2004 company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company learned fiscal 2004 one multiemployer plans steel manufacturing business would meet employee retirement incentive security act 1974 “erisa” minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service certain relief minimum funding standard internal revenue service “irs” indicated willingness consider granting relief provided plan’s contributing employers including company agree increased contributions increased contributions estimated average 6 per year compounded annually plan reaches funded status required irs increases based company’s current contribution level plan approximately 2 million per year based commitments majority employers participating plan make increased contributions plan trustees proceeded relief request august 2006 received formal approval irs based approval fourth fiscal quarter 2006 company reversed approximately 1 million charges accrued fiscal 2004 company’s estimated share additional contributions excise taxes would required irs approval received schnitzer steel industries inc notes consolidated financial statements continued benefits company adopted nonqualified supplemental retirement plan “serp” certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund classified assets pension liability classified longterm liabilities status plan summarized follows august 31 year ended trust fund assets stock market gains losses included income expense fiscal 2006 2005 2004 company recognized gains totaling 29 thousand 177 thousand 105 thousand respectively fiscal 2006 2005 2004 company contributed 189 thousand 1 thousand 1 thousand respectively plan unfunded plan contributions defined benefit payments made plan beneficiaries note 13 stock incentive plan company adopted 1993 stock incentive plan “plan” employees consultants directors pursuant provisions plan amended company authorized issue 7200000 shares class common stock awards issued plan 2006 annual meeting shareholders held january 30 2006 company’s shareholders approved amendments plan authorize grant performancebased longterm incentive awards “performancebased awards” plan would eligible treatment performancebased compensation section 162m internal revenue code 1986 b increase peremployee limit grants options stock appreciation rights plan 100000 shares 150000 shares annually amendments include increase number shares reserved issuance plan result adopting sfas 123r company’s income taxes minority interests fiscal 2006 lower 3 million similarly company’s net income fiscal 2006 lower 2 million amounts would reported company continued account stockbased compensation apb 25 compensation costs associated sharebased payments capitalized part cost asset august 31 2006 impact basic diluted net income per share fiscal 2006 006 per share accordance applicable provisions sfas 123r fasb staff position fsp fas 123r3 issued november 10 2005 company elected use shortform method calculate windfall tax pool “windfall” september 1 2005 future deficiency actual tax benefits exercises stock options compared tax benefits recorded sfas 123r defined shortfall offset september 1 2005 windfall calculated accordance provisions fsp fas 123r3 amounted 11 million prior adoption sfas 123r company presented tax benefits employee stock option plan operating cash flows upon adoption sfas 123r tax benefits excess compensation expense recognized options classified financing cash inflows schnitzer steel industries inc notes consolidated financial statements continued stock options plan stock options granted employees exercise prices equal fair market value company’s stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model “blackscholes” utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected lives grants based historical exercise patterns postvesting termination behavior described fair value stock options granted following years ended august 31 determined using blackscholes following assumptions summary company’s stock option activity related information follows years ended august 31 august 31 2006 august 31 2005 total number unvested stock options 654000 shares 498000 shares respectively aggregate intrinsic value table represents total pretax intrinsic value would received option holders option holders exercised options august 31 2006 aggregate intrinsic value calculated difference company’s closing stock price last trading day fiscal 2006 exercise price multiplied number inthemoney options total intrinsic value stock options exercised 12 million 4 million 22 million years ended august 31 2006 2005 2004 respectively total fair value stock options vested fiscal years ended august 31 2006 2005 2004 2 million 1 million 1 million respectively company recognized compensation expense associated stock options 2 million fiscal 2006 august 31 2006 total remaining unrecognized compensation expense related nonvested stock options amounted 9 million weightedaverage remaining requisite service period nonvested stock options approximately 38 months schnitzer steel industries inc notes consolidated financial statements continued total proceeds received option exercises years ended august 31 2006 2005 2004 4 million 1 million 7 million respectively tax benefits realized option exercises sharebased payment awards fiscal 2006 4 million fiscal year 2005 company recorded cumulative tax benefits exercises employee stock options 14 million deducting planning deduct original amended income tax returns amounts employees would report ordinary income connection stock option awards compensation committee july 25 2006 compensation committee authorized company permit option grantees elect receive value option award restricted shares class common stock company october 2006 company commenced tender offer recipients july 25 option grants afforded opportunity exchange options restricted stock units “rsus” 21 basis exchange ratio determined using blacksholes pricing model values time exchange equivalent rsus vest schedule options would vested longterm incentive plan subject shareholder approval proposed amendments plan november 29 2005 company’s compensation committee approved performancebased awards plan entry company longterm incentive award agreements evidencing awards shareholder approval plan amendments january 30 2006 satisfied condition effectiveness awards compensation committee approved additional awards terms two executive officers one officer division january 30 2006 april 28 2006 respectively compensation committee established series performance targets include company’s total shareholder return “tsr” performance period relative sp 500 industrials weighted 50 “tsr awards” operating income per ton company’s metals recycling business performance period weighted 1623 number economic value added “eva” positive stores auto parts business last year performance period weighted 1623 man hours per ton steel manufacturing business performance period weighted 1623 corresponding award payouts ranging 25 300 weighted portions target awards “performance awards” collectively participants work exclusively one business segment awards weighted 50 performance measure segment 50 total shareholder return participant generally must employed company october 31 following end performance period receive award payout although prorated awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company business segment participant works awards paid company’s class common stock soon practicable october 31 following end performance period fair value performance awards granted periods determined multiplying total number shares expected issued company’s closing stock price date grant recognized requisite service period 29 years weighted average fair value performance awards granted fiscal 2006 3427 weighted average expected life performance awards granted fiscal 2006 29 years schnitzer steel industries inc notes consolidated financial statements continued fair value tsr awards granted year ended august 31 2006 determined using monte carlo simulation model following assumptions accordance provisions sfas 123r compensation expense related tsr award market conditions recognized requisite service period adjusted requisite service rendered long term incentive plan “ltip” award activity plan fiscal 2006 follows august 31 2006 vested ltip awards compensation expense associated performance awards fiscal 2006 calculated assuming performance targets met total compensation expense associated performance awards tsr awards amounted 1 million fiscal 2006 deferred stock units july 26 2006 board directors recommendation compensation committee approved deferred compensation plan nonemployee directors conjunction authorizing issuance deferred stock units “dsus” nonemployee directors form restricted stock awards approved board july 2005 dsus awarded nonemployee directors pursuant plan one dsu gives director right receive one share class common stock future date annually immediately following annual meeting shareholders commencing 2007 annual meeting nonemployee director receive dsus number shares equal 87500 divided closing market price class common stock grant date dsus become fully vested day next annual meeting subject continued service board dsus also become fully vested death disability director change control company defined dsu award agreement dsus become vested directors credited additional whole fractional shares reflect dividends would paid stock subject dsus company issue class common stock director pursuant vested dsus lump sum january director ceases director company subject right director elect installment payment program company’s deferred compensation plan nonemployee directors order move cycle granting nonemployee director equity awards year june cycle granting awards january time annual meeting company grant onetime award dsus schnitzer steel industries inc notes consolidated financial statements continued nonemployee director effective august 31 2006 dsus become fully vested day 2007 annual meeting subject continued board service onetime grants number dsus equal 43750 65625 chairman board divided closing market price class common stock august 31 2006 august 31 2006 total number dsus granted 14000 shares compensation expense associated dsus granted recognized respective requisite service periods awards note 14 income taxes income tax expense consisted following august 31 temporary differences carryforwards gave rise deferred tax assets liabilities follows august 31 schnitzer steel industries inc notes consolidated financial statements continued income tax expense differs amounts would result applying us statutory rate earnings taxes reconciliation difference august 31 follows 37 tax rate fiscal 2006 higher 35 fiscal 2005 primarily year’s effective tax rate increased 14 million nondeductible penalties profits disgorgement expensed connection making improper payments purchasing managers nearly company’s customers asia see item 3 legal proceedings secondarily current year 57 million gain disposition joint venture interests see note 7 business combinations likely benefit either extraterritorial income exclusion export sales section 199 domestic manufacturing deduction reduces company’s effective tax rate operating income neither fiscal 2006 2005 tax rates benefited fiscal 2004 tax rate earlier year’s release valuation allowances previously offset 15 million federal net operating losses “nols” 1 million minimum tax credit carryforwards nols credit carryforwards accompanied company’s 1996 acquisition proler international corp valuation allowances originally established management uncertain whether federal tax law would ultimately constrain use fiscal year management assessed continuing need valuation allowances determined fiscal year 2004 remaining 6 million valuation reserves pertaining nols tax credits could released likely future taxable income tax would sufficient absorb determination based upon number factors profitability trends industry fundamentals recent profitable acquisitions release valuation reserves effect cash flows company valuation allowance august 31 2006 2005 company 15 million federal nols arose acquisition greenleaf expire years 2022 2024 use restricted 1 million per year schnitzer steel industries inc notes consolidated financial statements continued note 15 earnings dividends per share basic net income per share computed based upon weighted average number common shares outstanding period diluted net income per share reflects potential dilution would occur securities contracts issue common stock exercised converted common stock using treasury stock method following represents reconciliation basic net income per share diluted net income per share august 31 fiscal 2006 options ltip awards granted outstanding august 31 2006 except approximately 247000 shares granted november 29 2005 3000 shares granted april 28 2006 314000 shares granted july 25 2006 considered dilutive shares excluded diluted net income per share calculation would antidilutive years ended august 31 2005 2004 options issued outstanding respective dates considered dilutive note 16 related party transactions certain shareholders company significant interest related owners entities discussed entities considered related parties financial reporting purposes fiscal 2005 company sold one shipment recycled metal one joint ventures 9 million company historically sold recycled metal joint ventures sales recycled metal joint ventures 2006 2004 included assets 1 million notes receivable joint venture businesses august 31 2006 2005 company purchased recycled metal joint venture operations prices approximate market purchases joint ventures totaled 12 million 14 million 10 million fiscal 2006 2005 2004 respectively advances joint ventures 2 million 1 million fiscal 2006 2005 respectively company’s portland oregon metal recycling facility operated since 1972 property leased sic related party term lease extended 2063 annual rent approximately 2 million subject periodic adjustment 2004 sic began marketing property sale company deemed location property strategic operations company purchased property may 2005 20 million transaction approved company’s audit committee accordance company’s policy related party transactions schnitzer steel industries inc notes consolidated financial statements continued company leases administrative offices sic operating lease expires 2015 current annual rent less 1 million annually thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company operates four picknpull stores northern california mr klauer’s 25 share profits partnership totaled 1 million 2 million 2 million fiscal years 2006 2005 2004 respectively mr klauer also owns property one stores leased partnership lease providing annual rent 200 thousand subject annual adjustments based consumer price index term expiring december 2010 partnership option renew lease upon expiration fiveyear period following table summarizes future minimum rents thousands leases related party rent expense administrative offices less 1 million 2 million 2 million fiscal years ended august 31 2006 2005 2004 respectively company performs administrative services provided operation maintenance management information systems certain related parties services charged related parties based upon cost plus 15 margin overhead profit administrative charges totaled less 1 million per year fiscal years 2006 2005 2004 note 17 segment information company operates three industry segments metal purchasing processing recycling trading metals recycling business minimill steel manufacturing steel manufacturing business self service full service used auto parts auto parts business additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal result hnc separation completed september 30 2005 see note 7 business combinations joint venture segment eliminated results two entities acquired transaction company managing well remaining five joint venture interests consolidated metals recycling business current year joint venture amounts presented separately metals recycling business buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives steel manufacturing business metals recycling business also purchases ferrous metal processors shipment directly steel manufacturing business steel manufacturing business produces rebar merchant bar wire rod coiled rebar specialty products auto parts business purchases salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including metals recycling business intersegment sales metals recycling business steel manufacturing business auto parts business metals recycling business transferred negotiated market rates per ton schnitzer steel industries inc notes consolidated financial statements continued intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments revenues external customers intersegment transactions company’s consolidated operations follows year ended august 31 joint ventures’ revenues external customers 46 million 2205 million 1540 million years ended august 31 2006 2005 2004 respectively revenues geographic area year ended august 31 schnitzer steel industries inc notes consolidated financial statements continued operating income segment follows year ending august 31 operating income joint ventures represents company’s equity net income entities 2005 2004 depreciation amortization expense segment follows year ended august 31 company’s share depreciation amortization expense included determination joint ventures’ net income 1 million 7 million 7 million years ended august 31 2006 2005 2004 respectively following summary company’s total assets year ended august 31 schnitzer steel industries inc notes consolidated financial statements continued following summary company’s capital expenditures year ended august 31 fiscal 2006 one customer accounted 10 greater company’s consolidated revenues fiscal years 2005 2004 one customer accounted 13 12 respectively company’s consolidated revenues sales foreign countries significant part business schedule identifies foreign countries company’s sales exceed 10 consolidated revenues note 18 subsequent events october 16 2006 company finalized settlements doj sec resolving investigation company’s past practice making improper payments purchasing managers company’s customers asia connection export sales recycled ferrous metal refer contingencies note 11 commitments contingencies october 10 2006 company announced tender offer employees received stock options july 25 2006 would eligible exchange options restricted stock units “rsu”s see stock options note 13 stock incentive plan company anticipate incremental compensation expense arising exchange quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts schnitzer steel industries inc notes consolidated financial statements continued schedule ii valuation qualifying accounts years ended august 31 2006 2005 2004 item 9item 8 financial statements supplementary data index consolidated financial statements schedules exhibits omitted information applicable required management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2007 management excluded three entities acquired fiscal 2007 assessment internal control financial reporting august 31 2007 acquired company purchase business combinations year ended august 31 2007 combined basis total assets revenues entities represented one percent related consolidated financial statement amounts year ended august 31 2007 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2007 stated report included herein report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2007 2006 results operations cash flows three years period ended august 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 2 notes consolidated financial statements company changed manner accounts share based compensation september 1 2005 discussed note 12 consolidated financial statements company changed manner accounts defined benefit pension postretirement plans august 31 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s annual report internal control financial reporting management excluded three entities acquired fiscal 2007 assessment internal control financial reporting august 31 2007 acquired company purchase business combinations year ended august 31 2007 also excluded entities audit internal control financial reporting total assets revenues entities represented one percent related consolidated financial statement amounts year ended august 31 2007 pricewaterhousecoopers llp portland oregon october 29 2007 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts see notes consolidated financial statements schnitzer steel industries inc consolidated statements income thousands except per share amounts see notes consolidated financial statements schnitzer steel industries inc consolidated statements shareholders’ equity thousands see notes consolidated financial statements schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation currently one nation’s largest recyclers ferrous nonferrous metals leading recycler used salvaged vehicles manufacturer finished steel products company operates three reportable segments include metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb purchases collects processes recycles sells trades brokers recycled metal operating one largest metals recycling businesses united states “us” apb one country’s leading selfservice fullservice used auto parts networks additionally apb supplier autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products company provides end life cycle solution variety products vertically integrated businesses including sale used auto parts procuring autobodies metal products manufacturing finished steel products august 31 2007 company’s facilities located primarily us canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company whollyowned subsidiaries addition company held 50 interest five joint ventures accounted equity method significant intercompany account balances transactions profits eliminated august 31 2007 2006 2005 fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities allocation acquisition purchase price company allocates purchase price acquisitions identified tangible intangible assets acquired liabilities assumed based estimated fair values date acquisition residual amounts allocated goodwill addition company accrues contingent purchase price consideration outcome contingency deemed probable date acquisition cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 26 million 13 million august 31 2007 august 31 2006 respectively restricted cash august 2006 company deposited custody account 8 million connection expected settlement investigations us department justice “doj” staff us securities exchange commission “sec” interest amount deposited accrued benefit company schnitzer steel industries inc notes consolidated financial statements recognized interest income earned deposited funds released sec october 2006 upon completion settlement see note 11 commitments contingencies accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors cases management aware circumstances may impair specific customer’s ability meet financial obligations company management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends allowance doubtful accounts 2 million 1 million august 31 2007 2006 respectively inventories net company’s inventories primarily consist ferrous nonferrous processed unprocessed metals used salvaged vehicles finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory apb establishes cost used salvage vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts value ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume addition company establishes inventory reserves based upon historical experience adjustments mitigate risk significant adjustments determined reasonable reserve 2 million 1 million august 31 2007 2006 respectively property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred capitalized interest fiscal 2007 2006 2 million 1 million respectively fiscal 2005 capitalized interest assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized estimated useful lives property remaining lease term whichever less august 31 2007 useful lives used depreciation amortization follows schnitzer steel industries inc notes consolidated financial statements impairment longlived assets company estimates future undiscounted cash flows derived asset assess whether potential impairment exists certain triggering events circumstances indicate carrying value longlived asset may impaired carrying value exceeds company’s estimate future undiscounted cash flows company records impairment difference carrying amount fair value asset material adjustments carrying value longlived assets years ended august 31 2007 2006 2005 goodwill intangibles goodwill represents excess purchase price estimated fair value net tangible intangible assets acquired entities company accounts goodwill intangibles statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” sfas 142 goodwill amortized tested impairment least annually year company tests impairment goodwill according twostep approach first step company estimates fair values reporting units using present value future cash flows approach subject comparison reasonableness market capitalization date valuation carrying amount exceeds fair value second step goodwill impairment test performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit used first step less fair values net tangible intangible assets reporting unit carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill addition goodwill reporting unit tested impairment annual tests take place second quarter event occurs circumstances change would likely reduce fair value reporting unit carrying value noncompete agreements amortized lives respective agreements straightline basis company’s intangible assets indefinite lives including tradenames inplace distributor networks amortized also tested impairment least annually events circumstances arise may trigger impairment test consists comparison fair value intangible assets carrying amount accrued worker’s compensation costs company selfinsured maximum amount worker’s compensation claims reserve costs unpaid claims estimated costs incurred reported claims estimated balance sheet date company’s exposure claims protected various stoploss insurance policies estimate reserve based historical claim experience august 31 2007 2006 company accrued 7 million 4 million respectively estimated cost worker’s compensation claims environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible schnitzer steel industries inc notes consolidated financial statements parties identified claim situations recoveries environmental remediation costs parties recognized claim recovery actually realized assessments remediation progresses individual sites amounts recorded reviewed periodically adjusted reflect additional technical legal information becomes available derivative financial instruments manage exposure exchange risk associated significant accounts receivable denominated foreign currency company enters foreign currency forward contracts stabilize us dollar amount transaction maturity contracts designated hedging instruments sfas 133 “accounting derivative instruments hedging activities” “sfas 133” sfas 138 “accounting certain derivative instruments certain hedging activities amendment sfas 133” sfas 149 “amendment statement 133 derivative instruments hedging activities” net realized unrealized losses related foreign currency contract settlements marktomarket adjustments open foreign currency contracts 2 million 1 million years ended august 31 2007 2006 respectively company enter foreign currency contracts fiscal 2005 company held foreign currency forward contracts denominated euros august 31 2007 august 31 2006 fair value contracts estimated based quoted market prices derivative liability resulted marktomarket adjustments contracts immaterial august 31 2007 2006 related marktomarket expense recorded part income expense foreign currency translation accordance sfas 52 “foreign currency translation” “sfas 52” assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period translation adjustments included determining net income period recorded separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar sfas 52 generally requires gains losses foreign currency transactions recognized determination net income period company records gains losses income expense aggregate amounts net realized unrealized foreign currency transaction gains 2 million 1 million years ended august 31 2007 2006 respectively company realized unrealized foreign currency gains losses fiscal 2005 common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock shareholder rights plan march 21 2006 company adopted shareholder rights plan “rights plan” rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” schnitzer steel industries inc notes consolidated financial statements schnitzer steel industries inc voting trust trustees capacity trustees deemed beneficially common stock virtue bound voting trust agreement governing trust right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weightedaverage cost shares par value stock adjustment additional paidincapital revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers upon shipment based either cost insurance freight “cif” free board “fob” terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account retail sales apb revenues recognized customers pay parts wholesale products shipped customer location historically sales returns adjustments impact ultimate collection revenues therefore provisions made sale recognized freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises see note 14 income taxes valuation allowance established necessary reduce deferred tax assets including tax credits net operating loss carryforwards extent assets likely unrealized valuation allowance required august 31 2007 2006 concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable derivative financial instruments used hedging activities majority cash equivalents maintained two major financial institutions balances institutions exceeded fdic insurance amount 100000 august 31 2007 2006 schnitzer steel industries inc notes consolidated financial statements concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits monitoring procedures company also exposed credit loss event nonperformance counterparties foreign exchange contracts used hedging activities counterparties large international financial institutions date counterparty failed meet financial obligations company anticipate nonperformance counterparties addition company exposed credit risk respect open letters credit shipments foreign customers supported letters credit august 31 2007 2006 company less 1 million open letters credit interest income taxes paid company paid 10 million 4 million 1 million interest expense fiscal years 2007 2006 2005 respectively additionally fiscal years 2007 2006 2005 company paid 60 million 84 million 77 million income taxes respectively earnings per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share incorporates incremental shares issuable upon assumed exercise stock options warrants certain company’s stock options rsus performance shares excluded calculation diluted earnings per share antidilutive options could dilutive future see note 15 earnings dividends per share sharebased compensation effective september 1 2005 company adopted fair value recognition provisions sfas 123 revised 2004 “accounting sharebased payment” “sfas 123r” requires recognition fair value sharebased compensation net income company elected utilize modified prospective transition method adopting sfas 123r therefore retroactively adjusted results prior periods transition method compensation expense based grant date fair value estimated accordance original provisions sfas 123 “accounting sharebased compensation” “sfas 123” sharebased compensation awards granted prior yet vested september 1 2005 recognized company’s consolidated statements income periods date adoption sharebased compensation expense sharebased payment awards granted september 1 2005 based grant date fair value estimated accordance provisions sfas 123r stock options restricted stock units “rsus” performance share awards company recognizes compensation expense net forfeiture rate straightline basis requisite service period award generally fiveyear vesting term stock options rsus threeyear performance period performancebased awards company estimated forfeiture rate based historical experience preceding five fiscal years prior september 1 2005 company accounted plan intrinsic value method described accounting principles board opinion 25 “accounting stock issued employees” “apb 25” applying intrinsic value method company record sharebased compensation cost consolidated statements income exercise price stock options equaled market price underlying stock date grant company recognized liability recorded compensation expense due accelerating vesting period stock options retiring employees accordance provisions apb 25 amount 1 million year ended august 31 2005 company provided pro forma disclosure amounts fair value method defined sfas 123 applied sharebased compensation schnitzer steel industries inc notes consolidated financial statements prior adoption sfas 123r company presented tax benefits employee stock option plan operating cash flows upon adoption sfas 123r tax benefits excess compensation expense recognized options classified financing cash inflows sfas 123r specifically require continued disclosures pro forma information reporting period presented sharebased awards accounted intrinsic value method apb 25 following table illustrates effect net income basic diluted net income per share company applied fair value recognition provisions sfas 123r sharebased payments fiscal year ended august 31 2005 thousands pension postretirement benefit plans company sponsors defined benefit pension plan certain nonunion employees pension benefits based formulas reflect employees’ expected service periods based terms plan impact company’s investment funding decisions company adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 8788 106 132r” “sfas 158” effective august 31 2007 sfas 158 requires employer recognize funded status defined benefit pension postretirement benefit plans net asset liability statement financial position offsetting amount accumulated comprehensive income recognize changes funded status year changes occur comprehensive income following adoption sfas 158 additional minimum pension liabilities related intangible assets longer recognized see note 12 employee benefits use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies intangible asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts schnitzer steel industries inc notes consolidated financial statements reclassifications certain prior year amounts reclassified conform current year presentation changes impact previously reported operating income net income shareholders’ equity cash flows operating activities note 3 recent accounting pronouncements july 2006 financial accounting standards board “fasb” issued fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized entity’s financial statements accordance sfas 109 “accounting income taxes” prescribes recognition threshold measurement attribute financial statement recognition disclosure tax positions taken expected taken tax return interpretation effective fiscal years beginning december 15 2006 company required adopt fin 48 first quarter fiscal 2008 management expect adoption material impact company’s consolidated financial position results operations cash flows september 2006 sec staff issued staff accounting bulletin 108 “considering effects prior year misstatements quantifying misstatements current year financial statements” “sab 108” sab 108 requires public companies quantify errors using balance sheet income statement approach evaluate whether either approach results quantifying misstatement material relevant quantitative qualitative factors considered adoption sab 108 company august 31 2007 impact consolidated financial position results operations september 2006 fasb issued sfas 157 “fair value measurements” “sfas 157” sfas 157 defines fair value establishes framework measuring fair value us gaap expands disclosures fair value measurements sfas 157 effective financial statements issued fiscal years beginning november 15 2007 interim periods within fiscal years earlier application encouraged provided reporting entity yet issued financial statements fiscal year including financial statements interim period within fiscal year company required adopt sfas 157 first quarter fiscal 2009 management currently evaluating requirements sfas 157 yet determined impact company’s consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilitiesincluding amendment fasb statement 115” “sfas 159” sfas 159 establishes fair value option entities elect report certain financial assets liabilities fair value “fair value option” changes fair value recognized earnings sfas 159 effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged provided reporting entity also elects apply provisions sfas 157 sfas 159 becomes effective company first quarter fiscal 2009 management currently evaluating requirements sfas 159 yet concluded fair value option adopted schnitzer steel industries inc notes consolidated financial statements note 4 inventories consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment 39 million 29 million 20 million fiscal years 2007 2006 2005 respectively note 6 investment advances joint ventures fiscal 2005 september 30 2005 fiscal 2006 company investments nine joint ventures owned 50 joint venture interests joint ventures accounted equity method accounting presented separate reportable segment result hugo neu corporation “hnc” separation termination completed september 30 2005 see note 7 business combinations joint venture segment eliminated results two entities acquired transaction company managing well remaining five joint venture interests consolidated mrb income joint venture amounts fiscal 2007 2006 longer presented separately company determined retroactively adjusting prior period segment results entities acquired transaction meaningful given company 50 equity partner involved managing daytoday operations entities prior hnc separation schnitzer steel industries inc notes consolidated financial statements none remaining joint ventures considered individually significant following tables present summarized financial information company’s joint ventures company partner thousands note 7 business combinations company paid premium ie goodwill fair value net tangible identified assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • strengthen regional product offering • anticipated cost savings efficiencies synergies acquisitions accounted purchase method accounting therefore results operations included consolidated statements income since respective acquisition dates exception two entities acquired hugo neu corporation separation termination agreement discussed fiscal 2007 company completed following acquisitions • december 2006 company acquired metals recycling business provide additional sources scrap metals megashredder everett massachusetts • may 2007 company acquired two metals recycling businesses separately provide scrap metal everett massachusetts tacoma washington facilities pro forma operating results three acquisitions presented since aggregate results would significantly different historical results schnitzer steel industries inc notes consolidated financial statements fiscal 2006 company completed following acquisitions hugo neu corporation “hnc” separation termination agreement september 30 2005 company hnc certain subsidiaries closed transaction separate terminate metal recycling joint venture relationships company received following result hnc joint venture separation termination • prolerized new england company “pne” comprised joint ventures’ various interests northeast processing recycling operations primarily operate massachusetts new hampshire rhode island maine • assets related liabilities hugo neu schnitzer global trade related scrap metal business parts russia baltic region including poland denmark finland norway sweden company entered noncompete agreement hnc bars buying scrap metal certain areas russia baltic region fiveyear period ending june 8 2010 • ths recycling llc dba hawaii metals recycling company “hmr” hawaii metals recycling business previously owned 100 hnc • payment 37 million cash received hnc received following result hnc joint venture separation termination • joint venture operations new york new jersey california including scrap metal processing facilities marine terminals related ancillary satellite sites interim new york city recycling contract miscellaneous assets • assets related liabilities hugo neu schnitzer global trade related russian baltic region divestiture company’s interest joint ventures hnc enabled company expand metals recycling operations northeastern us hawaii addition divestiture removed restrictions company’s ability pursue additional acquisition opportunities purchase accounting finalized dispute remaining company hnc post closing adjustments company believes adequately accrued dispute purchase price hnc joint venture separation termination 165 million including acquisition costs 6 million upon divestiture joint venture interests 57 million pretax gain resulted difference fair value carrying value associated joint venture interests accordance accounting research bulletin 51 “consolidated financial statements” company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning fiscal 2006 instead acquisition date businesses partially owned prior acquisition greenleaf auto recyclers llc “greenleaf” september 30 2005 company acquired greenleaf five properties previously leased greenleaf assumed certain greenleaf debt obligations 45 million including acquisition costs 1 million acquisition greenleaf significantly expanded company’s national presence business auto dismantling recycling addition acquisition enabled company enter fullservice segment recycling auto parts market services commercial customers schnitzer steel industries inc notes consolidated financial statements acquisition regional recycling llc “regional” october 31 2005 company purchased substantially assets regional 69 million including acquisition costs 600000 assumed certain liabilities acquisition regional provided company presence growing markets southeastern us addition acquisition regional enhanced company’s ability service domestic eventually export markets acquisition minority interest metals recycling llc “mrl” part joint venture relationship hnc company indirectly owned 30 interest mrl rhode island based metals recycling business hnc minority interest owning remaining 30 40 interests respectively september 30 2005 company closed transaction separate terminate joint venture relationship hnc obtained hnc’s 30 ownership interest march 21 2006 company purchased remaining 40 minority interest 25 million acquisition 40 minority interest enabled company fully leverage investments pne mrl competed geographic regions operating one business optimize facilities increase market share summary fiscal 2006 acquisitions following summary fair values assets acquired liabilities assumed acquisition dates transactions millions businesses acquired hnc assets acquired regional mrl included company’s mrb segment greenleaf acquisition included company’s apb segment accordance sfas 142 “goodwill intangible assets” goodwill amortized tested impairment least annually goodwill recognized connection hnc separation termination regional acquisition minority interest mrl deductible tax purposes whereas goodwill recognized connection greenleaf payment consideration acquired businesses funded company’s existing cash balances credit facility net 37 million cash received hnc separation termination schnitzer steel industries inc notes consolidated financial statements following presents details identifiable intangible assets acquired 2006 thousands following table prepared pro forma basis years ended august 31 2006 2005 respectively though acquisitions hnc separation termination greenleaf regional acquisitions occurred beginning periods presented thousands except per share amounts 1 tax effected gain 35 million related hnc separation termination agreement included pro forma actual results year ended august 31 2006 pro forma results necessarily indicative would occurred acquisitions effect periods presented addition pro forma results intended projection future results reflect synergies might achieved combining operations schnitzer steel industries inc notes consolidated financial statements note 8 goodwill intangible assets net following table presents company’s intangible assets related lives august 31 thousands changes carrying amount goodwill reporting segment years ended august 31 2007 2006 respectively follows thousands goodwill adjustments fiscal 2007 2006 reflect 1 million related translation adjustments associated canadian subsidiary whose functional currency canadian dollar addition apb’s historical goodwill adjusted fiscal 2006 deferred tax asset recorded related environmental liability acquired fiscal 2005 excess aggregate purchase price fair value identifiable net assets acquired 56 million hnc separation termination recognized goodwill fiscal 2006 goodwill amount 7 million existed joint ventures’ balance sheets prior separation termination shown schnitzer steel industries inc notes consolidated financial statements separately company’s balance sheet accordance equity method accounting therefore total increase goodwill related hnc separation termination agreement 63 million fiscal 2006 total intangible amortization expense year ended august 31 2007 2006 2005 2 million 2 million 1 million respectively estimated amortization expense based current intangible balances next five fiscal years beginning september 1 2007 follows thousands note 9 shortterm borrowings company’s short term borrowings consist primarily unsecured credit line increased march 1 2007 5 million 20 million line credit expires march 1 2008 interest rates outstanding indebtedness unsecured line credit set bank time borrowing credit available agreement uncommitted august 31 2007 company 20 million outstanding agreement weighted average line 598 august 31 2007 amounts outstanding agreement august 31 2006 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2007 company compliance covenants note 10 longterm debt capital lease obligations longterm debt capital lease obligations consist following august 31 thousands november 2005 company entered amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto amended july 2007 revised agreement provides fiveyear 450 million revolving credit facility maturing july 2012 interest rates outstanding indebtedness amended agreement based company’s option schnitzer steel industries inc notes consolidated financial statements either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio august 31 2007 2006 company borrowings outstanding credit facility 115 million 95 million respectively additionally august 31 2007 2006 company 8 million longterm bonded indebtedness matures january 2021 bank credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2007 company compliance covenants august 31 2007 company three capital lease agreements use equipment expire various dates november 2014 august 31 2007 company 2 million assets accounted capital leases included property plant equipment machinery equipment consolidated balance sheet significant capital leases august 31 2006 principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates december 26 2026 rent expense 18 million 13 million 8 million fiscal 2007 2006 2005 respectively see discussion leases related parties note 16 related party transactions smb takeorpay natural gas contract expires may 31 2011 obligates purchase minimum 3435 million british thermal units “mmbtu” per day tiered pricing whether amount utilized blended rate period november 1 2006 october 31 2007 822 per mmbtu effective delivery period november 1 2007 october 31 2008 blended rate natural gas decreased 822 per mmbtu per day 770 per mmbtu per day derivative marktomarket charge incurred difference natural gas market prices contract price material date smb also electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 schnitzer steel industries inc notes consolidated financial statements table sets forth company’s future minimum obligations noncancelable operating leases unrelated parties service obligations purchase commitments august 31 2007 thousands contingenciesenvironmental company evaluates adequacy environmental reserves quarterly basis accordance company policy adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made changes company’s environmental reserves follows thousands 1 fiscal 2007 company recorded 4 million environmental reserves related 2007 acquisitions additionally company released 2 million reserves result mitigating environmental concerns one mrb locations metals recycling business august 31 2007 mrb’s environmental reserves consisted primarily reserves established connection hylebos waterway portland harbor various acquisitions consummated fiscal 2007 2006 hylebos waterway fiscal 1982 company notified us environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one 60 potentially responsible parties “prps” investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders company another party “other party” proceed remedial design remedial action “rdra” head hylebos two parties proceed rdra balance waterway unilateral administrative order head hylebos waterway converted voluntary consent decree 2004 pursuant company party agreed remediate head hylebos waterway second phase dredging head hylebos waterway began july 2004 company schnitzer steel industries inc notes consolidated financial statements incurred remediation costs 16 million fiscal 2005 company’s cost estimates based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company recorded environmental charges 14 million fiscal 2005 primarily account additional estimated costs complete work second dredging season company party incurred additional remediation costs 7 million fiscal 2006 company party filed complaint us district court western district washington tacoma dredge contractor recover damages significant portion cost overruns incurred second dredging season complete project following trial concluded february 2007 jury awarded company party damages amount 6 million judgment appealed dredge contractor enforcement judgment stayed pending appeal accrual reduction liabilities recorded legal options resolved award certain deemed collectible company party also pursued settlement negotiations legal action nonsettling nonperforming prps recover additional amounts august 31 2007 environmental reserves hylebos waterway aggregated 4 million portland harbor fiscal 2006 company notified epa cercla one least 69 prps operate formerly owned operated sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined unclear whether extent company liable environmental costs damages associated superfund site also unclear extent natural resource damage claims third party contribution damage claims asserted company participated certain preliminary portland harbor study efforts parties consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study however company could become liable share costs study later stage proceedings fiscal 2006 company received letters lwg one members respect participating lwg remedial investigationfeasibility study “rifs” demands various parties connection environmental response costs allegedly incurred investigating contamination portland harbor superfund site effort develop coordinated strategy response demands company joined twenty newlynoticed parties form blue water group “bwg” members bwg declined join lwg result discussions bwg lwg epa department environmental quality “deq” regarding potential cash contribution rifs certain members bwg including company agreed interim settlement lwg company would contribute toward bwg’s total settlement amount deq performing investigations involving company sites focused controlling current releases contaminants willamette river cost investigations remediation associated properties cost employment source control best management practices reasonably estimable completion data review investigations conducted lwg fiscal 2006 company recorded liability estimated share costs investigation incurred lwg date company’s estimated share costs considered material company reserved 1 million future investigation costs portland harbor metals recycling business sites fiscal 2005 2006 2007 company conducted environmental due diligence investigations connection hnc regional mrl mrb acquisitions result investigations schnitzer steel industries inc notes consolidated financial statements company identified certain environmental risks accrued share estimated costs remediate risks reserves recorded part purchase accounting acquisitions environmental compliance proceedings pending respect sites august 31 2007 environmental reserves theses sites aggregated 20 million company’s environmental reserves also include amounts potential future cleanup sites company subsidiaries conducted business allegedly disposed materials auto parts business fiscal 2003 fiscal 2006 company completed four acquisitions businesses within apb segment time acquisition company conducted environmental due diligence investigations related locations involved acquisition apb recorded reserve estimated cost address environmental matters identified result investigations reserve evaluated quarterly according company policy august 31 2007 environmental reserves apb aggregated 18 million includes environmental reserve 13 million greenleaf acquisition environmental enforcement proceedings pending respect sites amounts charged reserves fiscal 2007 steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships via specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit first issued fiscal 1998 since renewed fiscal year 2012 permit allows smb produce 950000 tons billets per year allows varying rolling mill production levels based levels emissions contingenciesother october 16 2006 company finalized settlements doj sec resolving investigation related past practice making improper payments purchasing managers company’s customers asia connection export sales recycled ferrous metal settlement company agreed deferred prosecution agreement doj “deferred prosecution agreement” agreed order issued sec instituting ceaseanddesist proceedings making findings imposing ceaseanddesist order pursuant section 21c securities exchange act 1934 “order” deferred prosecution agreement doj prosecute company meets conditions agreement period three years including among things company engage compliance consultant advise compliance officer board directors company’s compliance program order company agreed ceaseanddesist past practices subject investigation disgorge 8 million profits prejudgment interest order also contains provisions comparable deferred prosecution agreement regarding engagement compliance consultant addition settlement company’s korean subsidiary ssi international far east ltd pled guilty foreign corrupt practices act antibribery books records provisions conspiracy wire fraud charges paid fine 7 million amounts accrued fiscal 2006 paid first quarter fiscal 2007 investigation settlement first quarter fiscal 2007 affect company’s previously reported financial results settlement company agreed cooperate fully ongoing related doj sec investigations schnitzer steel industries inc notes consolidated financial statements company incurred expenses may incur expenses connection advancement funds indemnification individuals involved investigations terms corporate bylaws company obligated indemnify current former officers directors involved civil criminal investigative matters connection service company also obligated advance fees expenses persons advance final disposition matters involved officer director affirms good faith belief entitlement indemnification undertakes repay advance ultimately determined court person entitled indemnified company also option indemnify employees advance fees expenses involved employees furnish company written affirmation undertaking limit indemnification payments company could required make provisions company record liability indemnification obligations based fact employmentrelated costs time company believe indemnity payments company may required make material note 12 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees companies plans include defined benefit plan supplemental executive retirement benefit plan defined contribution plans multiemployer pension plans defined benefit pension plan supplemental executive retirement benefit plan “serbp” certain nonunion employees company maintains defined benefit pension plan effective june 30 2006 company made decision freeze defined benefit plan cease accrual benefits defined benefit plan freeze qualified plan curtailment sfas 88 “employers’ accounting settlements curtailments defined benefit plans termination benefits” “sfas 88” accordance sfas 88 company recognized insignificant curtailment loss equal unrecognized prior service cost associated years service longer expected rendered result curtailment addition company adopted nonqualified serbp certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund classified assets pension liability classified longterm liabilities trust fund assets’ stock market gains losses included income expense unfunded plan contributions defined benefit payments made plan beneficiaries company adopted sfas 158 august 31 2007 defined benefit pension plan serbp sfas 158 requires entity recognize statement financial position asset defined benefit pension postretirement benefit plans overfunded status liability plan’s underfunded status ii measure defined benefit pension postretirement benefit plan’s assets obligations determine funded status end employer’s fiscal year iii recognize changes funded status defined benefit pension postretirement benefit plans comprehensive income year changes occur requirement measure plan assets benefit obligations date fiscal yearend statement financial position consistent company’s current accounting treatment following adoption sfas 158 additional minimum pension liabilities related intangible assets longer recognized provisions sfas 158 applied prospective basis therefore prior periods presented retroactively adjusted schnitzer steel industries inc notes consolidated financial statements adoption sfas 158 resulted following impact consolidated balance sheet august 31 2007 thousands asset value plan based market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 thousands schnitzer steel industries inc notes consolidated financial statements amounts recognized consolidated balance sheet consist following august 31 thousands estimated amount net gain loss net prior service cost transition obligation remaining comprehensive income expected recognised component net periodic benefit cost fiscal 2008 thousands components net periodic pension benefit cost august 31 thousands weightedaverage assumptions used determine pension benefit obligations defined benefit pension plan serbp follows august 31 weightedaverage assumptions used determine net periodic pension benefit cost defined benefit pension plan serbp follows years ended august 31 schnitzer steel industries inc notes consolidated financial statements determine expected longterm rate return pension plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company applies expected rate return market related value assets reduces underlying variability assets company applies expected return company amortizes gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees actuarial assumptions primary actuarial assumptions determined follows • expected longterm rate return plan assets based company’s estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate • assumed discount rate used discount future benefit obligations back today’s dollars discount rate reflective yield rates us longterm investment grade corporate bonds around august 31 valuation date rate sensitive changes interest rates decrease discount rate would increase company’s obligation expense • effective june 30 2006 company ceased accrual benefits defined benefit plan thus expected rate compensation increase longer applicable calculating benefit obligations plan asset allocations company’s asset allocation defined benefit pension plan based primary goal maximizing investment returns long term time company invested diversified portfolio provide balance returns risk effort quantify allocation company’s plan committee established target guideline used determining investment mix table shows company’s target allocation range along actual allocations defined benefit pension plan august 31 company set target allocations serbp table exhibits accumulated benefit obligation measured august 31 thousands schnitzer steel industries inc notes consolidated financial statements contributions company expects make contributions defined benefit pension plan fiscal 2008 plan frozen june 30 2006 company expects make 145000 contributions serbp plan fiscal 2008 estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid thousands defined contribution plans company several defined contribution plans covering nonunion employees contributions plans totaled 4 million 2 million 1 million fiscal 2007 2006 2005 respectively multiemployer pension plans accordance collective bargaining agreements company contributed 4 million 3 million 3 million per year multiemployer pension plans fiscal 2007 2006 2005 company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company learned fiscal 2004 one multiemployer plans smb participating employer would meet employee retirement incentive security act 1974 “erisa” minimum funding standards plan year ending september 30 2004 trustees plan applied internal revenue service “irs” certain relief minimum funding standard irs indicated willingness consider granting relief provided plan’s contributing employers including company agreed increased contributions increased contributions estimated average 6 per year compounded annually plan reaches funded status required irs increases based company’s current contribution level plan approximately 2 million per year based commitments majority employers participating plan make increased contributions plan trustees proceeded relief request august 2006 received formal approval irs based approval fourth fiscal quarter 2006 company reversed approximately 1 million charges accrued fiscal 2004 company’s estimated share additional contributions excise taxes would required irs approval received company contingent liabilities share unfunded liabilities plan contributes company’s contingent liability plan would triggered withdraw plan schnitzer steel industries inc notes consolidated financial statements company current intention withdrawing plans company unable determine relative portion estimate future liability plans note 13 sharebased compensation company adopted 1993 stock incentive plan “the plan” employees consultants directors pursuant provisions plan amended company authorized issue 72 million shares class common stock awards issued plan 2006 annual meeting shareholders company’s shareholders approved amendments plan authorize grant performancebased longterm incentive awards “performancebased awards” plan would eligible treatment performancebased compensation section 162m internal revenue code 1986 b increase peremployee limit grants options stock appreciation rights plan 100000 shares 150000 shares annually amendments include increase number shares reserved issuance plan stock options plan stock options granted employees exercise prices equal fair market value company’s stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model “blackscholes” utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected lives grants based historical exercise patterns postvesting termination behavior described fair value stock options granted following years ended august 31 determined using blackscholes following assumptions 1 options granted fiscal 2007 schnitzer steel industries inc notes consolidated financial statements summary company’s stock option activity related information follows august 9 2007 compensation committee board directors approved modifications award agreements options outstanding plan provide accelerated vesting upon death disability retirement optionee upon change control company definition term “disability” broadened modification affected 18 employees resulted incremental increase stock option compensation expense 1 million fourth quarter fiscal 2007 august 31 2007 total number unvested stock options 248825 shares aggregate intrinsic value table represents total pretax intrinsic value would received option holders option holders exercised options august 31 2007 aggregate intrinsic value calculated difference company’s closing stock price last trading day fiscal 2007 exercise price multiplied number inthemoney options total intrinsic value stock options exercised 4 million 12 million 4 million years ended august 31 2007 2006 2005 respectively total fair value stock options vested fiscal years ended august 31 2007 2006 2005 1 million 2 million 1 million respectively company recognized compensation expense associated stock options 3 million 2 million fiscal 2007 2006 respectively august 31 2007 total remaining unrecognized compensation expense related nonvested stock options amounted 3 million weightedaverage remaining requisite service period nonvested stock options approximately 27 years total proceeds received option exercises years ended august 31 2007 2006 2005 2 million 4 million 1 million respectively tax benefits realized option exercises sharebased payment awards fiscal 2007 2006 1 million 4 million respectively fiscal year 2005 company recorded cumulative tax benefits exercises employee stock options 14 million original amended income tax returns amounts employees would report ordinary income restricted stock units connection approval stock option awards compensation committee july 25 2006 committee authorized company permit option grantees elect receive value option awards restricted shares class common stock company october 2006 company commenced tender schnitzer steel industries inc notes consolidated financial statements offer recipients july 25 2006 option grants allowed exchange options rsus 21 basis exchange ratio determined equivalent blackscholes pricing model rsus vest schedule options granted july 25 2006 close tender offer november 6 2006 stock options 272000 shares exchanged 136000 rsus estimated fair value rsus issued november 7 2006 5 million based market closing price underlying class common stock november 6 2006 3765 result exchange company estimated incremental compensation expense 541000 recognized remaining portion fiveyear vesting term rsus june 27 2007 compensation committee granted awards 50000 rsus executive officer another officer terms employment agreements vest 25 june 2007 25 june 2008 50 june 2009 vesting 25000 shares based continued employment remaining 25000 shares vest based performance metrics approved committee estimated fair value rsus issued june 27 2007 2 million based market closing price underlying class common stock june 27 2007 4725 august 9 2007 compensation committee granted 103578 rsus key employees officers 1993 plan rsus fiveyear term vest 20 per year five years commencing june 1 2008 committee also approved amendments definition term “disability” existing rsu award agreements estimated fair value rsus granted august 9 2007 5 million based market closing price underlying class common stock august 9 2007 5134 summary company’s rsus related information follows year ended august 31 2007 thousands except weighted average grant fair values total fair value rsu shares vested fiscal 2007 1 million company recognized compensation expense associated rsu shares 2 million fiscal 2007 august 31 2007 total remaining unrecognized compensation expense related unvested rsus 9 million expected recognized weightedaverage period 38 years rsu agreements provide accelerated vesting upon death disability retirement holder upon change control company accelerated vesting clause affected 27 employees received rsu awards resulted incremental increase rsu compensation expense 1 million fiscal 2007 longterm incentive plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company awards paid class common stock soon practicable october 31 following end performance period schnitzer steel industries inc notes consolidated financial statements fiscal 2006 2008 longterm incentive awards november 29 2005 company’s compensation committee approved performancebased awards plan compensation committee approved additional awards terms two executive officers one officer division january 30 2006 april 28 2006 respectively compensation committee established series performance targets include company’s total shareholder return “tsr” performance period relative sp 500 industrials weighted 50 “tsr awards” operating income per ton mrb performance period weighted 1623 number economic value added “eva” positive stores apb last year performance period weighted 1623 man hours per ton smb performance period weighted 1623 corresponding award payouts ranging 25 300 weighted portions target awards “performance awards” collectively participants work exclusively one business segment awards weighted 50 performance measure segment 50 total shareholder return participant generally must employed company october 31 following end performance period receive award payout although prorated awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company business segment participant works awards paid company’s class common stock soon practicable october 31 following end performance period fair value performance awards granted periods determined multiplying total number shares expected issued company’s closing stock price date grant recognized requisite service period 29 years weighted average fair value performance awards granted fiscal 2006 3427 fair value tsr performance awards granted year ended august 31 2006 determined using monte carlo simulation model following assumptions accordance provisions sfas 123r compensation expense related tsr award market conditions recognized requisite service period adjusted requisite service rendered fiscal 2007 2009 longterm incentive awards november 27 2006 company’s compensation committee approved performancebased awards plan compensation committee established series performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period corresponding award payouts ranging threshold 50 maximum 200 weighted portions target awards measuring earnings per share growth fiscal 2007 compensation committee set fiscal 2006 diluted earnings per share amount lower actual amount reflecting elimination certain large nonrecurring items weighted average fair value performance awards granted fiscal 2007 3972 schnitzer steel industries inc notes consolidated financial statements performance awards activity plan fiscal 2007 follows ltip performance awards number awards thousands compensation expense associated performance awards fiscal 2007 2006 calculated assuming performance targets met compensation expense anticipated awards based upon company’s financial performance 3 million 2007 1 million 2006 august 31 2007 unrecognized compensation expense related nonvested performance shares 16 million expected recognized weightedaverage period 18 years august 2007 compensation committee approved amendments definition term “disability” existing agreements performance awards deferred stock units july 26 2006 compensation committee approved deferred compensation plan nonemployee directors conjunction authorizing issuance deferred stock units “dsus” nonemployee directors form restricted stock awards approved board july 2005 one dsu gives director right receive one share class common stock future date annually immediately following annual meeting shareholders commencing 2007 annual meeting nonemployee director receive dsus number shares equal 87500 131250 chairman board divided closing market price class common stock grant date dsus become fully vested day next annual meeting subject continued service board dsus also become fully vested death disability director change control company defined dsu award agreement dsus become vested directors credited additional whole fractional shares reflect dividends would paid stock subject dsus company issue class common stock director pursuant vested dsus lump sum january director ceases director company subject right director elect installment payment program company’s deferred compensation plan nonemployee directors order move cycle granting nonemployee director equity awards year june cycle granting awards january time annual meeting company granted onetime award dsus nonemployee director effective august 31 2006 onetime grants number dsus equal 43750 65625 chairman board divided closing market price class common stock august 31 2006 august 31 2006 total number dsus granted 14000 shares dsus became fully vested january 31 2007 company recognized 1 million compensation expense dsus year ended august 31 2007 january 31 2007 compensation committee granted dsus nonemployee directors grant equal 87500 131250 chairman board divided closing market price class common stock january 31 2007 total number dsus granted january 31 2007 23864 shares dsus become fully vested day 2008 annual meeting subject continued board service schnitzer steel industries inc notes consolidated financial statements compensation expense associated dsus granted recognized respective requisite service periods awards company recognized 1 million compensation expense dsus year ended august 31 2007 note 14 income taxes income tax expense benefit consisted following august 31 thousands deferred tax assets liabilities comprised following august 31 thousands schnitzer steel industries inc notes consolidated financial statements income tax expense differs amount would result applying us statutory rate earnings taxes reconciliation difference august 31 follows tax rates 361 375 353 fiscal 2007 2006 2005 respectively tax rate fiscal 2006 higher fiscal 2007 primarily accrual recorded fiscal 2006 14 million nondeductible penalties profits disgorgement expensed connection settlement sec doj investigations nondeductible expense increased fiscal 2006 tax rate 21 addition fiscal 2006 tax rate higher normal included estimated tax rate 380 nonrecurring 57 million gain arising hnc separation termination see note 7 business combinations tax rate higher rate applicable company’s recurring income company acquired net operating losses “nols” pne acquired fiscal 1996 remaining 6 million pne nols august 31 2007 expire fiscal 2012 unused company acquired nols greenleaf acquired fiscal 2006 remaining 12 million greenleaf nols august 31 2007 expire fiscal 2024 unused annual use pne greenleaf nols limited section 382 internal revenue code valuation allowances established offset pne greenleaf nols management believes like likely future taxable income sufficient absorb nols entirety schnitzer steel industries inc notes consolidated financial statements note 15 earnings dividends per share following table sets forth reconciliation basic net income per share diluted net income per share years ended august 31 thousands except per share amounts company accounts earnings per share accordance sfas 128 “earnings per share” basic earnings per share computed dividing net income weighted average number common shares outstanding periods presented vested dsus diluted earnings per share computed using net income weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method stock options totaling 200000 600000 shares august 31 2007 2006 respectively excluded calculation diluted earnings per share options antidilutive note 16 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 19 million 12 million 14 million fiscal 2007 2006 2005 respectively advances joint ventures 48000 2 million august 31 2007 2006 respectively addition payments joint ventures amounted 2 million 250000 fiscal year ended august 31 2007 2006 respectively included assets notes receivable joint venture businesses 312000 august 31 2007 1 million august 31 2006 thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company partnership operates four selfservice stores northern california mr klauer’s 25 share profits partnership totaled 1 million fiscal years 2007 2006 2 million fiscal year 2005 mr klauer also owns property one stores leased partnership lease providing annual rent 228000 subject annual adjustments based consumer price index term expiring december 2010 partnership option renew lease upon expiration fiveyear period certain shareholders company significant interests related owners entities discussed entities considered related parties financial reporting purposes transactions schnitzer family including schnitzer family companies require approval company’s audit committee company compliance policy schnitzer steel industries inc notes consolidated financial statements schnitzer investment corp “sic” real estate company owns develops manages various commercial residential real estate projects owned members schnitzer family collectively controlling shareholders company ownership class b common stock company leased administrative offices sic operating lease expires 2015 august 31 2007 annual rent less 1 million annually first quarter fiscal 2008 sic sold building unrelated party following table summarizes future minimum rents related party leases thousands company sic another schnitzer family company also parties shared services agreement performance various administrative services fiscal 2006 substantially services performed company agreement eliminated shared services agreement company billed sic total 57000 156000 fiscal 2007 2006 respectively included accounts receivable amounts due sic 39000 21000 august 31 2007 2006 respectively company also repays sic various reimbursable expenses years ended august 31 2007 2006 company paid sic total 200000 173000 respectively reimbursable expenses administrative charges totaled less 1 million per year fiscal 2007 2006 2005 fiscal 2007 company engaged series transactions ec company “ec” electrical contractor ec provided goods services company’s portlandbased operations total charges ec company fiscal 2007 146000 robert ball director company chairman board 27 shareholder bsr holding company ec whollyowned subsidiary note 17 segment information company operates three reportable segments metal purchasing processing recycling selling trading mrb minimill steel manufacturing smb selfservice fullservice used auto parts apb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal result hnc separation completed september 30 2005 see note 7 business combinations joint venture segment eliminated results two entities acquired transaction company managing well remaining five joint venture interests consolidated mrb joint venture amounts fiscal 2007 2006 presented separately company determined retroactively adjusting prior period results entities acquired transaction meaningful given company 50 equity partner involved managing daytoday operations entities prior hnc separation mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb produces rebar coiled rebar merchant bar wire rod specialty products schnitzer steel industries inc notes consolidated financial statements apb purchases used vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb intersegment sales mrb smb apb mrb negotiated rates intended approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments unallocated expense operating income segment reflect operating income segment would standalone business schnitzer steel industries inc notes consolidated financial statements tables illustrate company’s operating results segment years ended august 3 thousands schnitzer steel industries inc notes consolidated financial statements 1 result hnc joint venture separation termination agreement joint venture segment eliminated results two entities acquired transaction company previous interest remaining joint ventures consolidated mrb beginning fiscal 2006 included joint venture segment fiscal 2005 estimated operating income two businesses 12 million year ended company determined retroactively adjusting prior period results entities acquired transaction meaningful given company 50 partner involved managing daytoday operations entities prior hnc separation revenues geographic area year ended august 31 millions fiscal 2007 2006 external customers accounted 10 company’s consolidated revenues fiscal year 2005 mrb one customer accounted 108 million 13 company’s consolidated revenues sales foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 schnitzer steel industries inc notes consolidated financial statements following summary company’s total assets year ended august 31 thousands longlived assets consist primarily net property plant equipment substantially company’s longlived assets located us quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts schedule ii valuation qualifying accounts years ended august 31 2007 2006 2005 thousands schnitzer steel industries form 10k item 9item 8 financial statements supplementary data index consolidated financial statements schedules exhibits omitted information applicable required 46 schnitzer steel industries inc form 10k 2008 management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2008 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2008 stated report included herein john carter richard peach president chief executive officer chief financial officer october 28 2008 october 28 2008 schnitzer steel industries inc form 10k 2008 47 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2008 2007 results operations cash flows three years period ended august 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed notes 2 12 consolidated financial statements company changed manner accounts defined benefit pension postretirement plans august 31 2007 discussed note 14 consolidated financial statements company changed manner accounts uncertain tax positions september 1 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon october 28 2008 48 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts see notes consolidated financial statements schnitzer steel industries inc form 10k 2008 49 schnitzer steel industries inc consolidated statements income thousands except per share amounts see notes consolidated financial statements 50 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc consolidated statements shareholders’ equity thousands see notes consolidated financial statements schnitzer steel industries inc form 10k 2008 51 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements 52 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation currently one nation’s largest recyclers ferrous nonferrous metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reportable segments include metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb purchases collects processes recycles sells trades brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice fullservice used auto parts networks additionally apb supplier autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products company provides end life cycle solution variety products vertically integrated businesses including sale used auto parts procuring autobodies metal products manufacturing finished steel products august 31 2008 company’s facilities located us canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries addition company holds 50 interest five joint ventures accounted equity method significant intercompany account balances transactions profits eliminated august 31 2008 2007 2006 fair value financial instruments cash receivables current liabilities consolidated financial statements considered reflect fair value shortterm maturity instruments fair value longterm debt deemed reflected consolidated financial statements given variable interest rates significant credit facilities allocation acquisition purchase price company allocates purchase price acquisitions identified tangible intangible assets acquired liabilities assumed based estimated fair values date acquisition residual amounts allocated goodwill addition company accrues contingent purchase price consideration outcome contingency deemed probable date acquisition cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 51 million 26 million august 31 2008 august 31 2007 respectively restricted cash august 2006 company deposited custody account 8 million connection expected settlement investigations us department justice “doj” staff us securities exchange commission “sec” interest amount deposited accrued benefit company recognized interest income earned deposited funds released sec october 2006 upon completion settlement see note 11 commitments contingencies accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors cases management aware circumstances may impair specific customer’s ability meet financial schnitzer steel industries inc form 10k 2008 53 schnitzer steel industries inc notes consolidated financial statements obligations company management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends allowance doubtful accounts 3 million 2 million august 31 2008 2007 respectively inventories net company’s inventories primarily consist ferrous nonferrous processed unprocessed metal used salvaged vehicles finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory apb establishes cost used salvaged vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb establishes finished steel product inventory cost based weighted average cost capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs company evaluates whether inventory properly valued lower cost market quarterly basis company considers estimated future selling prices determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts value ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume addition company establishes inventory reserves based upon historical experience adjustments mitigate risk significant adjustments determined reasonable reserve 1 million 2 million august 31 2008 2007 respectively property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred capitalized interest fiscal 2008 immaterial 2007 2 million assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized estimated useful lives property remaining lease term whichever less august 31 2008 useful lives used depreciation amortization follows 54 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements impairment longlived assets company estimates future undiscounted cash flows derived asset assess whether potential impairment exists certain triggering events circumstances indicate carrying value longlived asset may impaired carrying value exceeds company’s estimate future undiscounted cash flows company records impairment difference carrying amount fair value asset material adjustments carrying value longlived assets years ended august 31 2008 2007 2006 goodwill intangibles goodwill represents excess purchase price estimated fair value net tangible intangible assets acquired entities company accounts goodwill intangibles statement financial accounting standards “sfas” 142 “goodwill intangible assets” “sfas 142” sfas 142 goodwill amortized tested impairment least annually year company tests impairment goodwill according twostep approach first step company estimates fair values reporting units using present value future cash flows approach subject comparison reasonableness market capitalization date valuation carrying amount exceeds fair value second step goodwill impairment test performed measure amount impairment loss second step implied fair value goodwill estimated fair value reporting unit used first step less fair values net tangible intangible assets reporting unit carrying amount goodwill exceeds implied fair market value impairment loss recognized amount equal excess exceed carrying amount goodwill addition goodwill reporting unit tested impairment annual tests take place second quarter event occurs circumstances change would likely reduce fair value reporting unit carrying value noncompete agreements amortized lives respective agreements straightline basis reflective period benefit company’s intangible assets indefinite lives including tradenames real property options amortized also tested impairment least annually events circumstances arise may trigger impairment test consists comparison fair value intangible assets carrying amount accrued worker’s compensation costs company selfinsured maximum amount worker’s compensation claims reserve costs unpaid claims incurred reported claims recorded balance sheet date company’s exposure claims protected various stoploss insurance policies estimate reserve based historical claim experience august 31 2008 2007 company accrued 6 million 7 million respectively estimated cost worker’s compensation claims environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties identified claim situations recoveries environmental remediation costs parties recognized claim recovery actually realized assessments remediation progresses individual sites amounts recorded reviewed periodically adjusted reflect additional information becomes available schnitzer steel industries inc form 10k 2008 55 schnitzer steel industries inc notes consolidated financial statements derivatives company employs derivatives connection foreign currency exchange rate activities including forward purchases sales addition company’s natural gas contract supply smb minimill classified derivative accordance sfas 133 “accounting derivative instruments hedging activities” “sfas 133” refer note 11 commitments contingencies information smb natural gas contract derivative company’s accounting policies instruments based whether instruments designated hedge nonhedge instruments derivative instruments recorded consolidated balance sheets fair value either assets liabilities unless designated qualify normal purchases normal sales exemption afforded sfas 133 derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales pursuant exemption contracts qualify normal purchases normal sales markedtomarket available quoted market prices obtained external sources used measure contract’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts net realized unrealized losses related foreign currency contract settlements marktomarket adjustments open foreign currency contracts 1 million 2 million 1 million years ended august 31 2008 2007 2006 respectively historically company held foreign currency forward contracts denominated euros fair value contracts estimated based quoted market prices august 31 2008 foreign currency forward contracts denominated euros consequently derivative liability asset company held foreign currency forward contracts denominated euros august 31 2007 2006 marktomarket adjustments contracts resulted derivative liability 83000 12000 august 31 2007 2006 respectively related marktomarket expense recorded income expense mrb foreign currency translation transactions accordance sfas 52 “foreign currency translation” “sfas 52” assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period translation adjustments included determining net income period recorded separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar sfas 52 generally requires gains losses foreign currency transactions recognized determination net income period company records gains losses income expense aggregate amounts net realized unrealized foreign currency transaction gains 1 million 2 million 1 million years ended august 31 2008 2007 2006 respectively common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock shareholder rights plan march 21 2006 company adopted shareholder rights plan “rights plan” rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” 56 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements schnitzer steel industries inc voting trust trustees capacity trustees deemed beneficially common stock virtue bound voting trust agreement governing trust right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weightedaverage cost shares par value stock adjustment additional paidincapital revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers upon shipment based either cost insurance freight “cif” free board “fob” terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment retail sales apb revenues recognized customers pay parts wholesale products shipped customer location historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises see note 14 income taxes concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable derivative financial instruments used hedging activities majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded fdic insurance amount 100000 august 31 2008 2007 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits monitoring procedures company also exposed credit loss event nonperformance counterparties foreign exchange contracts used hedging activities counterparties large international financial institutions date counterparty failed meet financial obligations company anticipate nonperformance counterparties schnitzer steel industries inc form 10k 2008 57 schnitzer steel industries inc notes consolidated financial statements addition company exposed credit risk respect open letters credit shipments foreign customers supported letters credit august 31 2008 company 153 million open letters credit earnings per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share incorporates incremental dilutive effect stock options restricted stock units “rsu’s” stock based awards certain company’s stock options rsus performance share awards excluded calculation diluted earnings per share antidilutive options awards could dilutive future see note 15 earnings dividends per share sharebased compensation september 1 2005 company adopted provisions sfas 123 r “sharebased payment” “sfas 123 r” requiring company recognize expense related fair value sharebased compensation awards refer note 13 sharebased compensation details pension postretirement benefit plans company sponsors defined benefit pension plan certain nonunion employees pension benefits based formulas reflect employees’ expected service periods based terms plan impact company’s investment funding decisions effective august 31 2007 company adopted sfas 158 “employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r” “sfas 158” requires company’s consolidated balance sheets reflect funded status pension postretirement plans sfas 158 requires employer recognize funded status defined benefit pension postretirement benefit plans net asset liability statement financial position offsetting amount accumulated comprehensive income recognize changes funded status year changes occur comprehensive income following adoption sfas 158 additional minimum pension liabilities related intangible assets longer recognized see note 12 employee benefits use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies intangible asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts reclassifications certain prior year amounts reclassified conform current year presentation changes impact previously reported operating income net income shareholders’ equity cash flows operating activities note 3 recent accounting pronouncements may 2008 fasb issued sfas 162 “the hierarchy generally accepted accounting principles” “sfas 162” sfas 162 identifies sources accounting principles framework selecting principles used preparation financial statements nongovernmental entities presented conformity us gaap sfas 162 effective 60 days following sec’s approval public company accounting oversight board amendments au section 411 “the meaning ‘present fairly conformity generally accepted accounting principles’” 58 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” “sfas 161” sfas 161 intended improve financial reporting derivative instruments hedging activities requiring enhanced disclosures enable investors better understand risks impact entity’s financial position financial performance cash flows provisions sfas 161 effective company first quarter fiscal 2009 adoption sfas 161 enhance provide visibility company’s footnote disclosure surrounding derivative instruments hedging activities december 2007 fasb issued sfas 141r “business combinations” “sfas 141r” replaces sfas 141 issued sfas 160 “noncontrolling interests consolidated financial statements” “sfas 160” amendment arb 51 two new standards change accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements respectively sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity two standards effective company first quarter fiscal 2010 sfas 141r applied prospectively sfas 160 requires retrospective application classification presentation provisions requirements sfas 160 shall applied prospectively early adoption prohibited standards management currently evaluating requirements sfas 141r sfas 160 yet determined impact company’s consolidated financial statements february 2007 fasb issued sfas 159 “the fair value option financial assets financial liabilities including amendment fasb statement 115” “sfas 159” sfas 159 establishes fair value option entities elect report certain financial assets liabilities fair value changes fair value recognized earnings sfas 159 effective financial statements issued fiscal years beginning november 15 2007 earlier application encouraged provided reporting entity also elects apply provisions sfas 157 “fair value measurements” “sfas 157” sfas 159 becomes effective company first quarter fiscal 2009 adoption sfas 159 material impact company’s consolidated financial position results operations cash flows september 2006 fasb issued sfas 157 sfas 157 defines fair value establishes framework measuring fair value expands fair value measurement disclosure sfas 157 effective financial statements issued fiscal years beginning november 15 2007 company required adopt sfas 157 first quarter fiscal 2009 february 2008 fasb issued fasb staff position “fsp” 1571 fsp 1572 fsp 1571 amends sfas 157 remove certain leasing transactions scope fsp 1572 delays effective date sfas 157 nonrecurring nonfinancial assets liabilities beginning company’s first quarter fiscal 2010 adoption sfas 157 material impact company’s consolidated financial position results operations cash flows company currently evaluating requirements sfas 157 relates nonrecurring nonfinancial assets liabilities yet determined impact company’s consolidated financial position results operations cash flows april 2008 fasb issued fasb staff position 1423 “determination useful life intangible assets” “fsp 1423” fsp 1423 amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp 1423 must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 interim periods within fiscal years early adoption prohibited fsp 1423 material impact company’s consolidated financial position results operations cash flows schnitzer steel industries inc form 10k 2008 59 schnitzer steel industries inc notes consolidated financial statements note 4 inventories net inventories consisted following august 31 thousands company makes certain assumptions regarding future demand net realizable value order assess inventory properly recorded lower cost market assumptions based historical experience current information due declines future selling prices scrap metal began second half fourth quarter fiscal 2008 company recorded adjustment 49 million reduce value inventory increase cost sales august 31 2008 lower cost market accordance accounting research bulletin 43 company adjustments lower cost market august 31 2007 note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment 48 million 39 million 29 million fiscal 2008 2007 2006 respectively 60 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements note 6 investment advances joint ventures august 31 2008 company five remaining joint venture interests accounted equity method accounting presented part mrb operations following tables present summarized unaudited financial information company’s joint ventures company partner thousands company’s investment equity method joint venture investments resulted cumulative undistributed earnings 12 million august 31 2008 included part partners’ equity joint ventures note 7 business combinations company paid premium ie goodwill fair value net tangible identified assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses strengthen company’s regional market position • company anticipates cost savings efficiencies synergies acquisitions accounted purchase method accounting therefore results operations included consolidated statements income since respective acquisition dates exception two entities acquired hugo neu corporation separation termination agreement discussed fiscal 2008 company completed following acquisitions • september 2007 company acquired mobile metals recycling business provides additional sources scrap metal everett massachusetts facility • company acquired two metals recycling businesses november 2007 one metals recycling business february 2008 expanded company’s presence southeastern us • february 2008 company acquired remaining 50 equity interest auto parts business located nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity schnitzer steel industries inc form 10k 2008 61 schnitzer steel industries inc notes consolidated financial statements • august 2008 company acquired selfservice used auto parts business three locations southern us fiscal 2007 company completed following acquisitions • december 2006 company acquired metals recycling business provide additional sources scrap metal megashredder everett massachusetts • may 2007 company acquired two metals recycling businesses separately provide scrap metal everett massachusetts tacoma washington facilities acquisitions completed fiscal 2008 2007 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2008 2007 acquisitions presented since aggregate results would significantly different historical results fiscal 2006 company completed following acquisitions september 30 2005 company hugo neu corporation “hnc” certain subsidiaries closed transaction separate terminate metal recycling joint venture relationships company received following result hnc joint venture separation termination • prolerized new england company “pne” comprised various processing recycling operations massachusetts new hampshire rhode island maine • hugo neu schnitzer global trade scrap metal business parts russia baltic region company entered noncompete agreement hnc bars hnc buying scrap metal certain areas russia baltic region fiveyear period ending june 8 2010 • ths recycling llc dba hawaii metals recycling company “hmr” hawaii metals recycling business • payment 37 million cash received hnc received following result hnc joint venture separation termination • joint venture operations new york new jersey california • assets related liabilities hugo neu schnitzer global trade related russian baltic region divestiture company’s interest joint ventures hnc enabled company expand metal recycling operations northeastern us hawaii addition divestiture removed restrictions company’s ability pursue additional acquisition opportunities purchase accounting finalized dispute remaining company hnc post closing adjustments company believes adequately accrued dispute purchase price hnc joint venture separation termination 165 million including acquisition costs 6 million upon divestiture joint venture interests 57 million pretax gain resulted difference fair value carrying value associated joint venture interests accordance accounting research bulletin 51 “consolidated financial statements” company elected consolidate results two businesses acquired hnc separation termination agreement though transaction occurred beginning fiscal 2006 instead acquisition date businesses partially owned prior acquisition acquisitions completed fiscal 2006 • september 2005 company acquired greenleaf auto recyclers llc “greenleaf” five properties previously leased greenleaf assumed certain greenleaf debt obligations 45 million including acquisition costs 1 million • october 2005 company purchased substantially assets regional recycling llc “regional” 69 million including acquisition costs 600000 assumed certain liabilities 62 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements • march 2006 company purchased remaining 40 minority interest metals recycling llc “mrl” rhode island based metals recycling business 25 million businesses acquired hnc assets acquired regional mrl included company’s mrb segment greenleaf acquisition included company’s apb segment accordance sfas 142 “goodwill intangible assets” goodwill amortized tested impairment least annually goodwill recognized connection hnc separation termination regional acquisition minority interest mrl deductible tax purposes whereas goodwill recognized connection greenleaf payment consideration acquired businesses funded company’s existing cash balances credit facility net 37 million cash received hnc separation termination following table prepared pro forma basis year ended august 31 2006 though acquisitions hnc separation termination greenleaf regional acquisitions occurred beginning period thousands except per share amounts 1 tax gain 35 million related hnc separation termination agreement included pro forma actual results year ended august 31 2006 pro forma results necessarily indicative would occurred acquisitions effect periods presented addition pro forma results intended projection future results reflect synergies might achieved combining operations note 8 goodwill intangible assets net following table presents company’s intangible assets related lives august 31 thousands schnitzer steel industries inc form 10k 2008 63 schnitzer steel industries inc notes consolidated financial statements changes carrying amount goodwill reporting segment years ended august 31 2008 2007 respectively follows thousands total intangible asset amortization expense years ended august 31 2008 2007 2006 4 million 2 million 2 million respectively estimated amortization expense based current intangible asset balances next five fiscal years beginning september 1 2008 follows thousands note 9 shortterm borrowings company’s shortterm borrowings consist primarily unsecured uncommitted credit line wells fargo bank na increased 5 million 25 million march 1 2008 term credit facility also extended march 1 2009 interest rates outstanding indebtedness unsecured line credit set bank time borrowing weighted average interest rate line 269 august 31 2008 august 31 2008 august 31 2007 company 25 million 20 million respectively outstanding agreement credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2008 2007 company compliance covenants 64 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements note 10 longterm debt capital lease obligations longterm debt capital lease obligations consist following august 31 thousands november 2005 company entered amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto amended july 2007 revised agreement provides fiveyear 450 million revolving credit facility maturing july 2012 interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 weighted average interest rate line 424 august 31 2008 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio august 31 2008 2007 company borrowings outstanding credit facility 150 million 115 million respectively bank credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2008 company compliance covenants additionally august 31 2008 2007 company 8 million longterm bonded indebtedness matures january 2021 principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands schnitzer steel industries inc form 10k 2008 65 schnitzer steel industries inc notes consolidated financial statements note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates december 26 2026 rent expense 21 million 18 million 13 million fiscal 2008 2007 2006 respectively see discussion leases related parties note 16related party transactions company’s steel manufacturing operations exposed market risk due variations market price natural gas result company uses derivative instruments specifically forward purchases manage inherent commodity price risks smb takeorpay natural gas contract expires may 31 2011 obligates purchase minimum quantities per day october 31 2010 whether amount utilized fair value natural gas determined using forward price curve based observable market price quotations major natural gas trading hub effective delivery period july 1 2008 october 31 2009 committed rate 1048 per million british thermal units “mmbtu” rate increases 1099 period november 1 2009 october 31 2010 marktomarket adjustments contract resulted derivative liability 4 million august 31 2008 related marktomarket expense recorded part cost goods sold income statement smb also electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 table sets forth company’s future minimum obligations noncancelable operating leases unrelated parties service obligations purchase commitments august 31 2008 thousands contingenciesenvironmental company evaluates adequacy environmental reserves quarterly basis accordance company policy adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made 66 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements changes company’s environmental reserves follows thousands 1 fiscal 2008 company recorded 2 million environmental reserves purchase accounting related 2008 acquisitions released approximately 1 million related environmental issues remediated fiscal 2008 metals recycling business august 31 2008 mrb’s environmental reserves consisted primarily reserves established connection hylebos waterway portland harbor various acquisitions consummated fiscal 2006 2007 2008 hylebos waterway fiscal 1982 company notified us environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one 60 potentially responsible parties “prps” investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders company another party “other party” proceed remedial design remedial action “rdra” head hylebos two parties proceed rdra balance waterway unilateral administrative order head hylebos waterway converted voluntary consent decree 2004 pursuant company party agreed remediate head hylebos waterway second phase dredging head hylebos waterway began july 2004 company incurred remediation costs 16 million fiscal 2005 company’s cost estimates based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company recorded environmental charges 14 million fiscal 2005 primarily account additional estimated costs complete work second dredging season company party incurred additional remediation costs 7 million fiscal 2006 company party filed complaint us district court western district washington tacoma dredge contractor recover damages significant portion cost overruns incurred second dredging season complete project following trial concluded february 2007 jury awarded company party damages amount 6 million judgment appealed dredge contractor enforcement judgment stayed pending appeal accrual reduction liabilities recorded legal options resolved award certain deemed collectible company party also pursued settlement negotiations legal actions nonsettling nonperforming prps recover recovered additional amounts august 31 2008 environmental reserves hylebos waterway aggregated 3 million portland harbor fiscal 2006 company notified epa cercla one least 69 prps operate formerly owned operated sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup schnitzer steel industries inc form 10k 2008 67 schnitzer steel industries inc notes consolidated financial statements allocation costs cleanup among responsible parties yet determined unclear whether extent company liable environmental costs damages associated superfund site also unclear extent natural resource damage claims third party contribution damage claims asserted company participated certain preliminary portland harbor study efforts parties consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study however company could become liable share costs study later stage proceedings fiscal 2006 company received letters lwg one members respect participating lwg remedial investigationfeasibility study “rifs” demands various parties connection environmental response costs allegedly incurred investigating contamination portland harbor superfund site effort develop coordinated strategy response demands company joined twenty newlynoticed parties form blue water group “bwg” members bwg declined join lwg result discussions bwg lwg epa department environmental quality “deq” regarding potential cash contribution rifs certain members bwg including company agreed interim settlement lwg company would contribute toward bwg’s total settlement amount deq performing investigations involving company sites focused controlling current releases contaminants willamette river january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined agreement agreed pay 100000 costs cost investigations remediation associated properties reasonably estimable completion data review investigations conducted lwg natural resource damage trustees fiscal 2006 company recorded liability estimated share costs investigation incurred lwg date company’s estimated share costs considered material company reserved 1 million investigation costs portland harbor metals recycling business sites fiscal 2006 2007 2008 company conducted environmental due diligence investigations connection hnc regional mrl mrb acquisitions result investigations company identified certain environmental risks accrued share estimated costs remediate risks reserves recorded part purchase accounting acquisitions environmental compliance enforcement proceedings pending respect sites august 31 2008 environmental reserves theses sites aggregated 15 million company’s environmental reserves also include approximately 6 million potential future cleanup sites company subsidiaries conducted business allegedly disposed materials auto parts business fiscal 2003 fiscal 2008 company completed five acquisitions businesses within apb segment time acquisition company conducted environmental due diligence investigations related locations involved acquisition apb recorded reserve estimated cost address environmental matters identified result investigations reserve evaluated quarterly according company policy august 31 2008 environmental reserves apb aggregated 17 million includes environmental reserve 5 million greenleaf acquisition environmental enforcement proceedings pending respect sites 68 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships via specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit first issued fiscal 1998 since renewed fiscal 2012 permit allows smb produce 950000 tons billets per year allows varying rolling mill production levels based levels emissions contingenciesother october 16 2006 company finalized settlements doj sec resolving investigation related past practice making improper payments purchasing managers company’s customers asia connection export sales recycled ferrous metal settlement company agreed deferred prosecution agreement doj “deferred prosecution agreement” agreed order issued sec instituting ceaseanddesist proceedings making findings imposing ceaseanddesist order pursuant section 21c securities exchange act 1934 “order” deferred prosecution agreement doj prosecute company meets conditions agreement period three years including among things company engage compliance consultant advise compliance officer board directors company’s compliance program order company agreed ceaseanddesist past practices subject investigation disgorge 8 million profits prejudgment interest order also contains provisions comparable deferred prosecution agreement regarding engagement compliance consultant addition settlement company’s korean subsidiary ssi international far east ltd pled guilty foreign corrupt practices act antibribery books records provisions conspiracy wire fraud charges paid fine 7 million amounts accrued fiscal 2006 paid first quarter fiscal 2007 investigation settlement first quarter fiscal 2007 affect company’s previously reported financial results settlement company agreed cooperate fully ongoing related doj sec investigations company incurred expenses may incur expenses connection advancement funds indemnification individuals involved investigations terms corporate bylaws company obligated indemnify current former officers directors involved civil criminal investigative matters connection service company also obligated advance fees expenses persons advance final disposition matters involved officer director affirms good faith belief entitlement indemnification undertakes repay advance ultimately determined court person entitled indemnified company also option indemnify employees advance fees expenses involved employees furnish company written affirmation undertaking limit indemnification payments company could required make provisions company record liability indemnification obligations based fact employmentrelated costs time company believe indemnity payments company may required make material note 12 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees companies plans include defined benefit plan supplemental executive retirement benefit plan defined contribution plans multiemployer pension plans company currently uses august 31 measurement date pension postretirement plans schnitzer steel industries inc form 10k 2008 69 schnitzer steel industries inc notes consolidated financial statements defined benefit pension plan supplemental executive retirement benefit plan “serbp” certain nonunion employees company maintains defined benefit pension plan effective june 30 2006 company made decision freeze defined benefit plan cease accrual benefits defined benefit plan freeze qualified plan curtailment sfas 88 “employers’ accounting settlements curtailments defined benefit plans termination benefits” “sfas 88” accordance sfas 88 company recognized insignificant curtailment loss equal unrecognized prior service cost associated years service longer expected rendered result curtailment addition company adopted nonqualified serbp certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund classified assets pension liability classified longterm liabilities trust fund assets’ stock market gains losses included income expense unfunded plan contributions defined benefit payments made plan beneficiaries company adopted sfas 158 august 31 2007 defined benefit pension plan serbp upon adoption sfas 158 fiscal 2007 company recorded decrease 2 million assets net pension asset longterm increase 05 million deferred income tax asset decrease 04 million longterm liabilities decrease 1 million accumulated comprehensive income sfas 158 requires entity recognize statement financial position asset defined benefit pension postretirement benefit plans overfunded status liability plan’s underfunded status ii measure defined benefit pension postretirement benefit plan’s assets obligations determine funded status end employer’s fiscal year iii recognize changes funded status defined benefit pension postretirement benefit plans comprehensive income year changes occur requirement measure plan assets benefit obligations date fiscal yearend statement financial position consistent company’s current accounting treatment following adoption sfas 158 additional minimum pension liabilities related intangible assets longer recognized plan assets valued market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 thousands 70 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements estimated amount actuarial loss expected recognized net periodic cost fiscal 2009 thousands components net periodic pension benefit cost august 31 thousands weightedaverage assumptions used determine projected accumulated pension benefit obligations defined benefit pension plan serbp follows august 31 weightedaverage assumptions used determine net periodic pension benefit cost defined benefit pension plan serbp follows years ended august 31 determine expected longterm rate return pension plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company applies expected rate return market related value assets reduces underlying variability assets company applies expected return company amortizes gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees schnitzer steel industries inc form 10k 2008 71 schnitzer steel industries inc notes consolidated financial statements actuarial assumptions primary actuarial assumptions determined follows • expected longterm rate return plan assets based company’s estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate • assumed discount rate used discount future benefit obligations back today’s dollars discount rate reflective yield rates us longterm investment grade corporate bonds around august 31 valuation date rate sensitive changes interest rates decrease discount rate would increase company’s obligation expense • effective june 30 2006 company ceased accrual benefits defined benefit plan thus expected rate compensation increase longer applicable calculating benefit obligations plan asset allocations company’s asset allocation defined benefit pension plan based primary goal maximizing investment returns long term minimizing volatility plans’ funded status company’s net periodic pension cost time company invested diversified portfolio provide balance returns risk effort quantify allocation company’s plan committee established target guideline used determining investment mix company recognizes asset allocation pension plans’ assets important factor determining longterm performance actual asset allocations point time may vary specified targets result current anticipated market conditions required cash flows investment decisions company’s plan committee pension plans’ investment funds managers ranges established provide flexibility asset allocation vary around targets without need immediate rebalancing table shows company’s target allocation range along actual allocations defined benefit pension plan august 31 company set target allocations serbp table exhibits accumulated benefit obligation measured august 31 thousands 72 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements contributions company made 2 million contributions defined benefit pension plan 150000 contributions serbp fiscal 2008 company expects make contribution 150000 serbp fiscal 2009 contributions expected made defined benefit pension plan fiscal 2009 however changes discount rate actual investment returns lower longterm expected return plan assets could result company making additional contributions estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid thousands defined contribution plans company several defined contribution plans covering nonunion employees contributions plans totaled 7 million 4 million 2 million fiscal 2008 2007 2006 respectively multiemployer pension plans accordance collective bargaining agreements company contributed 4 million 4 million 3 million per year multiemployer pension plans fiscal 2008 2007 2006 company sponsor administrator multiemployer plans contributions determined accordance provisions negotiated labor contracts company contingent liabilities share unfunded liabilities plan contributes company’s contingent liability plan would triggered withdraw plan company current intention withdrawing plans company unable determine relative portion estimate future liability plans note 13 sharebased compensation company adopted 1993 stock incentive plan “the plan” employees consultants directors pursuant provisions plan amended company authorized issue 72 million shares class common stock awards issued plan 2006 annual meeting shareholders company’s shareholders approved amendments plan authorize grant performancebased longterm incentive awards “performancebased awards” plan would eligible treatment performancebased compensation section 162m internal revenue code 1986 b increase peremployee limit grants options stock appreciation rights plan 100000 shares 150000 shares annually amendments include increase number shares reserved issuance plan share based compensation expense recognized 14 million 9 million 3 million years ended august 31 2008 2007 2006 respectively tax benefits realized option exercises vesting restricted stock units 2 million 2 million 4 million fiscal 2008 2007 2006 respectively schnitzer steel industries inc form 10k 2008 73 schnitzer steel industries inc notes consolidated financial statements stock options plan stock options granted employees exercise prices equal fair market value company’s stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model “blackscholes” utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected lives grants based historical exercise patterns postvesting termination behavior options granted fiscal 2008 2007 fair value stock options granted year ended august 31 2006 determined using blackscholes model following assumptions summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options 74 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements august 31 2008 total number unvested stock options 140000 shares aggregate intrinsic value stock options exercised 2 million 4 million 12 million years ended august 31 2008 2007 2006 respectively represents difference exercise price value company’s stock time exercise total fair value stock options vested fiscal years ended august 31 2008 2007 2006 1 million 1 million 2 million respectively company recognized compensation expense associated stock options 1 million 3 million 2 million fiscal 2008 2007 2006 respectively august 31 2008 total unrecognized compensation costs related stock options amounted 2 million company expects recognize costs weightedaverage period 16 years total proceeds received option exercises years ended august 31 2008 2007 2006 1 million 2 million 4 million respectively tax benefits realized options exercised amounted less 1 million fiscal 2008 1 million fiscal 2007 4 million fiscal 2006 restricted stock units connection approval stock option awards compensation committee july 25 2006 committee authorized company permit option grantees elect receive value option awards restricted shares class common stock company october 2006 company commenced tender offer recipients july 25 2006 option grants allowed exchange options rsu awards 21 basis exchange ratio determined equivalent blackscholes pricing model rsu awards vest schedule options granted july 25 2006 close tender offer november 6 2006 stock options 272000 shares exchanged 136000 rsu awards estimated fair value rsus issued november 7 2006 5 million based market closing price underlying class common stock november 6 2006 3765 result exchange company estimated incremental compensation expense 541000 recognized remaining portion fiveyear vesting term rsus june 27 2007 compensation committee granted 50000 rsus executive officer another officer terms employment agreements vest 25 june 2007 25 june 2008 50 june 2009 vesting 25000 shares based continued employment remaining 25000 shares vest based performance metrics approved committee estimated fair value rsus issued june 27 2007 2 million based market closing price underlying class common stock june 27 2007 4725 august 9 2007 compensation committee granted 104000 rsus key employees officers plan rsu awards fiveyear term vest 20 per year commencing june 1 2008 committee also approved amendments definition term “disability” existing rsu award agreements estimated fair value rsu awards granted august 9 2007 5 million based market closing price underlying class common stock august 9 2007 5134 july 29 2008 compensation committee granted 75000 rsus key employees officers plan rsus fiveyear term vest 20 per year commencing june 1 2009 estimated fair value rsus granted july 29 2008 7 million based market closing price underlying class common stock july 29 2008 8752 schnitzer steel industries inc form 10k 2008 75 schnitzer steel industries inc notes consolidated financial statements summary company’s restricted stock unit activity follows 1 amounts represent value company’s stock date restricted stock units vested company recognized compensation expense associated rsus 4 million 2 million fiscal 2008 2007 respectively august 31 2008 total unrecognized compensation costs related unvested rsus amounted 12 million expected recognized weightedaverage period 33 years tax benefits realized rsus vested 1 million fiscal 2008 less 1 million fiscal 2007 performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company business segments participant works awards paid class common stock soon practicable october 31 following end performance period fiscal 2006 2008 performance share awards november 29 2005 company’s compensation committee approved performancebased awards plan compensation committee approved additional awards terms two executive officers one officer division january 30 2006 april 28 2006 respectively compensation committee established series performance targets include company’s total shareholder return “tsr” performance period relative sp 500 industrials weighted 50 “tsr awards” operating income per ton mrb performance period weighted 16 23 number economic value added “eva” positive stores apb last year performance period weighted 16 23 man hours per ton smb performance period weighted 16 23 corresponding award payouts ranging 25 200 weighted portions target awards “performance awards” collectively participants work exclusively one business segment awards weighted 50 performance measure segment 50 total shareholder return fair value performance awards granted period determined multiplying total number shares expected issued company’s closing stock price date grant recognized requisite service period 29 years weighted average fair value performance awards granted fiscal 2006 3427 76 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements fair value tsr awards granted year ended august 31 2006 determined using monte carlo simulation model following assumptions accordance provisions sfas 123r compensation expense related tsr awards market conditions recognized requisite service period adjusted requisite service rendered fiscal 2007 2009 performance share awards november 27 2006 company’s compensation committee approved performancebased awards plan compensation committee established series performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period corresponding award payouts ranging threshold 50 maximum 200 weighted portions target awards measuring earnings per share growth fiscal 2007 compensation committee set fiscal 2006 diluted earnings per share amount lower actual amount reflecting elimination certain large nonrecurring items weighted average grant date fair value performance awards granted fiscal 2007 3972 fiscal 2008 2010 performance share awards october 31 2007 company’s compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards weighted average grant date fair value performance awards granted fiscal 2008 6382 performance awards activity plan fiscal 2008 follows performance share awards compensation expense associated performance share awards fiscal 2008 2007 calculated using management’s current estimate performance targets plan compensation expense anticipated awards based company’s financial performance 8 million 3 million 1 million 2008 2007 2006 respectively august 31 2008 unrecognized compensation costs related nonvested performance shares amounted 10 million expected recognized weightedaverage period 16 years schnitzer steel industries inc form 10k 2008 77 schnitzer steel industries inc notes consolidated financial statements deferred stock units july 26 2006 compensation committee approved deferred compensation plan nonemployee directors conjunction authorizing issuance deferred stock units “dsus” nonemployee directors form restricted stock awards approved board july 2005 dsus granted plan one dsu gives director right receive one share class common stock future date annually immediately following annual meeting shareholders commencing 2007 annual meeting nonemployee director receive dsus become fully vested day next annual meeting subject continued service board dsus also become fully vested death disability director change control company defined dsu award agreement dsus vest directors credited additional whole fractional shares reflect dividends would paid stock subject dsus company issue class common stock director pursuant vested dsus lump sum january director ceases director company subject right director elect installment payment program company’s deferred compensation plan nonemployee directors order move cycle granting nonemployee director equity awards year june cycle granting awards january time annual meeting company granted onetime award dsus nonemployee director effective august 31 2006 onetime grants number dsus equal 43750 65625 chairman board divided closing market price class common stock august 31 2006 august 31 2006 total number dsus granted 14000 shares dsus vested january 31 2007 january 31 2007 nonemployee director received dsus equal 87500 131250 chairman board divided closing market price class common stock january 31 2007 total number dsus granted january 31 2007 23864 shares dsus vested january 29 2008 compensation expense associated dsus granted recognized respective requisite service periods awards january 30 2008 nonemployee director received dsus equal 87500 131250 chairman board divided closing market price class common stock january 31 2007 total number dsus granted january 30 2008 16406 shares dsus become fully vested day 2009 annual meeting subject continued board service compensation expense associated dsus granted recognized respective requisite service periods awards april 29 2008 compensation committee revised compensation structure nonemployee directors including amount annual dsu awards granted director connection adoption revised compensation structure company granted one time dsu award nonemployee director equal 32500 48750 chairman board divided closing market price class common stock april 29 2008 total number dsu awards granted april 29 2008 3950 shares become fully vested day 2009 annual meeting subject continued board service company start granting dsus august 31 2006 company recognized compensation expense associated dsus 1 million fiscal 2008 fiscal 2007 78 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements note 14 income taxes income tax expense benefit consisted following august 31 thousands income tax expense differs amount would result applying us statutory rate earnings taxes reconciliation difference august 31 follows deferred tax assets liabilities comprised following august 31 thousands schnitzer steel industries inc form 10k 2008 79 schnitzer steel industries inc notes consolidated financial statements deferred taxes include benefits expected realized use net operating loss carryforwards “nols” acquired proler international corp “pic” acquisition fiscal 1996 greenleaf acquisition fiscal 2006 august 31 2008 remaining balances two nols 3 million 11 million respectively annual use nols limited section 382 internal revenue code unused nols pic expire fiscal 2012 nols greenleaf expire fiscal 2024 company also state tax credits expire 2010 2020 valuation allowance 1 million recorded august 31 2008 state tax credits expected expire unused future realization remaining deferred tax assets dependent upon generating sufficient taxable income prior expiration remaining state tax credits net operating loss carryforwards although realization assured management believes likely recorded deferred tax asset net valuation allowance provided realized fin 48 company adopted fasb interpretation 48 “accounting uncertainty income taxes interpretation fasb statement 109” “fin 48” september 1 2007 fin 48 clarifies accounting uncertainty income taxes recognized accordance sfas 109 “accounting income taxes” fin 48 applies morelikelythannot recognition threshold tax uncertainties allows recognition tax benefits greater 50 likelihood sustained upon examination taxing authorities september 1 2007 adoption fin 48 resulted 3 million increase reserve unrecognized tax benefits unrecognized tax benefits represent aggregate tax differences tax return positions benefits recognized financial statements 3 million increase partially offset 2 million increase deferred tax assets cumulative effect 1 million decrease retained earnings september 1 2007 upon adoption balance reserve unrecognized tax benefits totaled 5 million included 1 million interest penalties august 31 2008 company reserve 7 million unrecognized tax benefits included 1 million interest penalties following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties thousands company’s policy record taxrelated penalties interest income tax expense recognition unrecognized tax benefits august 31 2008 would reduce income tax expense 5 million company anticipate material changes reserve next 12 months company files federal state income tax returns united states foreign tax returns canada federal statute limitations expired fiscal years 2003 prior limited insignificant exceptions company longer subject state foreign tax examinations years fiscal 2003 company currently examination major tax jurisdictions 80 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements note 15 earnings dividends per share following table sets forth reconciliation basic net income per share diluted net income per share years ended august 31 thousands except per share amounts company accounts earnings per share accordance sfas 128 “earnings per share” basic earnings per share computed dividing net income weighted average number common shares outstanding periods presented vested dsus diluted earnings per share computed using net income weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method fiscal 2008 rsus totaling 75000 shares considered antidilutive excluded calculation diluted earnings per share fiscal 2007 fiscal 2006 stock options totaling 200000 600000 shares considered antidilutive respectively note 16 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 52 million 19 million 12 million fiscal 2008 2007 2006 respectively advances joint ventures 3 million 2 million august 31 2008 2007 respectively thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company partnership operates four selfservice stores northern california mr klauer’s 25 share profits partnership totaled 2 million fiscal 2008 1 million fiscal 2007 2006 mr klauer also owns property one stores leased partnership lease providing annual rent 233000 subject annual adjustments based consumer price index term expiring december 2010 partnership option renew lease upon expiration fiveyear period addition fiscal 2008 company loaned partnership 5 million fund exercise option purchase property occupied partnership loan bears interest market rate partnership prohibited making distributions partners loan repaid february 2008 company acquired remaining 50 equity interest picknpull auto dismantlers llc nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity refer note 7 business combinations certain shareholders company significant interests related owners entities discussed entities considered related parties financial reporting purposes transactions schnitzer family including schnitzer family companies require approval company’s audit committee company compliance policy schnitzer steel industries inc form 10k 2008 81 schnitzer steel industries inc notes consolidated financial statements schnitzer investment corp “sic” real estate company owns develops manages various commercial residential real estate projects owned members schnitzer family collectively controlling shareholders company ownership class b common stock company previously leased administrative offices sic operating lease sic sold building unrelated party first quarter fiscal 2008 gary schnitzer gregory schnitzer joshua philip member schnitzer family employed company year ended august 31 2008 members schnitzer family collectively earned total compensation 2 million compared 3 million year ended august 31 2007 note 17 segment information company operates three reportable segments metal purchasing processing recycling selling trading mrb minimill steel manufacturing smb selfservice fullservice used auto parts apb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb produces rebar coiled rebar merchant bar wire rod specialty products apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb intersegment sales mrb smb made rates approximate west coast export market prices addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity operating segments unallocated expense operating income segment reflect operating income segment would standalone business 82 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements tables illustrate company’s operating results segment years ended august 31 thousands 1 mrb total assets include 12 million investment equity method joint ventures schnitzer steel industries inc form 10k 2008 83 schnitzer steel industries inc notes consolidated financial statements longlived assets consist primarily net property plant equipment substantially company’s longlived assets located us following revenues presented geographic area based country sales destination year ended august 31 thousands fiscal 2008 2007 2006 external customers accounted 10 company’s consolidated revenues sales foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 84 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc notes consolidated financial statements quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts schnitzer steel industries inc form 10k 2008 85 schedule ii valuation qualifying accounts years ended august 31 2008 2007 2006 thousands 86 schnitzer steel industries inc form 10k 2008 schnitzer steel industries form 10k item 9item 8 financial statements supplementary data index consolidated financial statements schedules exhibits omitted information applicable required 52 schnitzer steel industries inc form 10k 2009 management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2009 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2009 stated report included herein tamara l lundgren richard peach president chief executive officer chief financial officer october 27 2009 october 27 2009 schnitzer steel industries inc form 10k 2009 53 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2009 2008 results operations cash flows three years period ended august 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed notes 2 13 consolidated financial statements company changed manner accounts defined benefit pension postretirement plans august 31 2007 discussed note 15 consolidated financial statements company changed manner accounts uncertain tax positions september 1 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon october 27 2009 54 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts see notes consolidated financial statements schnitzer steel industries inc form 10k 2009 55 schnitzer steel industries inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc consolidated statements shareholders’ equity thousands see notes consolidated financial statements schnitzer steel industries inc form 10k 2009 57 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements 58 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation currently one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reportable segments include metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb purchases collects processes recycles sells brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice fullservice used auto parts networks additionally apb supplier autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products company provides end life cycle solution variety products vertically integrated businesses including sale used auto parts procuring autobodies metal products manufacturing finished steel products august 31 2009 company’s facilities located us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries addition company holds 50 interest five joint ventures accounted equity method significant intercompany account balances transactions profits losses eliminated august 31 2009 2008 2007 fair value financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable deferred compensation liabilities debt carrying amounts financial instruments approximate fair value including debt consists primarily variable interest rate notes company uses market approach value financial assets liabilities determined using available market information fair value disclosures included note 12 derivative financial instruments fair value measurements allocation acquisition purchase price company allocates purchase price acquisitions identified tangible intangible assets acquired liabilities assumed based estimated fair values date acquisition residual amounts allocated goodwill addition company accrues contingent purchase price consideration outcome contingency deemed probable date acquisition cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 23 million 51 million august 31 2009 2008 respectively restricted cash august 2006 company deposited custody account 8 million connection expected settlement investigations us department justice “doj” staff us securities exchange commission “sec” interest amount deposited accrued benefit company recognized interest income earned deposited funds released sec october 2006 upon completion settlement see note 11 commitments contingencies accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear schnitzer steel industries inc form 10k 2009 59 schnitzer steel industries inc notes consolidated financial statements interest company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends allowance doubtful accounts 8 million 3 million august 31 2009 2008 respectively inventories net company’s inventories primarily consist ferrous nonferrous unprocessed metal ferrous processed metal nonferrous recovered joint product used salvaged vehicles semifinished billets finished steel products consisting rebar coiled rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle selfservice business capitalizes vehicle cost inventory fullservice business capitalizes vehicle cost dismantling applicable storage towing fees inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance human resources yard costs company evaluates whether inventory properly valued lower cost market quarterly basis company considers estimated future selling prices determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred capitalized interest fiscal 2009 2008 material assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized estimated useful lives property remaining lease term whichever less august 31 2009 useful lives used depreciation amortization follows 60 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements impairment longlived assets company estimates future undiscounted cash flows derived asset assess whether potential impairment exists certain triggering events circumstances indicate carrying value longlived asset may impaired carrying value exceeds company’s estimate future undiscounted cash flows company records impairment difference carrying amount fair value asset material adjustments carrying value longlived assets years ended august 31 2009 2008 2007 goodwill intangibles goodwill represents excess purchase price estimated fair value net tangible intangible assets acquired entities company evaluates goodwill intangibles indefinite life annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill indefinite lived intangible assets may impaired impairment goodwill tested reporting unit level company’s reporting units goodwill allocated equivalent company’s operating segments components respective segments similar economic characteristics goodwill impairment test follows two step process first step fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value allocation similar purchase price allocation carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess event divestiture business unit within reporting unit goodwill reporting unit allocated business unit based fair value unit divested total fair value reporting unit gain loss determined remaining goodwill reporting unit assets divested subsequently reevaluated impairment company estimates fair value reporting segments using income approach based present value expected future cash flows utilizing risk adjusted discount rate estimate cash flows extend beyond final year discounted cash flow model company employs terminal value technique whereby company uses estimated operating cash flows minus capital expenditures adjusts changes working capital requirements final year model discounts risk adjusted discount rate establish terminal value company includes present value terminal value fair value estimate given market prices company’s reporting units readily available company makes various estimates assumptions determining estimated fair values reporting units forecasts future cash flows based management’s best estimate future sales operating costs pricing expectations general market conditions addition company tests indefinitelived intangibles impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed intangible asset carrying value longer considered recoverable company record impairment october 2 2009 company entered definitive agreement sell company’s fullservice used auto parts operation operated part apb reporting unit company identified divestiture triggering event resulted testing goodwill impairment based company’s valuation analysis performed relation divestiture fullservice operations company determined goodwill related apb impaired company continue monitor goodwill indefinitelived intangible longlived assets possible future impairment refer note 8 goodwill intangibles assets detail schnitzer steel industries inc form 10k 2009 61 schnitzer steel industries inc notes consolidated financial statements accrued worker’s compensation costs company selfinsured maximum amount worker’s compensation claims reserve costs unpaid claims estimated costs incurred reported claims estimated balance sheet date company’s exposure claims protected various stoploss insurance policies estimate reserve based historical claim experience august 31 2009 2008 company accrued 6 million estimated cost worker’s compensation claims environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures reserves established made wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery actually realized amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available fair value measurements september 1 2008 company adopted accounting standards define fair value fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets • level 2 directly indirectly observable market data • level 3 unobservable inputs market data correlation company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available developing fair value measurements company’s financial instrument subject fair value measurement outstanding natural gas contract smb measured fair value using model derived observable market data model considers various inputs including quoted futures prices commodities b time value c company’s credit risk well relevant economic measures impact adopting standard reflected company’s consolidated financial statements fiscal 2009 refer note 12 derivative financial instruments fair value measurements detail derivatives company’s natural gas contract supply smb minimill classified derivative discussed fair value measurements company’s accounting policies instruments based whether instruments designated hedge nonhedge instruments derivative instruments recorded consolidated balance sheets fair value either assets liabilities unless designated qualify normal purchases normal sales exemption derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales pursuant exemption contracts qualify normal purchases normal sales markedtomarket 62 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements available quoted market prices obtained external sources used measure contract’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts foreign currency translation transactions assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period translation adjustments included determining net income loss period recorded separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally required recognized determination net income loss period company records gains losses income expense net realized unrealized foreign currency transaction gains year ended august 31 2009 less 1 million aggregate amounts net realized unrealized foreign currency transaction gains 1 million 2 million years ended august 31 2008 2007 respectively common stock share class common stock entitled one vote share class b common stock entitled ten votes additionally share class b common stock may converted one share class common stock shareholder rights plan march 21 2006 company adopted shareholder rights plan “rights plan” rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” schnitzer steel industries inc voting trust trustees capacity trustees deemed beneficially common stock virtue bound voting trust agreement governing trust right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weightedaverage cost shares par value stock adjustment additional paidincapital revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers upon shipment based shipping terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment retail sales apb revenues recognized customers pay parts wholesale products shipped customer location additionally company recognizes revenues schnitzer steel industries inc form 10k 2009 63 schnitzer steel industries inc notes consolidated financial statements partially loaded shipments detailed documents support revenue recognition based transfer title risk loss historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises see note 15 income taxes concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable derivative financial instruments used hedging activities majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded fdic insurance amount 250000 august 31 2009 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits monitoring procedures company also exposed credit loss event nonperformance counterparties foreign exchange contracts used hedging activities counterparties large international financial institutions date counterparty failed meet financial obligations company anticipate nonperformance counterparties addition company exposed credit risk respect open letters credit shipments foreign customers supported letters credit company 99 million 153 million open letters credit august 31 2009 2008 respectively earnings per share basic earnings per share computed using weighted average number common shares outstanding period diluted earnings per share incorporates incremental dilutive effect stock options restricted stock units “rsu’s” stock based awards certain company’s stock options rsus performance share awards excluded calculation diluted earnings per share antidilutive options awards could dilutive future see note 16 earnings dividends per share sharebased compensation company recognizes sharebased compensation cost relating sharebased payment transactions vesting period cost measured based estimated fair value equity instruments issued see note 14 sharebased compensation detail pension postretirement benefit plans company sponsors defined benefit pension plan certain nonunion employees pension benefits based formulas reflect employees’ expected service periods based terms plan impact company’s investment funding decisions 64 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements company reflects funded status defined benefit pension postretirement benefit plans net asset net liability statement financial position offsetting amount accumulated comprehensive income recognizes changes funded status year changes occur comprehensive income see note 13 employee benefits use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies intangible asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts reclassifications certain prior year amounts reclassified within current assets current liabilities operating expenses cash flows operating activities conform current year presentation changes impact previously reported operating income net income shareholders’ equity cash flows operating activities note 3 recent accounting pronouncements december 2007 fasb issued sfas 141r “business combinations” “sfas 141r” replaces sfas 141 issued sfas 160 “noncontrolling interests consolidated financial statements” “sfas 160” amendment arb 51 two new standards change accounting reporting business combination transactions noncontrolling minority interests consolidated financial statements respectively sfas 141r change business acquisitions accounted impact financial statements acquisition date subsequent periods sfas 160 change accounting reporting minority interests recharacterized noncontrolling interests classified component equity two standards effective company fiscal year beginning september 1 2009 sfas 141r applied prospectively business combinations completed fiscal 2010 beyond company retrospectively apply applicable classification presentation provisions sfas 160 requirements sfas 160 shall applied prospectively early adoption prohibited standards february 2008 fasb issued fasb staff position “fsp” 1572 “effective date fasb statement 157” delays effective date sfas 157 nonrecurring nonfinancial assets liabilities fiscal year beginning september 1 2009 company’s significant nonfinancial assets liabilities could impacted deferral include assets liabilities initially measured fair value business combination goodwill tested annually impairment although believe adoption may impact way determine fair value goodwill indefinitelived intangible assets longlived assets company expect material impact company’s consolidated financial position results operations cash flows april 2008 fasb issued fsp 1423 “determination useful life intangible assets” amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” fsp 1423 must applied prospectively intangible assets acquired subsequent fiscal years beginning december 15 2008 interim periods within fiscal years standard effective company fiscal year beginning september 1 2009 early adoption prohibited fsp 1423 expected material impact company’s consolidated financial position results operations cash flows december 2008 fasb issued fsp 132r1 “employers’ disclosures postretirement benefit plan assets” provides guidance employer’s disclosures plan assets defined benefit pension postretirement plan require additional disclosure regarding investment policies strategies fair value schnitzer steel industries inc form 10k 2009 65 schnitzer steel industries inc notes consolidated financial statements major asset category based risks assets inputs valuations techniques used estimate fair value fair value measurement hierarchy levels sfas 157 asset category significant concentration risk information standard effective company fiscal year ending august 31 2010 fsp 132r1 enhance provide visibility company’s footnote disclosures surrounding plan assets company’s defined benefit pension plan april 2009 fasb issued fsp 1574 “determining fair value volume level activity asset liability significantly decreased identifying transactions orderly” fsp 1574 amends sfas 157 provides additional guidance estimating fair value accordance sfas 157 volume level activity asset liability significantly decreased also includes guidance identifying circumstances indicate transaction orderly fair value measurements fsp 1574 required applied prospectively retrospective application prohibited standard effective company fiscal period ending august 31 2009 material impact company’s consolidated financial position results operations cash flows june 2009 fasb issued sfas 168 “the fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162” fasb accounting standards codification become source authoritative us generally accepted accounting principles gaap applied nongovernmental entities rules interpretive releases securities exchange commission sec authority federal securities laws also sources authoritative gaap sec registrants effective date statement codification supersede thenexisting nonsec accounting reporting standards nongrandfathered nonsec accounting literature included codification become nonauthoritative standard became effective company september 15 2009 adoption sfas 168 expected material impact company’s consolidated financial position results operations cash flows note 4 inventories net inventories consisted following august 31 thousands company makes certain assumptions regarding future demand net realizable value order assess inventory properly recorded lower cost market assumptions based historical experience current information due reduced production levels fiscal 2009 company recognized 19 million expense fiscal 2009 production costs could capitalized inventory 66 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment 56 million 48 million 39 million fiscal 2009 2008 2007 respectively note 6 investment advances joint ventures august 31 2009 company five joint venture interests accounted equity method accounting presented part mrb operations following tables present summarized unaudited financial information company’s joint ventures company partner thousands company’s investment equity method joint venture investments resulted cumulative undistributed earnings 9 million 12 million august 31 2009 2008 respectively included part partners’ equity joint ventures schnitzer steel industries inc form 10k 2009 67 schnitzer steel industries inc notes consolidated financial statements note 7 business combinations fiscal 2009 company continued growth strategy completing acquisition four entities remaining 25 equity interest entity company previously 75 ownership interest total consideration 96 million acquisitions follows • december 2008 company completed acquisition metals recycler washington provide additional source scrap metal mrb’s tacoma washington export facility • february 2009 company completed acquisition metals recycler puerto rico acquisition expanded company’s presence new region increased company’s processing capability provided new sources scrap metal access international export facilities • february 2009 company acquired additional 1666 equity interest auto parts business located california april 2009 acquired remaining 834 minority equity interest business thus increasing company’s equity ownership business 100 acquired equity previously consolidated company’s financial statements company maintained operating control entity • february 2009 company completed acquisition selfservice used auto parts business two locations california acquisition provided additional sources used auto parts • march 2009 company completed acquisition metals recycler nevada provide additional source scrap metal mrb’s oakland california export facility purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 61 million recorded goodwill 14 million expected deductible tax purposes following summary aggregate fair values assets acquired liabilities assumed acquisitions completed fiscal 2009 thousands 68 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements following table presents aggregate intangible assets related lives associated purchase acquisitions discussed following unaudited pro forma summary presents effect businesses acquired fiscal 2009 though businesses acquired beginning periods presented thousands pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations fiscal 2008 company completed following acquisitions • september 2007 company acquired mobile metals recycling business provides additional sources scrap metal mrb’s everett massachusetts facility • company acquired two metals recycling businesses november 2007 one metals recycling business february 2008 expanded company’s presence southeastern us • february 2008 company acquired remaining 50 equity interest auto parts business located nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity • august 2008 company acquired selfservice used auto parts business three locations southern us fiscal 2007 company completed following acquisitions • december 2006 company acquired metals recycling business provide additional sources scrap metal megashredder everett massachusetts • may 2007 company acquired two metals recycling businesses separately provide scrap metal mrb’s everett massachusetts tacoma washington facilities schnitzer steel industries inc form 10k 2009 69 schnitzer steel industries inc notes consolidated financial statements acquisitions completed fiscal 2008 fiscal 2007 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2008 2007 acquisitions presented since aggregate results would significantly different reported results company paid premium ie goodwill fair value net tangible identified assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses enhance company’s regional market position • company anticipates cost savings efficiencies synergies note 8 goodwill intangible assets net changes carrying amount goodwill reporting segment years ended august 31 2009 2008 respectively follows thousands following table presents company’s intangible assets related lives august 31 thousands 70 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements total intangible asset amortization expense years ended august 31 2009 2008 2007 5 million 4 million 2 million respectively estimated amortization expense based current intangible asset balances next five fiscal years beginning september 1 2009 follows thousands note 9 shortterm borrowings company’s shortterm borrowings consist primarily one year unsecured uncommitted 25 million credit line wells fargo bank na expires march 2010 interest rates outstanding indebtedness unsecured line credit set bank time borrowing company borrowings outstanding facility august 31 2009 compared 25 million august 31 2008 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2009 2008 company compliance covenants note 10 longterm debt capital lease obligations longterm debt capital lease obligations consist following august 31 thousands company maintains 450 million revolving credit facility matures july 2012 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate “libor” plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 weighted average interest rate line 078 424 fiscal years ended august 31 2009 2008 respectively addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio august 31 2009 2008 company borrowings outstanding credit facility 100 million 150 million respectively schnitzer steel industries inc form 10k 2009 71 schnitzer steel industries inc notes consolidated financial statements bank credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2009 company compliance covenants principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates december 26 2026 rent expense 19 million 21 million 18 million fiscal 2009 2008 2007 respectively see discussion leases related parties note 17 related party transactions company’s steel manufacturing operations exposed market risk due variations market price natural gas result company uses derivative instruments specifically forward purchases manage inherent commodity price risks smb takeorpay natural gas contract expires may 31 2011 obligates purchase minimum quantities per day october 31 2010 whether amount utilized fair value natural gas contract determined using forward price curve based observable market price quotations major natural gas trading hub effective delivery period july 1 2008 october 31 2009 committed rate 1048 per million british thermal units “mmbtu” rate increases 1099 period november 1 2009 october 31 2010 marktomarket adjustments contract resulted derivative liability 6 million august 31 2009 related marktomarket expense recorded part cost goods sold income statement see note 12 derivative financial instruments fair value measurements disclosures smb also electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 72 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements table sets forth company’s future minimum obligations noncancelable operating leases unrelated parties service obligations purchase commitments august 31 2009 thousands contingenciesenvironmental company evaluates adequacy environmental liabilities quarterly basis accordance company policy adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures made reserves established changes company’s environmental liabilities thousands 1 fiscal 2009 company released 4 million environmental reserves primarily related resolution hylebos waterway litigation partially offset 2 million environmental liabilities recorded purchase accounting related acquisitions completed fiscal 2009 1 million new reserves metals recycling business august 31 2009 mrb’s environmental reserves 26 million consisted primarily reserves established connection potential future cleanup mrb locations company subsidiaries conducted business allegedly disposed certain materials various sites acquired acquisitions portland harbor fiscal 2006 company notified us environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one least 69 potentially responsible parties “prps” operate formerly owned operated sites adjacent portland harbor superfund site precise nature extent cleanup portland harbor parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined unclear extent company liable environmental costs damages associated portland harbor superfund site also unclear extent natural resource damage claims third party contribution damage claims asserted company participated certain preliminary portland harbor study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” schnitzer steel industries inc form 10k 2009 73 schnitzer steel industries inc notes consolidated financial statements remedial investigationfeasibility study however company could become liable share costs study later stage proceedings fiscal 2006 company received letters lwg one members respect participating lwg remedial investigationfeasibility study “rifs” demands various parties connection environmental response costs allegedly incurred investigating contamination portland harbor superfund site effort develop coordinated strategy response demands company joined twenty newlynoticed parties form blue water group “bwg” members bwg declined join lwg result discussions bwg lwg epa department environmental quality “deq” regarding potential cash contribution rifs certain members bwg including company agreed interim settlement lwg company contributed toward bwg’s total settlement amount deq performing investigations involving company sites focused controlling current releases contaminants willamette river separately january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined agreement agreed pay 100000 costs cost investigations remediation associated properties reasonably estimable completion data review investigations conducted lwg trustees fiscal 2006 company recorded liability estimated share costs investigation incurred lwg date august 31 2009 company reserved 1 million investigation costs portland harbor superfund site hylebos waterway fiscal 1982 company notified epa cercla one 60 prps investigation cleanup contaminated sediment along hylebos waterway march 25 2002 epa issued unilateral administrative orders company another party “other party” proceed remedial design remedial action “rdra” head hylebos two parties proceed rdra balance waterway unilateral administrative order head hylebos waterway converted voluntary consent decree 2004 pursuant company party agreed remediate head hylebos waterway second phase dredging head hylebos waterway began july 2004 company incurred remediation costs 16 million fiscal 2005 company’s cost estimates based assumption dredge removal contaminated sediments would accomplished within one dredge season july 2004 february 2005 however due variety factors including dredge contractor operational issues dredge related delays dredging completed first dredge season result company recorded environmental charges 14 million fiscal 2005 primarily account additional estimated costs complete work second dredging season company party incurred additional remediation costs 7 million fiscal 2006 company party filed complaint us district court western district washington tacoma dredge contractor recover damages significant portion cost overruns incurred second dredging season complete project following trial concluded february 2007 jury awarded company party damages amount 6 million first quarter fiscal 2009 judgment affirmed appeal company relieved liability amount 2 million related dredge contractor’s claim unpaid invoices recorded gain amount 3 million respect damages awarded august 31 2009 environmental reserves hylebos waterway aggregated less 1 million 74 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements metals recycling business sites company’s environmental reserves include approximately 24 million potential future cleanup mrb locations company subsidiaries conducted business allegedly disposed materials environmental compliance enforcement proceedings currently pending related sites auto parts business august 31 2009 company’s environmental reserves include 16 million potential future cleanup apb locations company subsidiaries conducted business allegedly disposed materials environmental compliance enforcement proceedings currently pending related sites steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit first issued fiscal 1998 since renewed fiscal 2012 permit allows smb produce 950000 tons billets per year allows varying rolling mill production levels based levels emissions smb environmental reserves august 31 2009 2008 2007 contingenciesother october 16 2006 company finalized settlements doj sec resolving investigation related past practice making improper payments purchasing managers company’s customers asia connection export sales recycled ferrous metal settlement company agreed deferred prosecution agreement doj “deferred prosecution agreement” agreed order issued sec instituting ceaseanddesist proceedings making findings imposing ceaseanddesist order pursuant section 21c securities exchange act 1934 “order” deferred prosecution agreement doj prosecute company meets conditions agreement period three years including among things company engage compliance consultant advise compliance officer board directors company’s compliance program settlement company agreed cooperate fully ongoing related doj sec investigations company anticipate future contingent losses associated settlement third quarter 2009 company recognized 7 million gain 2 million included operating income loss 5 million included income consolidated statement operations due settlement agreement resolve disputes arisen separation termination agreement relating dissolution company’s joint venture hugo neu september 2005 note 12 derivative financial instruments fair value measurements natural gas price risk management december 1 2008 company adopted additional derivative standards require enhanced disclosures company’s derivative hedging activities discussed order minimize volatility natural gas costs represented 2 smb’s cost goods sold fiscal 2009 2008 smb entered takeorpay natural gas contract obligates purchase minimum 3500 million british thermal units “btu” per day october 31 2009 minimum 2000 million btu per day thereafter whether amount utilized contract expires may 31 2011 obligates company purchase minimum quantities october 31 2010 whether amount used schnitzer steel industries inc form 10k 2009 75 schnitzer steel industries inc notes consolidated financial statements fair value measurement smb’s natural gas contract classified derivative instrument carried fair value fair value instrument impacted adoption fair value measurement standards determined using forward price curve based observable market price quotations major natural gas trading hub company considers nonperformance risk calculating fair value adjustments includes credit risk adjustment based credit spreads counterparty company unrealized gain position company’s credit spread company unrealized loss position assessment nonperformance risk generally derived credit default swap market bond market credit spreads impact credit risk adjustments company’s outstanding derivative material fair value calculation august 31 2009 marktomarket adjustments instrument resulted derivative liability 6 million august 31 2009 compared 4 million august 31 2008 amount classified level 2 fair value measurement fair value hierarchy described note 2 summary significant accounting policies derivative designated hedging instrument september 1 2008 company designated entire remaining portion natural gas contract cash flow hedge derivative instruments designated cash flow hedges must dedesignated hedges probable forecasted hedged transaction occur deferred gains losses comprehensive income associated derivative instruments immediately reclassified earnings extent forecasted transaction occur due changes expectation company’s future production result changes market conditions company dedesignated contract hedge redesignated portion 20000 million btu per month cash flow hedge october 2008 remaining portion contract accounted derivative designated hedge changes fair value cash flow hedge recorded comprehensive income “oci” extent hedge effective offsetting changes future cash flows forecasted natural gas purchase transactions amounts included accumulated comprehensive income “aoci” reclassified cost goods sold forecasted purchase transaction recognized earnings ineffectiveness arises hedge included accrued liabilities fair value designated hedge portion derivative 2 million august 31 2009 effective portion realized losses reclassified cost goods sold 1 million year ended august 31 2009 ineffective portion losses included cost goods sold less 1 million year ended august 31 2009 unrealized loss net tax effective portion hedge 1 million year ended august 31 2009 upon dedesignation cash flow hedge october 2008 1 million reclassified aoci cost goods sold existing unrealized losses net tax less 1 million currently recorded aoci expected reclassified cost goods sold within next 12 months derivatives designated hedges fiscal 2008 derivative designated hedging instrument portion natural gas contract designated hedge company recognizes change fair value cost goods sold period change included accrued liabilities fair value derivative designated hedge 4 million august 31 2009 2008 net losses 1 million 3 million 1 million recognized cost goods sold year ended august 31 2009 2008 2007 respectively note 13 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees companies plans include defined benefit plan supplemental executive retirement benefit plan “serbp” defined contribution plans multiemployer pension plans company currently uses august 31 measurement date pension postretirement plans 76 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements defined benefit pension plan supplemental executive retirement benefit plan “serbp” company maintains defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company also nonqualified serbp certain executives restricted trust fund established invested life insurance policies used plan benefits subject claims general creditors trust fund classified assets pension liability classified longterm liabilities trust fund assets’ stock market gains losses included income expense unfunded plan contributions defined benefit payments made plan beneficiaries company adopted defined benefit pension standards fiscal 2007 therefore recorded decrease 2 million assets net pension asset longterm increase 05 million deferred income tax asset decrease 04 million longterm liabilities decrease 1 million accumulated comprehensive income june 24 2009 company amended defined benefit pension plan incorporate new statutory minimum rules requiring use investment grade corporate yield rates calculating lump sum distributions plan employees lost previously earned pension benefit result amendment projected benefit obligation reduced 1 million plan assets valued market value represents fair value following table sets forth change benefit obligation change plan assets funded status august 31 thousands schnitzer steel industries inc form 10k 2009 77 schnitzer steel industries inc notes consolidated financial statements estimated amount actuarial loss expected recognized net periodic cost fiscal 2010 thousands components net periodic pension benefit cost august 31 thousands weightedaverage assumptions used determine projected accumulated pension benefit obligations defined benefit pension plan serbp follows august 31 na applicable weightedaverage assumptions used determine net periodic pension benefit cost defined benefit pension plan follows years ended august 31 determine expected longterm rate return pension plan assets company considers current expected asset allocations well historical expected returns various categories plan assets company applies expected rate return market related value assets reduces underlying variability assets company applies expected return company amortizes gains losses well effects changes actuarial assumptions plan provisions period longer average future service employees actuarial assumptions primary actuarial assumptions determined follows • expected longterm rate return plan assets based company’s estimate longterm returns equities fixed income securities weighted allocation assets plans rate impacted changes general market conditions represents longterm rate significantly impacted shortterm market swings changes allocation plan assets would also impact rate • assumed discount rate used discount future benefit obligations back today’s dollars discount rate reflective yield rates us longterm investment grade corporate bonds around august 31 valuation date rate sensitive changes interest rates decrease discount rate would increase company’s obligation expense 78 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements • effective june 30 2006 company ceased accrual benefits defined benefit plan thus expected rate compensation increase longer applicable calculating benefit obligations plan asset allocations company’s asset allocation defined benefit pension plan based primary goal maximizing investment returns long term minimizing volatility plans’ funded status company’s net periodic pension cost time company invested diversified portfolio provide balance returns risk effort quantify allocation company’s plan committee established target guideline used determining investment mix company recognizes asset allocation pension plans’ assets important factor determining longterm performance actual asset allocations point time may vary specified targets dictated current anticipated market conditions required cash flows investment decisions company’s plan committee pension plans’ investment funds managers ranges established provide flexibility asset allocation vary around targets without need immediate rebalancing table shows company’s target allocation range along actual allocations defined benefit pension plan august 31 fixed income investments unusually high balance august 31 2009 due timing company’s contributions plan allocated year end company set target allocations serbp table exhibits accumulated benefit obligation measured august 31 thousands contributions company made 3 million contributions defined benefit pension plan less 1 million contributions serbp fiscal 2009 company expects make contributions less 1 million serbp fiscal 2010 contributions expected made defined benefit pension plan fiscal 2010 however changes discount rate actual investment returns continue remain lower longterm expected return plan assets could result company making additional contributions schnitzer steel industries inc form 10k 2009 79 schnitzer steel industries inc notes consolidated financial statements estimated future benefit payments following benefit payments reflect expected future service appropriate expected paid thousands multiemployer pension plans company contributes various multiemployer pension plans accordance collective bargaining agreements plans jointly managed trustees include representatives management labor unions contribution rates established collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support company contributions multiemployer plans 3 million 4 million 4 million per year fiscal 2009 2008 2007 company contingent liabilities share unfunded liabilities plan contributes would triggered company withdraw partially withdraw plan company current intention withdrawing multiemployer plans participates recognized liability contingency january 2009 company notified plan administrator multiemployer plan benefiting employees smb accumulated funding deficiency ie failure satisfy minimum funding requirements current plan year therefore “in critical status” federal law requires pension plans critical status adopt rehabilitation plan designed restore financial health plan rehabilitation plans may involve contribution increases benefit reductions combination two law also requires contributing employers pay plan surcharge help correct plan’s financial situation signatory collective bargaining agreement consistent rehabilitation plan time company required make surcharge payments already signatory august 2008 agreement requires annual six percent contribution increases contributions company would required make would substantially less company’s estimated withdrawal liability defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 4 million 7 million 4 million fiscal 2009 2008 2007 respectively company suspended employer contributions plans march 2009 resumption contributions based variety factors including company performance overall economic conditions uncertain whether company make contributions plans fiscal 2010 note 14 sharebased compensation company adopted 1993 stock incentive plan “the plan” employees consultants directors 2006 annual meeting shareholders company’s shareholders approved amendments plan authorize grant performancebased longterm incentive awards “performancebased awards” plan 80 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements would eligible treatment performancebased compensation section 162m internal revenue code 1986 b increase peremployee limit grants options stock appreciation rights plan 100000 shares 150000 shares annually annual meeting shareholders january 28 2009 company’s shareholders approved amendment plan increase number shares class common stock reserved issuance plan 72 million shares 122 million shares share based compensation expense 9 million 14 million 9 million years ended august 31 2009 2008 2007 respectively tax benefits realized option exercises vesting restricted stock units 1 million 2 million 2 million fiscal 2009 2008 2007 respectively connection former chief executive officer john carter’s planned transition chief executive officer executive chairman board effective december 1 2008 company entered amended restated employment agreement reduced mr carter’s annual salary capped future annual bonus awards limited entitlement forward participation company’s long term incentive plan program vesting prior awards addition granted mr carter stock award grant date fair value 2 million fully vested grant date 2 million included total sharebased compensation expense described stock options plan stock options granted employees exercise prices equal fair market value company’s stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model “blackscholes” utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected lives grants based historical exercise patterns postvesting termination behavior options granted fiscal 2009 2008 2007 schnitzer steel industries inc form 10k 2009 81 schnitzer steel industries inc notes consolidated financial statements summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options august 31 2009 total number unvested stock options 53432 shares aggregate intrinsic value stock options exercised 4 million 2 million 4 million years ended august 31 2009 2008 2007 respectively represents difference exercise price value company’s stock time exercise total fair value stock options vested 1 million fiscal years ended august 31 2009 2008 2007 company recognized compensation expense associated stock options 1 million 1 million 3 million fiscal 2009 2008 2007 respectively august 31 2009 total unrecognized compensation costs related stock options amounted 1 million company expects recognize costs weightedaverage period less 1 year total proceeds received option exercises years ended august 31 2009 2008 2007 2 million 1 million 2 million respectively tax benefits realized options exercised amounted 1 million fiscal 2009 less 1 million fiscal 2008 1 million fiscal 2007 restricted stock units connection approval stock option awards compensation committee july 25 2006 committee authorized company permit option grantees elect receive value option awards restricted shares class common stock company october 2006 company commenced tender offer recipients july 25 2006 option grants allowed exchange options rsu awards 21 basis exchange ratio determined equivalent blackscholes pricing model rsu awards vest schedule options granted july 25 2006 close tender offer november 6 2006 stock options 272000 shares exchanged 136000 rsu awards estimated fair value rsus issued november 7 2006 5 million based market closing price underlying 82 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements class common stock november 6 2006 3765 result exchange company estimated incremental compensation expense 541000 recognized remaining portion fiveyear vesting term rsus june 27 2007 compensation committee granted 50000 rsus executive officer another officer terms employment agreements vested 25 june 2007 25 june 2008 50 june 2009 vesting 25000 shares based continued employment remaining 25000 shares vest based performance metrics approved committee performance awards vested 50 based upon actual performance achieved estimated fair value rsus issued june 27 2007 2 million based market closing price underlying class common stock june 27 2007 4725 august 9 2007 compensation committee granted 104000 rsus key employees officers plan rsu awards fiveyear term vest 20 per year commencing june 1 2008 committee also approved amendments definition term “disability” existing rsu award agreements estimated fair value rsu awards granted august 9 2007 5 million based market closing price underlying class common stock august 9 2007 5134 july 29 2008 compensation committee granted 75000 rsus key employees officers plan rsus fiveyear term vest 20 per year commencing june 1 2009 estimated fair value rsus granted july 29 2008 7 million based market closing price underlying class common stock july 29 2008 8752 july 28 2009 compensation committee granted 104000 rsus key employees officers plan rsus fiveyear term vest 20 per year commencing june 1 2010 estimated fair value rsus granted july 28 2009 5 million based market closing price underlying class common stock july 28 2009 5162 summary company’s restricted stock unit activity follows 1 amounts represent value company’s stock date restricted stock units vested company recognized compensation expense associated rsus 4 million 4 million 2 million fiscal 2009 2008 2007 respectively august 31 2009 total unrecognized compensation costs related unvested rsus amounted 12 million expected recognized weightedaverage period 31 years tax benefits realized rsus vested fiscal 2009 tax benefits realized 1 million less 1 million fiscal 2008 2007 respectively schnitzer steel industries inc form 10k 2009 83 schnitzer steel industries inc notes consolidated financial statements performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company business segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2006 2008 performance share awards november 29 2005 company’s compensation committee approved performancebased awards plan compensation committee approved additional awards terms two executive officers one officer division january 30 2006 april 28 2006 respectively compensation committee established series performance targets included company’s total shareholder return “tsr” performance period relative sp 500 industrials weighted 50 “tsr awards” operating income per ton mrb performance period weighted 16 23 number economic value added “eva” positive stores apb last year performance period weighted 16 23 man hours per ton smb performance period weighted 16 2 3 corresponding award payouts ranging 25 300 weighted portions target awards participants worked exclusively one business segment awards weighted 50 performance measure segment 50 total shareholder return fair value performancebased awards granted period determined multiplying total number shares expected issued company’s closing stock price date grant recognized requisite service period 29 years weighted average fair value performancebased awards granted fiscal 2006 3427 performancebased awards vested fiscal 2009 fiscal 2007 2009 performance share awards november 27 2006 company’s compensation committee approved performancebased awards plan compensation committee established series performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period corresponding award payouts ranging threshold 50 maximum 200 weighted portions target awards measuring earnings per share growth fiscal 2007 compensation committee set fiscal 2006 diluted earnings per share amount lower actual amount reflecting elimination certain large nonrecurring items weighted average grant date fair value performancebased awards granted fiscal 2007 3972 fiscal 2008 2010 performance share awards october 31 2007 company’s compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth 84 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards weighted average grant date fair value performancebased awards granted fiscal 2008 6382 fiscal 2009 2011 performance share awards november 24 2008 company’s compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth earnings per share weighted 50 average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion awards weighted average grant date fair value performancebased awards granted fiscal 2009 2230 performancebased awards activity plan fiscal 2009 follows compensation expense associated performancebased awards fiscal 2009 2008 2007 calculated using management’s current estimate performance targets plan compensation expense anticipated awards based company’s financial performance fiscal 2009 due reversal recognized compensation cost shares longer probable issued compensation expense anticipated awards based company’s financial performance 8 million 3 million fiscal 2008 2007 respectively august 31 2009 unrecognized compensation costs related nonvested performance shares amounted 3 million expected recognized weightedaverage period 12 years deferred stock units july 26 2006 compensation committee approved deferred compensation plan nonemployee directors conjunction authorizing issuance deferred stock units “dsus” nonemployee directors form restricted stock awards approved board july 2005 dsus granted plan one dsu gives director right receive one share class common stock future date annually immediately following annual meeting shareholders commencing 2007 annual meeting nonemployee director receive dsus become fully vested day next annual meeting subject continued service board dsus also become fully vested death disability director change control company defined dsu award agreement dsus vest directors credited additional whole fractional shares reflect dividends would paid stock subject dsus company issue class common stock director pursuant vested dsus lump sum january director ceases director company subject right director elect installment payment program company’s deferred compensation plan nonemployee directors schnitzer steel industries inc form 10k 2009 85 schnitzer steel industries inc notes consolidated financial statements order move cycle granting nonemployee director equity awards year june cycle granting awards january time annual meeting company granted onetime award dsus nonemployee director effective august 31 2006 onetime grants number dsus equal 43750 65625 chairman board divided closing market price class common stock august 31 2006 august 31 2006 total number dsus granted 14000 shares dsus vested january 31 2007 january 31 2007 nonemployee director received dsus equal 87500 131250 chairman board divided closing market price class common stock january 31 2007 total number dsus granted january 31 2007 23864 shares dsus vested january 29 2008 compensation expense associated dsus granted recognized respective requisite service period awards january 30 2008 nonemployee director received dsus equal 87500 131250 chairman board divided closing market price class common stock january 31 2007 total number dsus granted january 30 2008 16406 shares dsus vested day 2009 annual meeting compensation expense associated dsus granted recognized respective requisite service period awards april 29 2008 compensation committee revised compensation structure nonemployee directors including amount annual dsu awards granted director connection adoption revised compensation structure company granted one time dsu award nonemployee director equal 32500 48750 chairman board divided closing market price class common stock april 29 2008 total number dsu awards granted april 29 2008 3950 shares dsus vested january 27 2009 day 2009 annual meeting january 28 2009 company’s nonemployee directors received dsus equal 120000 divided closing market price class common stock january 28 2009 mr carter chairman tamara lundgren president chief executive officer receive compensation pursuant employment agreements receive dsus granted january 28 2009 total 24680 shares fully vest day 2010 annual meeting shareholders subject continued board service april 2009 two new nonemployee independent directors elected company’s board directors received dsus equal 90000 divided closing market price class common stock april 28 2009 dsus granted april 28 2009 total 3958 shares dsus fully vest day 2010 annual meeting shareholders subject continued board service company recognized compensation expense associated dsus 1 million fiscal 2009 2008 2007 note 15 income taxes income tax expense benefit consisted following august 31 thousands 86 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements income tax expense benefit differs amount would result applying us statutory rate earnings taxes reconciliation difference august 31 follows fiscal 2009 company recorded income tax benefit pretax loss income taxes minority interests effective tax rate benefit 407 compared expense 364 fiscal 2008 credits tax benefits would ordinarily decrease effective tax rate year pretax income converse effect increasing year pretax loss effective tax rate fiscal 2009 reflects following tax effect loss reversal 5 million nondeductible executive incentive compensation expense lower foreign tax rate permanently reinvested foreign earnings reduction contingent state tax liabilities reduction previouslyclaimed internal revenue code section 199 manufacturing deductions executive incentive compensation treated nondeductible fiscal 2008 voluntarily irrevocably declined fiscal 2009 resulting nontaxable income foreign earnings earned puerto rico metals recycling operation acquired february 2009 treated permanently reinvested puerto rico therefore us tax provided unrecognized deferred tax liability permanently reinvested foreign earnings august 31 2009 less 1 million contingent state tax liabilities reduced settlement negotiated one state statute limitations expired two states section 199 expense primarily represents estimated reduction fiscal 2007 section 199 benefits result carry back fiscal 2009 net operating loss earlier year income tax benefit fiscal 2009 also decreased items none individually material including adjustments arising ongoing tax audits 47 million refundable income taxes august 31 2009 reflects overpayment fiscal 2008 anticipated refund carrying back fiscal 2009 losses earlier fiscal year deferred tax assets liabilities comprised following august 31 thousands schnitzer steel industries inc form 10k 2009 87 schnitzer steel industries inc notes consolidated financial statements deferred taxes include benefits expected realized use net operating loss carryforwards “nols” acquired proler international corp “pic” acquisition fiscal 1997 greenleaf acquisition fiscal 2006 august 31 2009 remaining balances two nols 3 million 11 million respectively annual use nols limited section 382 internal revenue code unused nols pic expire fiscal 2012 greenleaf fiscal 2024 deferred taxes also include benefits state tax credits expire 2010 2020 valuation allowance less 1 million recorded august 31 2009 state tax credits expected expire unused future realization remaining deferred tax assets dependent upon generating sufficient taxable income prior expiration remaining state tax credits net operating loss carryforwards management believes likely recorded deferred tax asset net valuation allowance provided realized accounting uncertainty income taxes company adopted standard accounting uncertainty income taxes september 1 2007 august 31 2009 company reserve 4 million unrecognized tax benefits included 1 million interest penalties following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties thousands recognition unrecognized tax benefits august 31 2009 would reduce income tax expense 3 million company anticipate material changes reserve next 12 months company’s policy record taxrelated penalties interest income tax expense amounts recognized less 1 million fiscal 2008 fiscal 2009 company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2003 prior years company longer subject state foreign tax examinations years us internal revenue service currently examining company’s federal returns fiscal 2004 2005 2006 2007 2008 state california examining fiscal 2004 2005 88 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements note 16 earnings dividends per share following table sets forth reconciliation basic net income per share diluted net income per share years ended august 31 thousands except per share amounts basic earnings per share computed dividing net income loss weighted average number common shares outstanding periods presented including vested dsus rsus diluted earnings per share computed dividing net income loss weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance share dsu rsu awards using treasury stock method fiscal 2009 828869 common stock equivalent shares considered antidilutive excluded calculation diluted earnings per share fiscal 2008 rsus totaling 75000 shares considered antidilutive excluded calculation diluted earnings per share fiscal 2007 stock options totaling 200000 shares considered antidilutive note 17 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 16 million 52 million 19 million fiscal 2009 2008 2007 respectively advances payments joint ventures 2 million 3 million 2 million fiscal 2009 2008 2007 respectively company owed 2 million 4 million joint ventures august 31 2009 2008 respectively thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company partnership operates four selfservice stores northern california mr klauer’s 25 share profits partnership totaled 1 million fiscal 2009 2 million fiscal 2008 1 million fiscal 2007 mr klauer also owns properties one stores leased partnership leases providing annual rent less 1 million subject annual adjustments based consumer price index either monthtomonth terms term expiring december 2010 partnership option renew one leases upon expiration fiveyear period addition fiscal 2008 company loaned partnership 5 million fund exercise option purchase property occupied partnership loan bears interest market rate partnership prohibited making distributions partners loan repaid loan balance 1 million 3 million august 31 2009 2008 respectively february 2008 company acquired remaining 50 equity interest picknpull auto dismantlers llc nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity refer note 7 business combinations schnitzer steel industries inc form 10k 2009 89 schnitzer steel industries inc notes consolidated financial statements certain shareholders company significant interests related owners entities discussed entities considered related parties financial reporting purposes transactions schnitzer family including schnitzer family companies require approval company’s audit committee company compliance policy schnitzer investment corp “sic” real estate company owns develops manages various commercial residential real estate projects owned members schnitzer family collectively controlling shareholders company ownership class b common stock company previously leased administrative offices sic operating lease first quarter fiscal 2008 sic sold building unrelated party members schnitzer family significant interests company may exercise voting control virtue ownership class b common stock schnitzer family employees considered related parties financial reporting purposes gary schnitzer gregory schnitzer joshua philip member schnitzer family employed company members schnitzer family collectively earned total compensation 1 million 2 million 3 million fiscal 2009 2008 2007 respectively note 18 segment information company operates three reportable segments metal purchasing processing recycling selling trading mrb selfservice fullservice used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb produces rebar coiled rebar merchant bar wire rod specialty products apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb intersegment sales mrb smb made rates approximate west coast export market prices addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments unallocated expense operating income loss segment reflect operating income loss segment would standalone business 90 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc notes consolidated financial statements tables illustrate company’s operating results segment years ended august 31 thousands 1 mrb total assets include 11 million 12 million 10 million investment equity method joint ventures 2 mrb operating income loss includes bad debt expense 8 million 3 million 1 million fiscal 2009 2008 2007 respectively schnitzer steel industries inc form 10k 2009 91 schnitzer steel industries inc notes consolidated financial statements longlived assets consist primarily net property plant equipment substantially company’s longlived assets located us following revenues presented geographic area based country sales destination year ended august 31 thousands 1 includes sales canada 27 million 52 million 17 million fiscal 2009 2008 2007 respectively fiscal 2009 2008 2007 external customers accounted 10 company’s consolidated revenues sales foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 note 19 subsequent events preparing accompanying audited financial statements company reviewed events occurred august 31 2009 balance sheet date issuance financial statements occurred october 27 2009 october 2 2009 company entered definitive agreement sell company’s fullservice used auto parts operation operated part apb segment lkq corporation leading competitor used auto parts industry addition part agreement company agreed acquire six selfservice used auto parts facilities company’s acquisition four selfservice operations located near company’s metals recycling business export facility located portland oregon completed october 2 2009 four stores represent company’s first used auto parts operations pacific northwest acquisition remaining two selfservice facilities expected effective january 2010 increase number used auto parts facilities company operates dallasfort worth metroplex four acquired facilities operate company’s picknpull brand purchase price allocation process time issuance financial statements 92 schnitzer steel industries inc form 10k 2009 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts schnitzer steel industries inc form 10k 2009 93 schedule ii valuation qualifying accounts years ended august 31 2009 2008 2007 thousands 94 schnitzer steel industries inc form 10k 2009 schnitzer steel industries form 10k item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2010 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2010 stated report included herein tamara l lundgren richard peach president chief executive officer sr vice president chief financial officer october 20 2010 october 20 2010 44 schnitzer steel industries inc form 10k 2010 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2010 2009 results operations cash flows three years period ended august 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 7 consolidated financial statements company changed manner accounts business combinations september 1 2009 discussed note 3 consolidated financial statements company changed manner accounts noncontrolling interests september 1 2009 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon october 20 2010 schnitzer steel industries inc form 10k 2010 45 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 46 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements schnitzer steel industries inc form 10k 2010 47 schnitzer steel industries inc consolidated statements equity thousands see notes consolidated financial statements 48 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements schnitzer steel industries inc form 10k 2010 49 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation currently one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reporting segments include metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb buys collects processes recycles sells brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice used auto parts networks additionally apb supplier autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products company provides endoflife cycle solution variety products crossdivisional synergies including sale used auto parts procuring autobodies metal products recycling scrap metal manufacturing finished steel products august 31 2010 company’s facilities located us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries addition company holds 50 interest five joint ventures accounted equity method significant intercompany account balances transactions profits losses eliminated august 31 2010 2009 years ended august 31 2010 2009 2008 cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 25 million 23 million august 31 2010 2009 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 6 million 8 million august 31 2010 2009 respectively inventories net company’s inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard 50 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements costs company evaluates whether inventory properly valued lower cost market quarterly basis company considers estimated future selling prices determining estimated net realizable value inventory however mrb generally sells export recycled ferrous metal contracts provide shipment within 30 90 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred capitalized interest fiscal 2010 2009 2008 material assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized estimated useful lives property remaining lease term whichever less august 31 2010 useful lives used depreciation amortization follows impairment longlived assets company estimates future undiscounted cash flows derived asset assess whether potential impairment exists certain triggering events circumstances indicate carrying value longlived asset may impaired carrying value exceeds company’s estimate future undiscounted cash flows company records impairment difference carrying amount fair value asset material adjustments carrying value longlived assets years ended august 31 2010 2009 2008 goodwill intangible assets net goodwill represents excess purchase price estimated fair value net tangible intangible assets acquired entities company evaluates goodwill intangibles indefinite life annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill indefinite lived intangible assets may impaired impairment goodwill tested reporting segment level company’s reporting segments goodwill allocated equivalent company’s operating segments components respective segments similar economic characteristics goodwill impairment test follows two step process first step fair value reporting segment compared carrying value carrying value reporting segment exceeds fair value second step schnitzer steel industries inc form 10k 2010 51 schnitzer steel industries inc notes consolidated financial statements impairment test performed purposes measuring impairment second step fair value reporting segment allocated assets liabilities reporting segment determine implied goodwill value allocation similar purchase price allocation company must assign fair values using market participant assumptions carrying amount reporting segment’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess event divestiture business unit within reporting segment goodwill reporting segment allocated business unit based fair value unit divested total fair value reporting segment gain loss determined remaining goodwill reporting segment assets divested subsequently reevaluated impairment company estimates fair value reporting segments using income approach based present value expected future cash flows utilizing marketbased weighted average cost capital “wacc” estimate cash flows extend beyond final year discounted cash flow model company employs terminal value technique whereby company uses estimated operating cash flows minus capital expenditures adjusts changes working capital requirements final year model discounts wacc establish terminal value company includes present value terminal value fair value estimate given market prices company’s reporting segments readily available company makes various estimates assumptions determining estimated fair values reporting segments price would received sell reporting segment whole orderly transaction market participants forecasts future cash flows based management’s best estimate future sales operating costs pricing expectations general market conditions addition company tests indefinitelived intangibles impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed intangible asset carrying value longer considered recoverable company record impairment see note 9 goodwill intangibles assets net detail allocation acquisition purchase price company allocates purchase price acquisitions identified tangible intangible assets acquired liabilities assumed based estimated fair values date acquisition residual amounts allocated goodwill measuring assets liabilities fair value requires us determine price would paid third party market participant based highest best use assets interests acquired addition company accrues contingent purchase price consideration fair value date acquisition accrued workers’ compensation costs company selfinsured workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state reserve recorded based upon amount unpaid claims balance sheet date reserve amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included reserve august 31 2010 2009 company accrued 6 million estimated cost workers’ compensation claims environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues 52 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements expenditures made reserves established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery actually realized amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions inherent shortcomings estimation process factors amounts accrued could vary significantly amounts paid fair value financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt natural gas derivative carrying amounts nonderivative financial instruments approximate fair value including debt consists primarily variable interest rate notes company uses market approach value financial assets liabilities determined using available market information fair value disclosures included note 14 derivative financial instruments fair value measurements fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets • level 2 directly indirectly observable market data • level 3 unobservable inputs market data correlation developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available company’s natural gas contract smb measured fair value using model derived observable market data model considers various inputs including quoted futures prices commodities b time value c company’s credit risk well relevant economic measures see note 14 derivative financial instruments fair value measurements detail derivatives company’s accounting policies derivative instruments based whether instruments designated hedge nonhedge instruments derivative instruments recorded consolidated balance sheets fair value either assets liabilities unless designated qualify normal purchases normal sales exemption derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales pursuant exemption contracts qualify normal purchases normal sales markedtomarket available quoted market prices obtained external sources used measure contract’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts foreign currency translation transactions assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period translation adjustments included determining net income loss period recorded accumulated comprehensive loss separate component ssi shareholders’ equity foreign currency transaction schnitzer steel industries inc form 10k 2010 53 schnitzer steel industries inc notes consolidated financial statements gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally required recognized determination net income loss period company records gains losses income expense net realized unrealized foreign currency transaction gains less 1 million years ended august 31 2010 2009 1 million year ended august 31 2008 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” schnitzer steel industries inc voting trust trustees capacity trustees deemed beneficially common stock virtue bound voting trust agreement governing trust right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidincapital excess retained earnings additional paidincapital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipments historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheet remitted 54 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes sharebased compensation cost relating sharebased payment transactions vesting period cost measured based estimated fair value equity instruments issued see note 16 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises see note 17 income taxes detail net income loss per share basic net income loss per share attributable ssi based weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income loss per share attributable ssi based weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income loss per share antidilutive options awards could dilutive future see note 18 net income loss per share detail effective september 1 2009 company adopted accounting standard noncontrolling interests consolidated financial statements certain provisions accounting standard required adopted retrospectively periods presented include requirement carrying value noncontrolling interests previously referred minority interests removed mezzanine section balance sheet reclassified equity result adopting accounting standard net income loss attributable noncontrolling interests deducted income loss continuing operations arrive net income loss continuing operations attributable ssi purposes calculating net income loss per share use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities intangible asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded fdic insurance amount 250000 august 31 2010 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits letters credit monitoring procedures schnitzer steel industries inc form 10k 2010 55 schnitzer steel industries inc notes consolidated financial statements addition company exposed credit risk respect open letters credit shipments foreign customers supported letters credit company 85 million 99 million open letters credit august 31 2010 2009 respectively reclassifications certain prior year amounts statement cash flows reclassified within cash flows operating activities conform current year presentation changes impact previously reported operating income net income loss net cash provided operating activities note 3 recent accounting pronouncements recently adopted accounting standards september 2006 financial accounting standards board “fasb” issued guidance defines fair value establishes framework measuring fair value expands fair value measurement disclosure guidance relates nonfinancial assets liabilities recognized disclosed fair value financial statements nonrecurring basis effective company fiscal year ended august 31 2010 assets acquired business combinations completed year ended august 31 2010 valued accordance guidance nonrecurring nonfinancial asset fair value measurements also include used company’s test recoverability goodwill indefinitelived intangible assets company determines whether fair values applicable reporting segments exceed carrying values december 2007 fasb issued amended guidance regarding business combinations establishing principles requirements acquirer recognizes measures identifiable assets acquired liabilities assumed resulting goodwill noncontrolling interest acquiree financial statements well requiring transaction costs expensed incurred guidance also provides disclosures enable users financial statements evaluate nature financial effects business combination amended guidance became effective company beginning september 1 2009 applied prospectively business combinations completed fiscal 2010 transaction costs 1 million related acquisitions completed time adoption expensed subsequent transaction costs expensed incurred december 2007 fasb issued new guidance regarding accounting reporting noncontrolling interests subsidiaries guidance clarifies noncontrolling interests subsidiaries accounted component equity separate parent’s equity additionally guidance requires income noncontrolling interests presented net income derive net income figure attributable parent entity guidance became effective company beginning september 1 2009 applicable classification presentation provisions applied retrospectively december 2008 fasb issued guidance relating employer’s disclosures plan assets defined benefit pension post retirement plan guidance requires additional disclosure regarding investment policies strategies fair value major asset category based risks assets inputs valuation techniques used estimate fair value fair value measurement hierarchy asset category significant concentrations risk information guidance effective company fiscal year ended august 31 2010 disclosures incorporated accordingly see note 15 employee benefits june 2009 fasb established fasb accounting standards codification “codification” single source authoritative us gaap nongovernmental entities codification changes referencing organization accounting guidance became effective us beginning september 1 2009 changes us gaap result issuance fasb codification january 2010 accounting standards update issued fasb improve disclosure requirements related fair value measurement update requires additional disclosures relating significant transfers levels 1 2 fair value measurements along reason transfer separate presentation purchases sales issuances settlements reconciliation level 3 fair value measurements update effective 56 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements company third quarter fiscal year ended august 31 2010 except disclosures relating level 3 activity effective fiscal year ending august 31 2012 applied prospectively thus impact previously issued financial information see note 14 derivative financial instruments fair value measurements february 2010 fasb issued amended guidance subsequent events amended guidance sec filers longer required disclose date subsequent events evaluated originally issued revised financial statements guidance effective immediately company adopted new requirements second quarter fiscal 2010 preparing accompanying audited financial statements company reviewed events occurred august 31 2010 balance sheet date noting material subsequent events recently issued accounting standards june 2009 fasb issued new accounting standard revised guidance consolidation variable interest entities “vie” new guidance requires qualitative approach identifying controlling financial interest vie requires ongoing assessment whether entity vie whether interest vie makes holder primary beneficiary vie guidance effective company beginning september 1 2010 expected adoption impact company’s consolidated financial position results operations july 2010 fasb issued accounting standards update require disaggregated disclosures improve financial statement users’ understanding 1 nature entity’s credit risk associated financing receivables 2 entity’s assessment risk estimating allowance credit losses well changes allowance reasons changes update effective company second quarter fiscal 2011 except disclosures relating activity occurred reporting period effective company third quarter fiscal 2011 since update addresses disclosures related credit quality financing receivables allowance credit losses expected adoption update material impact company’s consolidated financial position results operations cash flows note 4 inventories net inventories consisted following august 31 thousands schnitzer steel industries inc form 10k 2010 57 schnitzer steel industries inc notes consolidated financial statements note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization assets capital leases 57 million 56 million 48 million years ended august 31 2010 2009 2008 respectively note 6 investment advances joint ventures august 31 2010 company five joint venture interests accounted equity method accounting presented part mrb operations following tables present summarized unaudited financial information company’s joint ventures company partner thousands company’s investment equity method joint venture investments resulted cumulative undistributed earnings 12 million 9 million august 31 2010 2009 respectively included part partners’ equity joint ventures note 7 business combinations september 1 2009 company adopted revised accounting standard business combinations issued fasb december 2007 standard requires company recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date requires acquisition costs expensed incurred 58 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements year ended august 31 2010 company spent 41 million acquire six selfservice used auto parts stores metals recycler acquisitions follows • october 2009 company acquired four selfservice used auto parts stores located near mrb’s export facility portland oregon acquisition represented company’s first used auto parts operations pacific northwest • january 2010 company acquired two selfservice used auto parts stores increased four number used auto parts stores company operates dallasfort worth metroplex • april 2010 company acquired metals recycler montana provide additional source scrap metal mrb’s tacoma washington export facility acquisition purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase prices fair value identifiable net assets acquired 27 million recorded goodwill expected deductible tax purposes acquisitions completed fiscal 2010 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2010 acquisitions presented since aggregate results would significantly different reported results year ended august 31 2009 company acquired following • december 2008 company acquired metals recycler washington provide additional source scrap metal mrb’s tacoma washington export facility • february 2009 company acquired metals recycler puerto rico acquisition expanded company’s presence new region increased company’s processing capability provided new sources scrap metal access international export facilities • february 2009 company acquired additional 1666 equity interest auto parts business located california april 2009 acquired remaining 834 minority equity interest business thus increasing company’s equity ownership business 100 acquired equity previously consolidated company’s financial statements company maintained operating control entity • february 2009 company acquired selfservice used auto parts business two locations california acquisition strengthened company’s presence northern california • march 2009 company acquired metals recycler nevada provide additional source scrap metal mrb’s oakland california export facility acquisition purchase price allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase prices fair value identifiable net assets acquired 61 million recorded goodwill 14 million expected deductible tax purposes schnitzer steel industries inc form 10k 2010 59 schnitzer steel industries inc notes consolidated financial statements following summary aggregate fair values assets acquired liabilities assumed acquisitions completed year ended august 31 2009 thousands following table presents intangible assets associated acquisitions completed year ended august 31 2009 dollars thousands following unaudited pro forma summary presents effect consolidated financial results company businesses acquired year ended august 31 2009 though businesses acquired beginning years ended august 31 thousands 60 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations year ended august 31 2008 company acquired following • september 2007 company acquired mobile metals recycling business provides additional sources scrap metal mrb’s everett massachusetts facility • november 2007 company acquired two metals recycling businesses february 2008 company acquired one metals recycling business expanded company’s presence southeastern us • february 2008 company acquired remaining 50 equity interest auto parts business located nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity • august 2008 company acquired selfservice used auto parts business three locations southeastern us acquisitions completed fiscal 2008 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2008 acquisitions presented since aggregate results would significantly different reported results company paid premium ie goodwill fair value net tangible identified assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses enhance company’s regional market position • company anticipates cost savings efficiencies synergies note 8 discontinued operations october 2009 company sold fullservice used auto parts operation operated part apb reporting segment company concluded divestiture met definition discontinued operation accordingly results discontinued operation reclassified periods presented sale resulted loss 15 million net tax included writeoff 12 million goodwill allocated fullservice operation apb reporting segment operating results discontinued operations summarized amounts exclude general corporate overhead previously allocated fullservice used auto parts operation schnitzer steel industries inc form 10k 2010 61 schnitzer steel industries inc notes consolidated financial statements assets liabilities discontinued operations consisted following august 31 2009 thousands note 9 goodwill intangible assets net gross changes carrying amount goodwill reporting segment years ended august 31 2010 2009 follows thousands following table presents company’s intangible assets related lives august 31 dollars thousands total intangible asset amortization expense years ended august 31 2010 2009 2008 6 million 5 million 4 million respectively 62 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 10 shortterm borrowings company’s shortterm borrowings consist primarily one year unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2011 interest rates outstanding indebtedness unsecured line credit set bank time borrowing company borrowings outstanding facility august 31 2010 2009 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio august 31 2010 2009 company compliance covenants note 11 longterm debt capital lease obligations longterm debt capital lease obligations consisted following august 31 thousands company maintains 450 million revolving credit facility matures july 2012 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate plus spread 050 100 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 050 addition annual commitment fees payable unused portion credit facility rates 010 025 based pricing grid tied company’s leverage ratio company paid commitment fees less 1 million years ended august 31 2010 2009 2008 weighted average interest rate amounts outstanding facility 079 078 august 31 2010 2009 respectively bank credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio schnitzer steel industries inc form 10k 2010 63 schnitzer steel industries inc notes consolidated financial statements maximum leverage ratio august 31 2010 2009 company compliance covenants principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands letters credit totaling 18 million outstanding august 31 2010 related certain obligations including workers’ compensation performance bonds note 12 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates july 2024 rent expense 18 million 19 million 21 million fiscal 2010 2009 2008 respectively see note 19 related party transactions discussion leases related parties company’s steel manufacturing operations exposed market risk due variations market price natural gas result company uses derivative instruments specifically forward purchases manage inherent commodity price risks smb takeorpay natural gas contract expires may 31 2011 obligates purchase minimum quantities per day october 31 2010 whether amount utilized fair value natural gas contract determined using forward price curve based observable market price quotations major natural gas trading hub effective delivery period november 1 2009 october 31 2010 committed rate 1099 per million british thermal units “mmbtu” see note 14 derivative financial instruments fair value measurements disclosures smb also electricity contract mcminnville water light requires minimum purchase electricity rate subject variable pricing whether amount utilized contract expires september 2011 64 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements table sets forth company’s future minimum obligations noncancelable operating leases unrelated parties service obligations purchase commitments august 31 2010 thousands contingencies environmental company evaluates adequacy environmental liabilities quarterly basis accordance company policy adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures made reserves established changes company’s environmental liabilities years ended august 31 2010 2009 follows thousands 1 fiscal 2009 company released 4 million environmental reserves primarily related resolution hylebos waterway litigation partially offset 2 million environmental liabilities recorded purchase accounting related acquisitions completed fiscal 2009 1 million new reserves 2 fiscal 2010 company released 2 million environmental reserves discontinued operations related fullservice auto parts operation partially offset 1 million environmental liabilities recorded purchase accounting metals recycling business august 31 2010 mrb environmental reserves 25 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor company notified us environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one least 100 potentially responsible parties “prps” operate formerly owned operated sites adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain schnitzer steel industries inc form 10k 2010 65 schnitzer steel industries inc notes consolidated financial statements preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team finalizing allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment cost investigations remediation associated site reasonably estimable completion data review investigations conducted lwg trustees selection approval remedy epa however given size site nature conditions identified date total cost investigations remediation likely substantial addition determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps possible estimate costs company might incur connection site although costs could material company’s financial position results operations company insurance policies believe provide reimbursement costs incur defense remediation connection site although assurance policies cover costs may incur fiscal 2006 company recorded liability estimated share costs investigation incurred lwg date august 31 2010 2009 company’s reserve third party investigation costs site 1 million oregon department environmental quality separately providing oversight voluntary investigation company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river reserves established connection investigations extent contamination company’s responsibility contamination yet determined metals recycling business sites august 31 2010 company environmental reserves related various mrb sites 24 million reserves range amounts less 1 million 2 million per site relate potential future remediation soil contamination groundwater contamination storm water runoff issues material environmental compliance enforcement proceedings currently pending related sites auto parts business august 31 2010 company environmental reserves related various apb sites 15 million reserves range amounts less 1 million 2 million per site relate potential future remediation soil contamination groundwater contamination storm water runoff issues material environmental compliance enforcement proceedings currently pending related sites 66 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit first issued 1998 since renewed 2012 permit based annual production capacity 950 thousand tons smb environmental reserves august 31 2010 portland harbor discussed management currently believes adequate provision made financial statements potential impact issues outcomes significantly impact financial position results operations company although may material impact earnings particular quarter historically amounts company ultimately paid remediation activities material note 13 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 thousands note 14 derivative financial instruments fair value measurements natural gas price risk management order minimize volatility natural gas costs smb entered takeorpay natural gas contract obligates purchase minimum 2000 mmbtus per day october 31 2010 whether amount utilized contract expires may 31 2011 fair value measurement smb’s natural gas contract classified derivative instrument carried fair value fair value instrument company’s financial instrument carried fair value determined using forward price curve based observable market price quotations major natural gas trading hub company considers nonperformance risk calculating fair value adjustments includes credit risk adjustment based credit spreads counterparty company unrealized gain position company’s credit spread company unrealized loss position assessment nonperformance risk generally derived credit default swap market bond market credit spreads impact credit risk adjustments company’s outstanding derivative material fair value calculation august 31 2010 marktomarket adjustments instrument resulted derivative liability 1 million august 31 2010 compared 6 million august 31 2009 amount classified level 2 fair value measurement fair value hierarchy described note 2 summary significant accounting policies derivative designated hedging instrument september 1 2008 company designated entire remaining portion natural gas contract cash flow hedge due changes expectation company’s future production result changes market conditions company dedesignated contract hedge redesignated portion 20000 mmbtus per month cash flow hedge october 2008 remaining portion contract accounted derivative designated hedge schnitzer steel industries inc form 10k 2010 67 schnitzer steel industries inc notes consolidated financial statements amounts included accumulated comprehensive income “aoci” reclassified cost goods sold forecasted purchase transaction recognized earnings ineffectiveness arises hedge included accrued liabilities fair value designated hedge portion derivative less 1 million 2 million august 31 2010 2009 respectively effective portion realized losses reclassified cost goods sold 1 million years ended august 31 2010 2009 ineffective portion unrealized losses included cost goods sold less 1 million years ended august 31 2010 2009 unrealized loss net tax effective portion hedge less 1 million 1 million years ended august 31 2010 2009 respectively upon dedesignation cash flow hedge october 2008 1 million reclassified aoci cost goods sold existing unrealized losses net tax less 1 million currently recorded aoci expected reclassified cost goods sold first quarter year ending august 31 2011 derivatives designated hedges fiscal 2008 derivative designated hedging instrument portion natural gas contract designated hedge company recognizes change fair value cost goods sold period change included accrued liabilities fair value derivative designated hedge 1 million 4 million august 31 2010 2009 respectively net gains losses 3 million 1 million 3 million recognized cost goods sold years ended august 31 2010 2009 2008 respectively note 15 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees companies plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company reflects funded status defined benefit pension plan net asset consolidated balance sheets changes funded status recognized comprehensive income net periodic pension benefit cost 1 million years ended august 31 2010 2009 respectively income less 1 million recognized year ended august 31 2008 fair value plan assets 15 million 14 million august 31 2010 2009 respectively projected benefit obligation 15 million 14 million august 31 2010 2009 respectively plan fully funded plan assets exceeding projected benefit obligation less 1 million 1 million august 31 2010 2009 respectively plan assets comprised 14 million level 1 investments 1 million level 2 investments august 31 2010 level 1 assets valued based quoted market price identical securities principal market level 2 investments valued net asset value fund provided fund’s manager independent administrator contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 487 536 august 31 2010 2009 respectively company estimates future annual benefit payments approximate 1 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 2 million august 31 2010 2009 trust fund assets’ gains losses included income expense company’s consolidated statements operations benefit obligation unfunded amount 3 million 2 million august 31 2010 2009 respectively company estimates future annual benefit 68 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements payments approximate less 1 million per year net periodic pension benefit cost recognized serbp consisting primarily interest cost less 1 million years ended august 31 2010 2009 2008 defined benefit pension plan serbp immaterial consolidated financial statements disclosures required generally accepted accounting principles omitted multiemployer pension plans company contributes various multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations company contributions multiemployer plans 3 million 3 million 4 million years ended august 31 2010 2009 2008 respectively approximately 60 company’s multiemployer pension plan contributions made western independent shops pension trust “wisp trust” benefit union employees smb 2004 internal revenue service “irs” approved sevenyear extension period wisp trust may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels based actuarial valuation wisp trust october 1 2009 latest available actuarial information funded percentage wisp trust based ratio market value assets accumulated benefits liability present value accrued benefits 654 targeted funding ratio specified agreement irs result wisp trust process seeking relief specified funding requirement irs wisp trust cannot obtain relief revocation irs amortization extension retroactively 2002 plan year could occur result material liability company’s share resulting funding deficiency extent currently cannot estimated 2006 pension protection act “act” became law together related regulations established new minimum funding requirements multiemployer pension plans act mandates multiemployer pension plans certain funding levels projected funding deficiencies adopt funding improvement plan rehabilitation program improve funding levels defined period time january 2010 company notified plan administrator wisp trust plan “critical status” 2009 without benefit relief irs discussed wisp trust’s funding standard account expected show funding deficiency september 30 2010 result trustees wisp trust required update wisp trust’s rehabilitation plan adoption updates rehabilitation plan subject collective bargaining current contribution rate increases 6 per year time company required increase contributions wisp trust beyond 6 december 2008 worker retiree employer recovery act 2008 “recovery act” became law plan years beginning october 1 2008 september 30 2009 recovery act allows multiemployer plans freeze funding certification based funding status previous plan year addition recovery act provides multiemployer plans “endangered” “critical” status plan years beginning 2008 2009 threeyear extension plan’s funding improvement rehabilitation period company notified several multiemployer plans contributes underlying plans would “critical status” frozen 2008 funding status recovery act schnitzer steel industries inc form 10k 2010 69 schnitzer steel industries inc notes consolidated financial statements company also contingent liabilities share unfunded liabilities plan contributes including withdrawal liability 28 million wisp trust calculated trust’s actuary september 30 2009 withdrawal liabilities would triggered company withdraw partially withdraw respective plans company current intention withdrawing multiemployer plans participates recognized liability contingencies defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million 4 million 7 million years ended august 31 2010 2009 2008 respectively company suspended employer contributions plans march 2009 resumed certain contributions plans april 2010 company expects make contributions 3 million defined contribution plans year ending august 31 2011 note 16 sharebased compensation company’s 1993 stock incentive plan “the plan” established employees consultants directors 2006 annual meeting shareholders company’s shareholders approved amendments plan authorize grant performancebased longterm incentive awards “performancebased awards” plan would eligible treatment performancebased compensation section 162m internal revenue code 1986 b increase peremployee limit grants options stock appreciation rights plan 100000 shares 150000 shares annually annual meeting shareholders january 28 2009 company’s shareholders approved amendment plan increase number shares class common stock reserved issuance plan 72 million shares 122 million shares sharebased compensation expense 11 million 9 million 14 million years ended august 31 2010 2009 2008 respectively tax benefits used option exercises vesting restricted stock units less 1 million recognized year ended august 31 2010 tax benefits realized 1 million 2 million years ended august 31 2009 2008 respectively connection former chief executive officer john carter’s planned transition chief executive officer executive chairman board effective december 1 2008 company entered amended restated employment agreement reduced mr carter’s annual salary capped future annual bonus awards limited entitlement forward participation company’s long term incentive plan vesting prior awards granted mr carter stock award grant date fair value 2 million fully vested grant date 2 million included total sharebased compensation expense year ended august 31 2009 described restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus granted recognized respective requisite service period awards years ended august 31 2010 2009 2008 compensation committee granted 115179 rsus 104399 rsus 74593 rsus respectively key employees officers plan rsus fiveyear term vest 20 per year commencing june 1 year grant april 27 2010 compensation committee granted 25000 rsus tamara lundgren company’s president chief executive officer rsus twoyear term vest 100 april 27 2012 estimated fair value rsus granted years ended august 31 2010 2009 2008 7 million 5 million 7 million respectively 70 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 5 million 4 million 4 million years ended august 31 2010 2009 2008 respectively august 31 2010 total unrecognized compensation costs related unvested rsus amounted 14 million expected recognized weighted average period 3 years tax benefits used less 1 million recognized rsus vested years ended august 31 2010 2009 tax benefits realized 1 million year ended august 31 2008 performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reporting segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed schnitzer steel industries inc form 10k 2010 71 schnitzer steel industries inc notes consolidated financial statements fiscal 2006 2008 performance share awards november 29 2005 compensation committee approved performancebased awards plan compensation committee approved additional awards terms two executive officers one officer division january 30 2006 april 28 2006 respectively compensation committee established series performance targets included company’s total shareholder return performance period relative sp 500 industrials weighted 50 operating income per ton mrb performance period weighted 16 23 number economic value added positive stores apb last year performance period weighted 16 23 man hours per ton smb performance period weighted 16 23 corresponding award payouts ranging 25 300 weighted portions target awards participants worked exclusively one reporting segment awards weighted 50 performance measure segment 50 total shareholder return fair value performancebased awards granted period determined multiplying total number shares class common stock expected issued company’s closing stock price date grant recognized requisite service period 29 years weighted average fair value performancebased awards granted year ended august 31 2006 3427 performancebased awards vested year ended august 31 2009 fiscal 2007 2009 performance share awards november 27 2006 compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards measuring earnings per share growth year ended august 31 2007 compensation committee set fiscal 2006 diluted earnings per share amount lower actual amount reflecting elimination certain large nonrecurring items weighted average grant date fair value performancebased awards granted year ended august 31 2007 3972 performancebased awards vested year ended august 31 2010 fiscal 2008 2010 performance share awards october 31 2007 compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards weighted average grant date fair value performancebased awards granted year ended august 31 2008 6382 fiscal 2009 2011 performance share awards november 24 2008 compensation committee approved performancebased awards plan compensation committee established performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards weighted average grant date fair value performancebased awards granted year ended august 31 2009 2230 fiscal 2010 2012 performance share awards november 20 2009 compensation committee approved performancebased awards plan compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion 72 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements target awards weighted average grant date fair value performancebased awards granted year ended august 31 2010 4710 summary company’s performancebased awards activity follows compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 3 million less 1 million 8 million years ended august 31 2010 2009 2008 respectively august 31 2010 unrecognized compensation costs related nonvested performance shares amounted 5 million expected recognized weighted average period 13 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date annually immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board dsus also become fully vested death disability director change control company defined dsu award agreement dsus vest directors credited additional whole fractional shares reflect dividends would paid stock subject dsus company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan compensation expense associated dsus granted recognized respective requisite service period awards years ended august 31 2010 2009 2008 nonemployee director granted dsus equal 120000 years ended august 31 2010 2009 2008 mr carter john carter chairman tamara lundgren president chief executive officer received compensation pursuant employment agreements receive dsus year ended august 31 2008 chairman board granted dsus equal 180000 schnitzer steel industries inc form 10k 2010 73 schnitzer steel industries inc notes consolidated financial statements april 2009 two new nonemployee directors elected company’s board directors received dsus equal 90000 dsus vested january 26 2010 day 2010 annual meeting dsus granted years ended august 31 2010 2009 2008 total 30834 shares 28638 shares 20356 shares respectively company recognized compensation expense associated dsus 1 million years ended august 31 2010 2009 2008 total value shares vested years ended august 31 2010 2009 2008 1 million august 31 2010 unrecognized compensation costs related nonvested dsus amounted 1 million recognized year ending august 31 2011 stock options plan stock options granted employees exercise prices equal fair market value company’s class common stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior options granted years ended august 31 2010 2009 2008 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options august 31 2010 total number unvested stock options 4081 shares aggregate intrinsic value stock options exercised 1 million 4 million 2 million years ended august 31 2010 2009 2008 respectively represents difference exercise price value company’s stock time exercise total fair value stock options vested 1 million years ended 74 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements august 31 2010 2009 2008 company recognized compensation expense associated stock options less 1 million 1 million 1 million years ended august 31 2010 2009 2008 respectively august 31 2010 total unrecognized compensation costs related stock options amounted less 1 million company expects recognize costs next year total proceeds received option exercises years ended august 31 2010 2009 2008 1 million 2 million 1 million respectively tax benefits realized options exercised amounted less 1 million 1 million less 1 million years ended august 31 2010 2009 2008 respectively note 17 income taxes income loss continuing operations income taxes follows years ended august 31 thousands schnitzer steel industries inc form 10k 2010 75 schnitzer steel industries inc notes consolidated financial statements deferred tax assets liabilities comprised following august 31 thousands deferred taxes included benefits state net operating loss carry forwards 1 million state tax credits 2 million expire used 2011 2029 valuation allowance 1 million recorded august 31 2010 federal capital loss carry forward state tax credits expected expire unused future management believes likely company generate sufficient taxable income prior expiration remaining deferred tax assets ensure realization accounting uncertainty income taxes august 31 2010 company reserve 2 million unrecognized tax benefits included less 1 million interest penalties following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands recognition unrecognized tax benefits august 31 2010 would reduce income tax expense 2 million company anticipate material changes reserve next 12 months company’s policy record taxrelated penalties interest income tax expense amounts recognized less 1 million years ended august 31 2010 2009 2008 company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2003 prior years company longer subject 76 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements state foreign tax examinations years federal canadian several state tax authorities currently examining company’s income tax returns fiscal years 2004 2008 company currently pays 7 tax rate earnings commonwealth puerto rico company aware regulatory agencies puerto rico reevaluating company’s entitlement manufacturing tax exemption company currently believes continue entitled 7 tax rate existing exemptions change company’s tax exemption status could cause increase tax rate puerto rico earnings overall effective tax rate consolidated earnings based upon known facts range reasonably possible changes cannot currently estimated note 18 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands basic net income loss per share computed dividing net income loss weighted average number common shares outstanding periods presented including vested dsus rsus diluted net income loss per share computed dividing net income loss weighted average number common shares outstanding assuming dilution years ended august 31 2010 2009 2008 50702 828869 74593 common stock equivalent shares respectively considered antidilutive excluded calculation diluted net income loss per share note 19 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 29 million 16 million 52 million years ended august 31 2010 2009 2008 respectively advances payments joint ventures less 1 million 2 million 3 million years ended august 31 2010 2009 2008 respectively company owed 1 million 2 million joint ventures august 31 2010 2009 respectively thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company 75 partner operates four selfservice stores northern california mr klauer’s 25 share profits partnership totaled 2 million 1 million 2 million years ended august 31 2010 2009 2008 respectively company owned mr klauer jointly real property one stores leased partnership mr klauer’s share annual rent paid partnership less 1 million term lease expires december 2015 partnership option renew lease upon expiration multiple fiveyear periods rent lease adjusted annually based consumer price index also fiscal 2009 mr klauer company sole shareholder acquired ownership contiguous parcel real property portion leased partnership term lease expires december 2015 partnership schnitzer steel industries inc form 10k 2010 77 schnitzer steel industries inc notes consolidated financial statements option renew lease upon expiration multiple fiveyear periods rent lease adjusted annually based consumer price index rent paid partnership mr klauer’s company parcel less 1 million years ended august 31 2010 2009 addition year ended august 31 2008 company loaned partnership 5 million fund exercise option purchase another property occupied partnership unrelated third party loan incurred interest 5 per annum partnership prohibited making distributions partners taxes income partnership loan repaid principal balance repaid first quarter fiscal 2010 compared balance 1 million august 31 2009 february 2008 company acquired remaining 50 equity interest picknpull auto dismantlers llc nevada exchange 50 interest land buildings owned entity acquired business previously consolidated company’s financial statements company maintained operating control entity see note 7 business combinations detail certain shareholders company significant interests related owners entities discussed entities considered related parties financial reporting purposes transactions schnitzer family including schnitzer family companies require approval company’s audit committee company compliance policy schnitzer family employees considered related parties financial reporting purposes members schnitzer family significant interests company gary schnitzer gregory schnitzer member schnitzer family employed company joshua philip also member schnitzer family employed company resignation effective january 8 2010 members schnitzer family collectively earned total compensation 1 million 1 million 2 million years ended august 31 2010 2009 2008 respectively members schnitzer family outstanding stock schnitzer investment corp “sic” engaged real estate business subsidiary company prior 1989 company sic potentially responsible parties respect portland harbor designated superfund site since december 2000 company incurred 6 million net insurance reimbursements legal consulting fees related investigation site includes company’s portland scrap metal operations company sic worked together response portland harbor matters company paid legal consulting fees joint defense part due environmental indemnity obligation sic respect portland scrap metal operations property costs increased substantially last two years company sic agreed equitable cost sharing arrangement respect defense costs sic pay 50 legal consulting costs net insurance recoveries company recognized 3 million reimbursement environmental expenses year ended august 31 2010 sic’s share costs incurred date amounts receivable sic agreement 1 million august 31 2010 company’s restated articles incorporation bylaws obligate indemnify current former directors officers fullest extent prohibited law obligates advance expenses incurred defending pending threatened proceeding person advance final disposition matters involved officer director affirms good faith belief entitlement indemnification undertakes repay expenses ultimately determined court person entitled indemnified connection continuing investigation certain former employees related company’s past practice making improper payments purchasing managers customers asia robert w philip former chairman president chief executive officer company gary schnitzer executive vice president company requested advancement expenses provided required undertaking years ended august 31 2010 2009 2008 company advanced 1 million mr philip legal expenses connection investigation fourth quarter fiscal 2010 company reimbursed insurance carrier approximately 3 million amounts advanced 78 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements william furman director company chairman chief executive officer greenbrier companies subsidiaries “greenbrier” years ended august 31 2010 2009 2008 company engaged series transactions greenbrier company sold well purchased goods years ended august 31 2010 2009 2008 company sold goods greenbrier amount 1 million less 1 million 1 million respectively purchases goods greenbrier less 1 million years ended august 31 2010 2009 2008 note 20 segment information company operates three reporting segments metal purchasing processing recycling selling mrb used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal company’s reporting segments based nature business activities nature different products production processes earns revenues incurs expenses financial information reviewed chief operating decisionmaker capital allocation performance assessment process organizational structure financial information presented board directors investors mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales mrb smb made rates approximate export market prices shipments west coast us addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company uses operating income loss measure segment performance company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would standalone business amounts presented exclude results operations company’s discontinued fullservice used auto parts operation following summary company’s total assets august 31 thousands 1 mrb total assets include 14 million 11 million august 31 2010 2009 respectively investments joint venture partnerships schnitzer steel industries inc form 10k 2010 79 schnitzer steel industries inc notes consolidated financial statements longlived assets consist primarily net property plant equipment substantially company’s longlived assets located us table illustrates company’s operating results continuing operations reporting segment years ended august 31 thousands 1 mrb operating income fiscal 2009 includes bad debt expense 8 million 2 mrb operating income includes 3 million 1 million 12 million income joint ventures accounted equity method fiscal 2010 2009 2008 respectively 80 schnitzer steel industries inc form 10k 2010 schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination reporting segment major product years ended august 31 thousands fiscal 2010 2009 2008 external customers accounted 10 company’s consolidated revenues sales foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 schnitzer steel industries inc form 10k 2010 81 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts 82 schnitzer steel industries inc form 10k 2010 schedule ii valuation qualifying accounts years ended august 31 2010 2009 2008 thousands schnitzer steel industries inc form 10k 2010 83 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles proper authorization receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2011 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2011 stated report included herein 39 schnitzer steel industries inc form 10k 2011 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2011 2010 results operations cash flows three years period ended august 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed accompanying index presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp portland oregon october 20 2011 40 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 41 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements 42 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc consolidated statements equity thousands 43 schnitzer steel industries inc form 10k 2011 1 net income attributable noncontrolling interests august 31 2011 excludes 100 thousand allocable redeemable noncontrolling interest reported mezzanine section consolidated balance sheets august 31 2011 see note 12 redeemable noncontrolling interest detail 2 foreign currency translation adjustments exclude 509 thousand relating redeemable noncontrolling interests year ended august 31 2011 reported mezzanine section consolidated balance sheets august 31 2011 see note 12 redeemable noncontrolling interest detail see notes consolidated financial statements 44 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements 45 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reporting segments follows metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb buys collects processes recycles sells brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice used auto parts networks additionally apb supplier autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products august 31 2011 company’s facilities located us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts 40 million 25 million august 31 2011 2010 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains reserve considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 6 million august 31 2011 2010 inventories net company’s inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product nonferrous arising manufacturing process used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories principally using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately predict 46 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2011 useful lives used depreciation amortization follows impairment longlived assets amortizable intangible assets longlived assets intangible assets subject amortization subject impairment assessment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related asset impairment recorded difference carrying amount fair value asset material adjustments carrying value longlived assets intangible assets subject amortization years ended august 31 2011 2010 2009 investment joint ventures august 31 2011 2010 company five 50owned joint venture interests accounted equity method accounting presented part mrb operations company’s investment equity method joint venture investments resulted cumulative undistributed earnings 11 million 12 million august 31 2011 2010 respectively included part partners’ equity joint ventures see note 19 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price estimated fair value net tangible intangible assets acquired entities company evaluates goodwill intangibles indefinite life impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill intangible assets may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ company determined reporting units goodwill allocated equivalent company’s operating segments mrb apb smb components segment similar economic characteristics goodwill impairment test follows two step process first step fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess event divestiture business unit within reporting unit goodwill reporting unit allocated business unit based fair value unit divested total fair value reporting unit gain loss determined remaining goodwill reporting unit assets divested subsequently reevaluated impairment company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital forecasts future cash flows based best estimate future sales operating costs pricing expectations general market conditions addition aggregated estimated fair value reporting units compared company’s market capitalization including 47 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements consideration control premium company believes reconciliation consistent market participant perspective company tests indefinitelived intangible assets impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed indefinitelived intangible asset carrying value longer considered recoverable company record impairment company record material impairment charges indefinitelived intangible assets periods presented see note 8 goodwill intangibles assets net detail acquisitions september 1 2009 company adopted revised accounting standard business combinations requires company recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date revised accounting standard applied prospectively business combinations completed date adoption contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balances result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred accrued workers’ compensation costs company selfinsured workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state reserve recorded based upon amount unpaid claims balance sheet date reserve amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included reserve company accrued 10 million 6 million estimated cost workers’ compensation claims august 31 2011 2010 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities made additional information becomes available affects estimated costs study remediate environmental issues expenditures made reserves established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery actually realized amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts carrying amounts nonderivative financial instruments approximate fair value including debt primarily variable interest rates company uses market approach value financial assets liabilities determined using available market information fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities 48 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements • level 2 directly indirectly observable market data • level 3 significant unobservable inputs developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 12 redeemable noncontrolling interest note 14 derivative financial instruments detail derivatives company records derivative instruments assets liabilities consolidated balance sheets fair value changes fair value either recognized accumulated comprehensive income loss consolidated balance sheets net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive income loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure contract’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 14 derivative financial instruments derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period translation adjustments included determining net income loss period recorded accumulated comprehensive income loss separate component ssi shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally required recognized determination net income loss period company records gains losses income expense net realized unrealized foreign currency transaction gains material years ended august 31 2011 2010 2009 redeemable noncontrolling interest company issued common stock noncontrolling interest holder one subsidiaries redeemable option holder upon occurrence event solely within company’s control interest redeemed company would required purchase interest fair value date redemption redeemable noncontrolling interest measured fair value reporting period adjustments carrying amount redeemable noncontrolling interest prior exercise redemption option recorded equity since redemption noncontrolling interest outside company’s control interests presented consolidated balance sheets mezzanine section caption “redeemable noncontrolling interests” see note 12 redeemable noncontrolling interest detail common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding 49 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” schnitzer steel industries inc voting trust trustees capacity trustees deemed beneficially common stock virtue bound voting trust agreement governing trust right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidincapital excess retained earnings additional paidincapital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipments historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes compensation cost relating sharebased payment transactions vesting period cost measured based estimated fair value equity instruments issued see note 16 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information recognize interest penalties related uncertain tax positions income tax expense see note 17 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income loss per share attributable ssi computed dividing net income loss weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method 50 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements certain company’s stock options rsus performance share awards excluded calculation diluted net income loss per share antidilutive however options awards could dilutive future net income loss attributable noncontrolling interests deducted income loss continuing operations arrive net income loss continuing operations attributable ssi purposes calculating net income loss per share see note 18 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities intangible asset valuation inventory valuation redeemable noncontrolling interest valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2011 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits letters credit monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 176 million 85 million open letters credit august 31 2011 2010 respectively note 3 recent accounting pronouncements december 2010 accounting standard update issued regarding interpretation disclosure supplementary pro forma information business combinations standard clarifies entity required disclose pro forma revenue earnings though business combinations occurred current year occurred beginning comparable prior annual reporting period addition standard expands supplemental pro forma disclosures include description nature amount material nonrecurring pro forma adjustments directly attributable business combination included reported pro forma revenue earnings standard effective company fiscal year 2012 company currently complies disclosures thus standard impact previously issued financial statements may 2011 accounting standard update issued clarify existing fair value measurement guidance expand disclosure requirements fair value measurements estimated using unobservable inputs level 3 inputs new disclosures required report quantitative information unobservable inputs used measurement level 3 valuations include valuation process used determine fair value item sensitivity measurement changes unobservable inputs standard effective company third quarter fiscal year 2012 standard unlikely impact fair value measurement company’s existing assets liabilities equity valuations additional disclosures required company’s redeemable noncontrolling interest measured using level 3 inputs june 2011 accounting standard update issued regarding presentation comprehensive income financial statements standard eliminates option presenting comprehensive income part statement changes stockholders’ equity instead requires entity present comprehensive income either single statement comprehensive income combined net income two separate continuous statements amendment effective company fiscal year 2013 interim periods therein company currently reports comprehensive income summary changes equity comprehensive income required update presentation comprehensive income compliance new standard september 2011 accounting standard update issued simplifies entity tests goodwill impairment allowing entity first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test entity believes result qualitative assessment morelikelythannot fair value reporting unit less carrying amount quantitative impairment test required otherwise testing required revised standard includes examples types factors consider conducting qualitative assessment include macroeconomic conditions deterioration entity’s operating environment entityspecific events 51 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements declining financial performance events expectation reporting unit sold revised standard effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 early adoption permitted company likely early adopt standard goodwill impairment test performed fiscal 2012 upon adoption standard impact company assesses goodwill impairment change measurement recognition potential goodwill impairment charge september 2011 accounting standard update issued requires additional disclosures employer’s participation multiemployer pension plans revised disclosures provide additional information plans employer participates level participation financial health significant plans nature employer’s commitments plans including collectivebargaining agreements require contributions significant plans set expire whether agreements require minimum contributions made plans revised disclosures also require additional information significant plans sources available outside basic financial statements including funded status plans revised standard change existing recognition measurement disclosure provisions withdrawal liabilities revised standard effective company fiscal year 2012 company currently complies disclosure requirements revised standard note 4 inventories net inventories consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization assets capital leases 68 million 57 million 56 million years ended august 31 2011 2010 2009 respectively note 6 business combinations fiscal 2011 company made following acquisitions • september 2010 company acquired substantially assets sos metals island recycling llc metals recycler maui hawaii provide additional source scrap metal mrb hawaii facility • november 2010 company acquired substantially assets utilized specialized parts planet inc stockton california used auto parts facility expanded apb’s presence western us • december 2010 company acquired substantially assets waco upull inc used auto parts store waco texas expanded apb’s presence southwestern us • december 2010 company acquired substantially assets macon iron paper stock co metals recycler two yards macon georgia expanded mrb’s presence southeastern us 52 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements • december 2010 company acquired substantially assets steel pacific recycling inc metals recycler six yards vancouver island british columbia canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition marked mrb’s initial expansion canada • january 2011 company acquired substantially assets state line scrap co inc metals recycler one yard attleboro massachusetts expanded mrb’s presence northeastern us • january 2011 company acquired substantially mobile car crushing assets northwest recycling inc based portland oregon provides scrap metal mrb’s portland oregon facility • february 2011 company acquired substantially assets ferrill’s auto parts inc used auto parts business three stores seattle washington expanded apb’s presence northwestern us • march 2011 company acquired substantially metals recycling business assets amix salvage sales ltd operated four metals recycling yards british columbia canada two metals recycling yards alberta canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition expanded mrb’s presence western canada part consideration paid company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary • april 2011 company acquired substantially assets american metal group inc certain affiliates metals recycler yards san jose santa clara california previously supplied ferrous scrap mrb’s oakland california facility acquisition expanded mrb’s presence western us total purchase price 314 million comprising 293 million cash 21 million noncash consideration 19 million shares subsidiary 2 million contingent consideration acquisitions fiscal 2011 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 246 million year ended august 31 2011 recorded goodwill 232 million expected deductible tax purposes following unaudited pro forma summary presents effect consolidated financial results company businesses acquired year ended august 31 2011 though businesses acquired beginning fiscal 2010 thousands 1 excludes nonrecurring executive compensation paid management acquired companies incurred future pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations since dates acquisitions acquired operations generated aggregate revenues sales third parties 93 million operating income 10 million august 31 2011 excluding benefits realized geographically proximate export facilities integrating acquired businesses existing operations fiscal 2010 company made following acquisitions • october 2009 company acquired substantially assets four lkq corporation’s selfservice used auto parts stores located near mrb’s export facility portland oregon acquisition represented company’s first used auto parts operations pacific northwest • january 2010 company acquired substantially assets two lkq corporation’s selfservice used auto parts stores increased four number used auto parts stores company operates dallasfort worth metroplex • april 2010 company acquired substantially assets golden recycling salvage inc 53 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements metals recycler montana provide additional source scrap metal mrb’s tacoma washington export facility total purchase price 41 million cash acquisitions fiscal 2010 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 27 million recorded goodwill expected deductible tax purposes acquisitions completed fiscal 2010 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2010 acquisitions presented since aggregate results would significantly different reported results fiscal 2009 company made following acquisitions • december 2008 company acquired substantially assets arrow metals corporation metals recycler washington provide additional source scrap metal mrb’s tacoma washington export facility • february 2009 company acquired ponce resources inc leading metals recycler puerto rico acquisition expanded company’s presence new region increased company’s processing capability provided new sources scrap metal access international export facilities • february 2009 company acquired additional 1666 equity interest auto parts business located california april 2009 acquired remaining 834 minority equity interest business thus increasing company’s equity ownership business 100 acquired equity previously consolidated company’s financial statements company maintained operating control entity • february 2009 company acquired substantially assets two selfservice used auto parts businesses california operated specialized parts planet inc thereby strengthening company’s presence northern california • march 2009 company acquired substantially assets solid waste reduction services inc metals recycler nevada provide additional source scrap metal mrb’s oakland california export facility total purchase price 96 million comprising 93 million cash 3 million notes payable acquisitions fiscal 2009 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase prices fair value identifiable net assets acquired 61 million recorded goodwill 14 million expected deductible tax purposes following unaudited pro forma summary presents effect consolidated financial results company businesses acquired year ended august 31 2009 though businesses acquired beginning fiscal 2008 thousands pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations 54 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements following summary aggregate fair values assets acquired liabilities assumed acquisitions completed years ended august 31 thousands 1 acquisitions completed fiscal 2010 material individually aggregate company’s financial position results operations following table presents fair value intangible assets acquired acquisitions completed year ended august 31 2011 dollars thousands 1 intangible assets subject amortization include supply contracts permits licenses leasehold interests 2 indefinitelived intangible assets include tradenames real property options following table presents intangible assets associated acquisitions completed year ended august 31 2009 dollars thousands 1 intangible assets subject amortization include tradenames employment agreements permits licenses supply contracts company paid premium ie goodwill fair value net tangible identified intangible assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses increase company’s market presence new existing regions • company anticipates cost savings efficiencies synergies 55 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements note 7 discontinued operations october 2009 company sold fullservice used auto parts operation operated part apb reporting segment proceeds 41 million company concluded divestiture met definition discontinued operation accordingly results discontinued operation reclassified periods presented sale resulted loss 15 million net tax included 12 million goodwill allocated fullservice operation apb reporting segment operating results discontinued operations summarized operating results fiscal 2011 material amounts exclude general corporate overhead previously allocated fullservice used auto parts operation note 8 goodwill intangible assets net second quarter fiscal 2011 company performed annual goodwill impairment testing comparing fair value reporting unit carrying value including goodwill result testing company determined fair value reporting unit substantially excess respective carrying value reporting unit’s goodwill balance indefinitelived intangible assets impaired february 28 2011 triggering events remainder fiscal 2011 required goodwill impairment test accumulated goodwill impairment charges august 31 2011 gross changes carrying amount goodwill reporting segment years ended august 31 2011 2010 follows thousands 56 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements following table presents company’s intangible assets august 31 thousands 1 intangibles assets subject amortization include tradenames marketing agreements employment agreements leasehold interests permits licenses real property options 2 indefinitelived intangibles include tradenames permits licenses real property options total intangible asset amortization expense years ended august 31 2011 2010 2009 7 million 6 million 5 million respectively estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 9 shortterm borrowings company unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2012 interest rates set bank time borrowing company borrowings outstanding facility august 31 2011 2010 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio note 10 longterm debt capital lease obligations longterm debt capital lease obligations consisted following august 31 thousands 57 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements february 2011 company amended restated unsecured committed bank credit agreement bank america na administrative agent lenders party thereto increase amount available 650 million 450 million including 30 million canadian dollar availability maturity also extended february 2016 interest rates outstanding indebtedness amended agreement based company’s option either london interbank offered rate canadian equivalent plus spread 175 275 amount spread based pricing grid tied company’s leverage ratio base rate plus spread 0 1 addition annual commitment fees payable unused portion credit facility rates 025 045 based pricing grid tied company’s leverage ratio company borrowings outstanding credit facility 393 million 90 million august 31 2011 2010 respectively weighted average interest rate amounts outstanding facility 248 079 august 31 2011 2010 respectively bank credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company outstanding letters credit totaling 18 million august 31 2011 2010 related certain obligations including workers’ compensation performance bonds note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates july 2024 rent expense 25 million 18 million 19 million fiscal 2011 2010 2009 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2011 thousands contingencies environmental company evaluates adequacy reserves environmental liabilities quarterly basis accordance company policy adjustments made additional information becomes available affects estimated costs study 58 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements remediate environmental issues expenditures made reserves established changes company’s reserves environmental liabilities years ended august 31 2011 2010 follows thousands 1 fiscal 2010 company released 2 million environmental reserves discontinued operations related fullservice auto parts operation partially offset 1 million environmental liabilities recorded purchase accounting 2 fiscal 2011 company recorded 1 million environmental liabilities purchase accounting related acquisitions completed fiscal 2011 metals recycling business august 31 2011 mrb environmental reserves 26 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway epa indicated expects issue record decision discuss remedial alternatives site sometime 2013 unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team finalized allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined agreement paid portion costs company participate funding second phase natural resource damage assessment cost investigations remediation associated site reasonably estimable completion data review investigations conducted lwg trustees selection approval remedy epa however given size site nature conditions identified date total cost investigations remediation likely substantial addition determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps possible estimate costs company might incur connection site although costs could material company’s financial position results operations cash flows liquidity company insurance policies believes provide reimbursement costs incurs defense remediation connection site although assurance 59 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements policies cover costs company may incur fiscal 2006 company recorded liability estimated share costs investigation incurred lwg date august 31 2011 2010 company’s reserve third party investigation costs site 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river reserves established connection investigations extent contamination company’s responsibility contamination yet determined metals recycling business sites august 31 2011 company environmental reserves related various mrb sites portland harbor 25 million reserves range 2 million per site relate potential future remediation soil contamination groundwater contamination storm water runoff issues material environmental compliance enforcement proceedings currently pending related sites auto parts business august 31 2011 company environmental reserves related various apb sites 15 million reserves range 2 million per site relate potential future remediation soil contamination groundwater contamination storm water runoff issues material environmental compliance enforcement proceedings currently pending related sites steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit first issued 1998 since renewed march 1 2012 expected renewed prior expiration permit based upon annual production capacity 950 thousand tons smb environmental reserves august 31 2011 portland harbor superfund site discussed management currently believes adequate provision made consolidated financial statements potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period note 12 redeemable noncontrolling interest march 2011 company whollyowned acquisition subsidiary acquired substantially metals recycling business assets amix salvage sales ltd part purchase consideration company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary terms agreement related acquisition noncontrolling interest owner right require company purchase 20 interest company’s acquisition subsidiary fair value “redemption option” noncontrolling interest becomes redeemable within 60 days later third anniversary date acquisition ii date certain principals minority shareholder longer employed company conditions redemption noncontrolling interest met august 31 2011 august 31 2011 fair value redeemable noncontrolling interest 19 million material changes fair value recorded since initial measurement noncontrolling interest company estimates fair value using level 3 inputs fair value hierarchy based standard valuation techniques using discounted cash flow analysis determination fair value requires management apply significant judgment formulating estimates assumptions estimates assumptions primarily include forecasts future cash flows based management’s best estimate future sales operating costs pricing expectations capital expenditures working capital requirements discount rates growth rates tax rates general market conditions 60 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements note 13 accumulated comprehensive income loss components accumulated comprehensive income loss net tax follows august 31 thousands note 14 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company may enter foreign currency forward contracts stabilize us dollar amount transaction settlement contracts designated hedging instruments accounting purposes realized unrealized gains losses settled unsettled forward contracts measured fair value recognized income expense consolidated statement operations undesignated contracts outstanding august 31 2011 2010 realized gains losses derivatives material periods presented company entered forward contracts fiscal 2011 mitigate exposure exchange rate fluctuations eurodenominated fixed asset purchases designated cash flow hedges accounting purposes foreign currency forward contracts measured using forward exchange rates based observable exchange rates quoted active market classified level 1 fair value measurement fair value hierarchy august 31 2011 nominal amount open forward contracts fair value related unrealized losses recognized comprehensive income loss material consolidated financial statements natural gas price risk management order minimize volatility natural gas costs smb entered takeorpay natural gas contract obligated purchase minimum 2000 mmbtus per day october 31 2010 whether amount utilized contract expired may 31 2011 contract met definition derivative instrument carried fair value determined using forward price curve based observable market price quotations major natural gas trading hub consideration nonperformance risk considered level 2 fair value measurement fair value hierarchy portion natural gas contract equivalent 20000 mmbtu per month designated cash flow hedge october 1 2008 fair value natural gas derivative contract material august 31 2010 amounts recognized effective ineffective portion hedge undesignated portion natural gas contract material periods presented note 15 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees companies plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company reflects funded status defined benefit pension plan net asset consolidated balance sheets changes funded status recognized comprehensive income net periodic pension benefit cost material years ended august 31 2011 2010 2009 fair value plan assets 17 million 15 million august 31 2011 2010 respectively projected benefit obligation 15 million 15 million august 31 2011 2010 respectively plan fully funded plan assets exceeding projected benefit obligation 2 million less 1 million august 31 2011 2010 respectively plan assets comprised 16 million 14 million level 1 investments 1 million 1 million level 2 investments august 31 2011 august 31 2010 respectively level 1 assets valued based quoted market price identical securities principal market level 2 investments valued net asset value fund provided fund’s manager independent administrator contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected 61 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements benefit obligations 497 487 august 31 2011 2010 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 2 million august 31 2011 2010 trust fund assets’ gains losses included income expense company’s consolidated statements operations benefit obligation unfunded amount 3 million august 31 2011 2010 respectively defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 13 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan ein 900169564 plan 001 benefiting union employees smb collective bargaining agreement associated plan expires march 31 2012 plan certified zone status required pension protection act 2006 red august 31 2011 2010 plan’s yearend september 30 2010 2009 respectively zone status based information company received plan’s administrator certified plan’s actuary although plan 814 funded plan considered red zone projected deficiency funding standard account within one year plan utilize extended amortization provisions calculation zone status result red zone status plan adopted rehabilitation plan requires annual contribution rate increases 6 rehabilitation plan adopted contributing employers company required pay surcharge plan company contributed 2 million plan years ended august 31 2011 2010 2009 contributions represented 5 total contributions plan year company contributions multiemployer plans 3 million years ended august 31 2011 2010 2009 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million 1 million 4 million years ended august 31 2011 2010 2009 respectively note 16 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 65 million available future grants august 31 2011 sharebased compensation expense 14 million 11 million 9 million years ended august 31 2011 2010 2009 respectively tax benefits used option exercises vesting restricted stock units material periods presented restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus granted recognized respective requisite service period awards net estimated forfeitures years ended august 31 2011 2010 2009 compensation committee granted 135255 rsus 153986 rsus 106387 rsus respectively key employees officers directors plan rsus fiveyear term vest 20 per year commencing june 1 year grant except immaterial number awards granted different terms estimated fair value rsus granted years ended august 31 2011 2010 2009 7 million 7 million 5 million respectively 62 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 7 million 5 million 4 million years ended august 31 2011 2010 2009 respectively august 31 2011 total unrecognized compensation costs related unvested rsus amounted 13 million expected recognized weighted average period three years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reporting segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2009 2011 performance share awards compensation committee approved performancebased awards plan grant date november 24 2008 compensation committee established performance targets based company’s average growth earnings per share weighted 50 company’s average return capital employed weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards fiscal 2010 2012 performance share awards compensation committee approved performancebased awards plan grant date november 20 2009 compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards 63 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements fiscal 2011 2013 performance share awards compensation committee approved performancebased awards plan grant date december 3 2010 compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion awards summary company’s performancebased awards activity follows 1 amounts represent value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 6 million 3 million less 1 million years ended august 31 2011 2010 2009 respectively august 31 2011 unrecognized compensation costs related nonvested performance shares amounted 8 million expected recognized weighted average period 16 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2011 2010 2009 total 17459 shares 30834 shares 28638 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2011 2010 2009 well unrecognized compensation expense august 31 2011 material stock options plan stock options granted employees exercise prices equal fair market value company’s class common stock dates grant sole discretion board directors generally stock options vest ratably fiveyear period date grant contractual term ten years fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior options granted years ended august 64 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements 31 2011 2010 2009 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options outstanding stock options vested august 31 2011 aggregate intrinsic value stock options exercised 1 million 1 million 4 million years ended august 31 2011 2010 2009 respectively represents difference exercise price value company’s stock time exercise total fair value stock options vested compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised material years ended august 31 2011 2010 2009 note 17 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands 65 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements reconciliation difference federal statutory rate companys effective tax rate years ended august 31 follows effective tax rate differed us federal statutory rate 350 primarily due lower tax rate foreign income domestic production activities deductions fiscal 2011 effective tax rate also benefited certain adjustments recorded period including recognition research development credits reduction reserve unrecognized state income tax benefits addition fourth quarter fiscal 2011 company recorded adjustment correct error originated prior period pertaining deferred tax liabilities related company’s investment subsidiary correction error resulted reduction income tax expense increase net income 3 million year ended august 31 2011 management determined error material previously reported consolidated financial statements resulting correction material consolidated financial statements year ended august 31 2011 deferred tax assets liabilities comprised following august 31 thousands deferred taxes included benefits state net operating loss carry forwards state tax credits expire used 2012 2029 66 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2007 prior years canadian several state tax authorities currently examining company’s income tax returns fiscal years 2004 2008 company currently pays 7 tax rate earnings puerto rico based qualification manufacturer 2010 local regulatory agency issued letter challenging company’s entitlement manufacturing tax exemption upheld could increased company’s tax rate puerto rico september 2011 agency withdrew challenge company continues benefit manufacturing tax exemption note 18 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 39820 50702 828869 considered antidilutive excluded calculation diluted net income loss per share years ended august 31 2011 2010 2009 respectively note 19 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 48 million 29 million 16 million years ended august 31 2011 2010 2009 respectively advances payments joint ventures 2 million less 1 million 2 million years ended august 31 2011 2010 2009 respectively company owed 2 million 1 million joint ventures august 31 2011 2010 respectively november 2010 company joint venture partner entered series agreements facilitate expansion 67 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements joint venture operations order increase flow scrap mrb yards order fund growth company joint venture partner contributed additional 2 million equity joint venture connection acquisition metals recycling business assets amix salvage sales ltd fiscal 2011 company entered series agreements lease property obtain services entities owned minority shareholder company’s subsidiary operates mrb facilities british columbia alberta canada company paid 3 million agreements year ended august 31 2011 thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company 75 partner operates four selfservice stores northern california mr klauer’s 25 share profits partnership totaled 2 million 2 million 1 million years ended august 31 2011 2010 2009 respectively company owned mr klauer jointly real property one stores leased partnership mr klauer’s share annual rent paid partnership less 1 million term lease expires december 2015 partnership option renew lease upon expiration multiple fiveyear periods rent lease adjusted annually based consumer price index also fiscal 2009 mr klauer company sole shareholder acquired ownership contiguous parcel real property portion leased partnership term lease expires december 2015 partnership option renew lease upon expiration multiple fiveyear periods rent lease adjusted annually based consumer price index rent paid partnership mr klauer’s company parcel less 1 million years ended august 31 2011 2010 2009 addition july 2011 company leased parcel land san jose company mr klauer sole shareholder term lease expires january 31 2012 company option renew lease additional six months rent paid mr klauer’s company fiscal 2011 parcel less 1 million addition year ended august 31 2008 company loaned partnership 5 million fund exercise option purchase another property occupied partnership unrelated third party loan accrued interest 5 per annum partnership prohibited making distributions partners taxes income partnership loan repaid principal balance repaid first quarter fiscal 2010 certain shareholders company significant interests related owners entities discussed entities considered related parties financial reporting purposes transactions schnitzer family including schnitzer family companies require approval company’s audit committee company compliance policy members schnitzer family outstanding stock schnitzer investment corp “sic” engaged real estate business subsidiary company prior 1989 company sic potentially responsible parties respect portland harbor designated superfund site since december 2000 company sic worked together response portland harbor matters company paid legal consulting fees joint defense part due environmental indemnity obligation sic respect portland scrap metal operations property costs increased substantially last two years company sic agreed equitable cost sharing arrangement respect defense costs sic pay 50 legal consulting costs net insurance recoveries company recognized 1 million 3 million reimbursement environmental expenses year ended august 31 2011 2010 respectively sic’s share costs amounts receivable sic agreement less 1 million 1 million august 31 2011 2010 respectively company’s restated articles incorporation bylaws obligate indemnify current former directors officers fullest extent prohibited law obligates advance expenses incurred defending pending threatened proceeding person advance final disposition matters involved officer director affirms good faith belief entitlement indemnification undertakes repay expenses ultimately determined court person entitled indemnified connection continuing investigation certain former employees related company’s past practice making improper payments purchasing managers customers asia robert w philip former chairman president chief executive officer company requested advancement expenses provided required undertaking company advanced 1 million mr philip legal expenses connection investigation fiscal 2010 2009 fiscal 2010 company reimbursed insurance carrier approximately 3 million amounts advanced former officers directors william furman director company chairman chief executive officer greenbrier companies subsidiaries “greenbrier” years ended august 31 2011 2010 2009 company engaged series transactions greenbrier company sold well purchased goods arm’s length’s basis years ended august 31 2011 2010 2009 company sold goods greenbrier amount less 1 million 1 million less 1 million respectively purchases goods greenbrier less 1 million years ended august 31 2011 2010 2009 68 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements note 20 segment information accounting standards reporting information operating segments define operating segments components enterprise separate financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance company’s chief operating decision maker chief executive officer company organized line business chief executive officer evaluates results number different ways line business management structure primary basis allocation resources financial results assessed aforementioned criteria company operates three operating reporting segments metal purchasing processing recycling selling mrb used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales mrb smb made rates approximate export market prices shipments west coast us addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decisionmaker purpose corporate management company uses operating income loss measure segment performance company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments unallocated expense operating income loss reporting segment reflect operating income loss reporting segment would standalone business amounts presented exclude results operations company’s discontinued fullservice used auto parts operation following summary company’s total assets august 31 thousands 1 mrb total assets include 17 million 14 million august 31 2011 2010 respectively investments joint venture partnerships 2 property plant equipment net includes 49 million 3 million august 31 2011 2010 respectively canadian locations 69 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results reporting segment years ended august 31 thousands 1 mrb operating income fiscal 2009 includes bad debt expense 8 million 2 mrb operating income includes 5 million 3 million 1 million income joint ventures accounted equity method fiscal 2011 2010 2009 respectively 70 schnitzer steel industries inc form 10k 2011 schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2011 2010 2009 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 71 schnitzer steel industries inc form 10k 2011 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts fourth quarter fiscal 2011 company recorded adjustment correct error originated prior period pertaining deferred tax liabilities related company’s investment subsidiary correction error resulted reduction income tax expense increase net income 3 million fourth quarter fiscal 2011 72 schnitzer steel industries inc form 10k 2011 schedule ii valuation qualifying accounts years ended august 31 2011 2010 2009 thousands 73 schnitzer steel industries inc form 10k 2011 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2012 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2012 stated report included herein 42 schnitzer steel industries inc form 10k 2012 report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements income shareholders’ equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2012 2011 results operations cash flows three years period ended august 31 2012 conformity accounting principles generally accepted united states america addition opinion financial statement schedule index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 25 2012 43 schnitzer steel industries inc form 10k 2012 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 44 schnitzer steel industries inc form 10k 2012 schnitzer steel industries inc consolidated statements income thousands except per share amounts see notes consolidated financial statements 45 schnitzer steel industries inc form 10k 2012 schnitzer steel industries inc consolidated statements equity thousands 46 schnitzer steel industries inc form 10k 2012 1 net income attributable noncontrolling interests august 31 2012 2011 excludes 1163 thousand 100 thousand respectively allocable redeemable noncontrolling interest reported mezzanine section consolidated balance sheets august 31 2012 2011 see note 13 redeemable noncontrolling interest detail 2 foreign currency translation adjustments years ended august 31 2012 2011 exclude 350 thousand 509 thousand respectively relating redeemable noncontrolling interest reported mezzanine section consolidated balance sheets august 31 2012 2011 see note 13 redeemable noncontrolling interest detail see notes consolidated financial statements 47 schnitzer steel industries inc form 10k 2012 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements 48 schnitzer steel industries inc form 10k 2012 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reporting segments follows metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb buys collects processes recycles sells brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice used auto parts networks additionally apb supplier ferrous nonferrous material including autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products august 31 2012 company’s facilities located us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 38 million 40 million august 31 2012 2011 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 4 million 6 million august 31 2012 2011 respectively inventories net company’s inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product nonferrous arising manufacturing process used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances metal inventory estimates quantities required mitigate risk company adjusts 49 schnitzer steel industries inc form 10k 2012 ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2012 useful lives used depreciation amortization follows impairment longlived assets amortizable intangible assets longlived assets intangible assets subject amortization subject impairment assessment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related asset impairment recorded difference carrying amount fair value asset material impairments carrying value longlived assets intangible assets subject amortization years ended august 31 2012 2011 2010 investment joint ventures august 31 2012 2011 company five 50owned joint venture interests accounted equity method accounting presented part mrb operations company’s investment equity method joint ventures resulted cumulative undistributed earnings 11 million august 31 2012 2011 see note 20 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ company determined reporting units goodwill allocated equivalent company’s operating segments components operating segment similar economic characteristics goodwill impairment test follows twostep process first step fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates appropriate discount rates addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation aggregated fair value 50 schnitzer steel industries inc form 10k 2012 reporting units company’s market capitalization including consideration control premium company believes reconciliation consistent market participant’s perspective company tests indefinitelived intangible assets impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed indefinitelived intangible asset carrying value longer considered recoverable company record impairment company record material impairment charges indefinitelived intangible assets periods presented see note 8 goodwill intangibles assets net detail acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balances result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred restructuring charges restructuring charges consist severance contract termination exit costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability exit costs measured fair value period liability incurred see note 12 restructuring charges detail accrued workers’ compensation costs company selfinsured workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 11 million 10 million estimated cost workers’ compensation claims august 31 2012 2011 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery actually realized amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 11 commitments contingencies detail 51 schnitzer steel industries inc form 10k 2012 financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts company uses market approach value financial assets liabilities determined using available market information longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 carrying amounts nonderivative financial instruments approximate fair value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 8 goodwill intangible assets net note 13 redeemable noncontrolling interest note 15 derivative financial instruments detail derivatives company records derivative instruments assets liabilities consolidated balance sheets fair value changes fair value either recognized accumulated comprehensive income loss consolidated balance sheets net income consolidated statements income applicable depending nature underlying exposure whether derivative designated qualifying hedge designated qualifying hedge extent hedge effective amounts included accumulated comprehensive income loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 15 derivative financial instruments derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities foreign operations translated us dollars periodend exchange rate revenues expenses foreign operations translated us dollars average exchange rate period cash flows foreign operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income period recorded accumulated comprehensive income loss separate component ssi shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally required recognized determination net income period company records gains losses income expense net realized unrealized foreign currency transaction gains material years ended august 31 2012 2011 2010 redeemable noncontrolling interest company issued common stock one subsidiaries noncontrolling interest holder subsidiary redeemable option holder upon occurrence event solely within company’s control since redemption noncontrolling interest outside company’s control interest presented consolidated balance sheets mezzanine section caption redeemable noncontrolling interest redeemed company would required purchase interest fair value date redemption redeemable 52 schnitzer steel industries inc form 10k 2012 noncontrolling interest presented greater carrying amount adjusted noncontrolling interest’s share allocation income loss subsidiary dividends contributions noncontrolling interest fair value measurement date adjustments carrying amount redeemable noncontrolling interest changes fair value prior exercise redemption option recorded retained earnings see note 13 redeemable noncontrolling interest detail common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipments historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes compensation cost relating sharebased payment transactions vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 17 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized 53 schnitzer steel industries inc form 10k 2012 one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 18 income taxes detail net income per share basic net income per share attributable ssi computed dividing net income weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income per share attributable ssi computed dividing net income weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income per share antidilutive however options awards could dilutive future net income attributable noncontrolling interests deducted income continuing operations arrive net income continuing operations attributable ssi purposes calculating net income per share see note 19 net income per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities goodwill intangible asset valuation inventory valuation redeemable noncontrolling interest valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2012 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits letters credit monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 37 million 90 million open letters credit august 31 2012 2011 respectively reclassifications certain prior year amounts reclassified within operating expenses income net consolidated statements income cash flows operating activities consolidated statements cash flows conform current year presentation changes impact previously reported operating income net income net cash provided operating activities note 3 recent accounting pronouncements june 2011 accounting standard update issued regarding presentation comprehensive income financial statements standard eliminates option presenting comprehensive income part statement changes stockholders’ equity instead requires entity present comprehensive income either single continuous statement comprehensive income two separate consecutive statements amendment effective company fiscal year 2013 interim periods therein company currently reports comprehensive income summary changes equity comprehensive income update presentation comprehensive income two separate continuous statements compliance new standard september 2011 accounting standard update issued simplifies entity tests goodwill impairment 54 schnitzer steel industries inc form 10k 2012 allowing entity first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test entity believes result qualitative assessment morelikelythannot fair value reporting unit less carrying amount quantitative impairment test required otherwise testing required revised standard effective annual interim goodwill impairment test performed fiscal years beginning december 15 2011 company adopt standard goodwill impairment test performed fiscal 2013 upon adoption standard impact company assesses goodwill impairment change measurement recognition potential goodwill impairment charge december 2011 accounting standard update issued increasing disclosures regarding offsetting assets liabilities financial instruments derivative instruments standard requires disclosure gross amounts recognized assets liabilities amounts offset balance sheet amounts subject offsetting requirements offset balance sheet standard effective company fiscal year 2014 interim periods therein applied retrospectively adoption standard expected significant impact company’s consolidated financial position results operations cash flows july 2012 accounting standard update issued simplifies entity tests indefinitelived intangible assets impairment allowing entity first assess qualitative factors determine whether necessary perform quantitative impairment test entity believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required revised standard effective annual interim indefinitelived intangible asset impairment tests performed fiscal years beginning september 15 2012 early adoption permitted adoption standard expected significant impact company’s consolidated financial position results operations cash flows note 4 inventories net inventories net consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization assets capital leases 77 million 68 million 57 million years ended august 31 2012 2011 2010 respectively note 6 business combinations fiscal 2012 company made following acquisitions • june 2012 company acquired substantially assets rocky mountain salvage ltd metals recycler hinton alberta expanded mrb’s presence western canada 55 schnitzer steel industries inc form 10k 2012 acquisition completed fiscal 2012 material company’s financial position results operations pro forma operating results fiscal 2012 acquisition presented since aggregate results would significantly different reported results fiscal 2011 company made following acquisitions • september 2010 company acquired substantially assets sos metals island recycling llc metals recycler maui hawaii provide additional source scrap metal mrb hawaii facility • november 2010 company acquired substantially assets utilized specialized parts planet inc stockton california used auto parts facility expanded apb’s presence western us • december 2010 company acquired substantially assets waco upull inc used auto parts store waco texas expanded apb’s presence southwestern us • december 2010 company acquired substantially assets macon iron paper stock co metals recycler two yards macon georgia expanded mrb’s presence southeastern us • december 2010 company acquired substantially assets steel pacific recycling inc metals recycler six yards vancouver island british columbia canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition marked mrb’s initial expansion canada • january 2011 company acquired substantially assets state line scrap co inc metals recycler one yard attleboro massachusetts expanded mrb’s presence northeastern us • january 2011 company acquired substantially mobile car crushing assets northwest recycling inc based portland oregon provides scrap metal mrb’s portland oregon facility • february 2011 company acquired substantially assets ferrill’s auto parts inc used auto parts business three stores seattle washington expanded apb’s presence northwestern us • march 2011 company acquired substantially metals recycling business assets amix salvage sales ltd operated four metals recycling yards british columbia canada two metals recycling yards alberta canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition expanded mrb’s presence western canada part consideration paid company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary • april 2011 company acquired substantially assets american metal group inc certain affiliates metals recycler yards san jose santa clara california previously supplied ferrous scrap mrb’s oakland california facility acquisition expanded mrb’s presence western us total purchase price 316 million comprising 294 million cash 22 million noncash consideration 20 million shares subsidiary 2 million contingent consideration subsequently paid cash third quarter fiscal 2012 acquisitions fiscal 2011 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 253 million recorded goodwill 245 million expected deductible tax purposes following unaudited pro forma summary presents effect consolidated financial results company businesses acquired year ended august 31 2011 though businesses acquired beginning fiscal 2010 thousands 1 excludes nonrecurring executive compensation paid management acquired companies incurred future 56 schnitzer steel industries inc form 10k 2012 pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations fiscal 2010 company made following acquisitions • october 2009 company acquired substantially assets four lkq corporation’s selfservice used auto parts stores located near mrb’s export facility portland oregon acquisition represented company’s first used auto parts operations pacific northwest • january 2010 company acquired substantially assets two lkq corporation’s selfservice used auto parts stores increased four number used auto parts stores company operates dallasfort worth area • april 2010 company acquired substantially assets golden recycling salvage inc metals recycler montana provide additional source scrap metal mrb’s tacoma washington export facility total purchase price 41 million cash acquisitions fiscal 2010 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 27 million recorded goodwill expected deductible tax purposes acquisitions completed fiscal 2010 material individually aggregate company’s financial position results operations pro forma operating results fiscal 2010 acquisitions presented since aggregate results would significantly different reported results following summary aggregate fair values assets acquired liabilities assumed acquisitions completed year ended august 31 2011 thousands 1 acquisitions completed fiscal 2012 2010 material individually aggregate company’s financial position results operations 57 schnitzer steel industries inc form 10k 2012 following table presents fair value intangible assets acquired acquisitions completed year ended august 31 2011 dollars thousands 1 intangible assets subject amortization include supply contracts permits licenses leasehold interests 2 indefinitelived intangible assets include tradenames real property options company paid premium ie goodwill fair value net tangible identified intangible assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses increase company’s market presence new existing regions • company anticipates cost savings efficiencies synergies note 7 discontinued operations october 2009 company sold fullservice used auto parts operation operated part apb reporting segment proceeds 41 million company concluded divestiture met definition discontinued operation accordingly results discontinued operation reclassified periods presented sale resulted loss 15 million net tax included 12 million goodwill allocated fullservice operation apb reporting segment operating results discontinued operations fiscal 2010 summarized material fiscal 2012 2011 amounts exclude general corporate overhead previously allocated fullservice used auto parts operation note 8 goodwill intangible assets net second quarter fiscal 2012 company performed annual goodwill impairment testing comparing fair value reporting unit carrying value including goodwill addition third quarter fiscal 2012 management identified combination recent significant decline company’s market capitalization carrying value net assets persistent uncertainty around global macroeconomic conditions impact fiscal 2012 operating results current challenging market conditions industry company operates triggering event requiring interim impairment test goodwill result tests company determined fair value reporting unit goodwill allocated excess respective carrying value goodwill balance impaired determination fair value reporting units used perform first step impairment test requires judgment involves significant estimates assumptions expected future cash flows impact market conditions assumptions future events changing market conditions including sustained decline company’s market capitalization may lead company reevaluate assumptions future growth rates operating margins capital expenditures working capital requirements tax rates terminal growth rates appropriate discount rates factors may result changes 58 schnitzer steel industries inc form 10k 2012 estimates discounted future cash flows due inherent uncertainty associated forming estimates actual results could differ estimates gross changes carrying amount goodwill reporting segment years ended august 31 2012 2011 follows thousands accumulated goodwill impairment charges august 31 2012 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include tradenames marketing agreements employment agreements leasehold interests permits licenses real property options 2 indefinitelived intangibles include tradenames permits licenses real property options total intangible asset amortization expense years ended august 31 2012 2011 2010 5 million 7 million 6 million respectively estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands 59 schnitzer steel industries inc form 10k 2012 note 9 shortterm borrowings company unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2013 interest rates set bank time borrowing company borrowings outstanding facility august 31 2012 2011 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio note 10 longterm debt longterm debt capital lease obligations consisted following august 31 thousands april 2012 company certain subsidiaries entered amendment unsecured committed bank credit agreement “credit agreement” bank america na administrative agent lenders party thereto amendment among things increased aggregate commitment size us revolving loans 50 million credit agreement provides revolving loans 670 million c30 million ii reduced applicable margin rates loans outstanding credit agreement bear interest based company’s option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 iii reduced rates applicable commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied companys leverage ratio iv extended maturity date revolving loans credit agreement february 2016 april 2017 except modified amendment described terms credit agreement remained company borrowings outstanding credit facility 325 million 393 million august 31 2012 2011 respectively weighted average interest rate amounts outstanding facility 206 248 august 31 2012 2011 respectively credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands 60 schnitzer steel industries inc form 10k 2012 company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds august 31 2012 2011 company 18 million outstanding arrangements note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates july 2024 rent expense 28 million 25 million 18 million fiscal 2012 2011 2010 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2012 thousands contingencies environmental changes company’s liabilities environmental liabilities years ended august 31 2012 2011 follows thousands 1 fiscal 2012 2011 company recorded 8 million 1 million respectively purchase accounting environmental liabilities related properties acquired leased connection business combinations completed fiscal 2011 metals recycling business august 31 2012 mrb environmental liabilities 31 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company 61 schnitzer steel industries inc form 10k 2012 made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team entered allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment march 30 2012 lwg submitted epa made available website draft feasibility study “draft fs” site based approximately ten years work 100 million costs classified lwg investigation related draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs reviewed may subject revisions prior approval epa draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa expect issue final rod selecting remedy site least 2014 responsibility implementing funding epa’s selected remedy determined separate allocation process determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely reasonably possible company may incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently known available detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined mrb sites august 31 2012 company environmental liabilities related various mrb sites portland harbor 30 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site material environmental compliance enforcement proceedings currently pending related sites auto parts business august 31 2012 company environmental liabilities related various apb sites 16 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site material environmental compliance enforcement proceedings currently pending related sites steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste 62 schnitzer steel industries inc form 10k 2012 smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 renewed march 1 2012 company timely filed renewal application allows existing permit conditions remain force permit renewed new permit issued smb environmental liabilities august 31 2012 portland harbor superfund site discussed management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period addition company party various legal proceedings arising normal course business management believes adequate provisions made contingencies company anticipate resolution legal proceedings arising normal course business material adverse effect results operations financial condition cash flows note 12 restructuring charges fourth quarter fiscal 2012 company announced initiated number restructuring initiatives designed extract greater synergies significant acquisitions technology investments made fiscal 2011 realign company’s organization support future growth decrease operating expenses streamlining functions reducing organizational layers including achieving greater synergies mrb apb initiatives expected substantially complete end fiscal 2013 company expects total pretax charges pursuant restructuring initiatives approximately 12 million amount 5 million incurred fourth quarter fiscal 2012 approximately half remainder expected incurred first quarter fiscal 2013 balance expected incurred end fiscal 2013 company expects vast majority restructuring charges 12 million require company make cash payments following illustrates reconciliation restructuring liability major type costs year ended august 31 2012 thousands restructuring charges operating segment follows thousands 63 schnitzer steel industries inc form 10k 2012 note 13 redeemable noncontrolling interest march 2011 company whollyowned acquisition subsidiary acquired substantially metals recycling business assets amix salvage sales ltd part purchase consideration company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary terms agreement related acquisition noncontrolling interest owner right require company purchase interest company’s acquisition subsidiary fair value noncontrolling interest becomes redeemable within 60 days later third anniversary date acquisition ii date certain principals minority shareholder longer employed company august 31 2012 noncontrolling interest 19 outstanding capital stock subsidiary conditions redemption met august 31 2012 noncontrolling interest presented adjusted carrying value 22 million approximates fair value company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis determination fair value requires management apply significant judgment formulating estimates assumptions used discounted cash flow model including primarily revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements terminal year growth rates appropriate discount rate present value future cash flows determined using marketbased weighted average cost capital 125 including subjectcompany risk premium subsidiary presently undertaking significant investments install shredder related processing sorting equipment result projections future cash flows assume volumes earnings grow historical levels construction activity complete new equipment put service terminal year growth rate used discounted cash flow model 2 company also used market approach based earnings multiple data corroborate fair value estimate noncontrolling interest determined using discounted cash flow model significant increases decreases revenue growth rate driven commodity prices volume expectations terminal growth rate would result significantly higher lower fair value measurement significant decrease increase marketbased weighted average cost capital would result significantly higher lower fair value measurement following reconciliation changes redeemable noncontrolling interest years ended august 31 thousands note 14 accumulated comprehensive income loss components accumulated comprehensive income loss net tax follows august 31 thousands note 15 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company may enter foreign currency forward contracts stabilize us dollar amount transaction settlement contracts designated hedging instruments accounting purposes realized unrealized gains losses settled unsettled forward contracts measured fair value recognized income expense consolidated statement income undesignated contracts outstanding august 31 2012 2011 realized gains losses derivatives material periods presented 64 schnitzer steel industries inc form 10k 2012 company entered forward contracts fiscal 2012 2011 mitigate exposure exchange rate fluctuations eurodenominated fixed asset purchases designated qualifying cash flow hedges accounting purposes foreign currency forward contracts measured using forward exchange rates based observable exchange rates quoted active market classified level 2 fair value measurements fair value hierarchy first quarter fiscal 2012 company determined certain forecasted transactions longer probable dedesignated contracts hedges subsequently terminated contracts nominal amount fair value forward contracts amounts reclassified accumulated comprehensive income loss realized losses recorded income expense net period material consolidated financial statements natural gas price risk management order minimize volatility natural gas costs smb entered takeorpay natural gas contract obligated purchase minimum 2000 mmbtus per day october 31 2010 whether amount utilized contract expired may 31 2011 contract met definition derivative instrument carried fair value determined using forward price curve based observable market price quotations major natural gas trading hub consideration non performance risk considered level 2 fair value measurement fair value hierarchy portion natural gas contract equivalent 20000 mmbtu per month designated cash flow hedge october 1 2008 fair value natural gas derivative contract material august 31 2010 amounts recognized effective ineffective portion hedge undesignated portion natural gas contract material periods presented note 16 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income net periodic pension benefit cost material years ended august 31 2012 2011 2010 fair value plan assets 17 million august 31 2012 2011 projected benefit obligation 18 million 15 million august 31 2012 2011 respectively plan underfunded projected benefit obligation exceeding plan assets 1 million august 31 2012 plan fully funded plan assets exceeding projected benefit obligation 2 million august 31 2011 plan assets comprised 16 million level 1 investments 1 million level 2 investments august 31 2012 2011 level 1 investments valued based quoted market prices identical securities principal market level 2 investments valued net asset value fund provided fund’s manager independent administrator contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 367 497 august 31 2012 2011 respectively company estimates future annual benefit payments 1 million 4 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 2 million august 31 2012 2011 trust fund assets’ gains losses included income expense company’s consolidated statements income benefit obligation unfunded amount 4 million 3 million august 31 2012 2011 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 13 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent 65 schnitzer steel industries inc form 10k 2012 actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees smb covered collective bargaining agreement expire march 31 2016 wispp certified zone status required pension protection act 2006 red august 31 2012 2011 plan’s yearend september 30 2011 2010 respectively zone status based information company received plan’s administrator certified plan’s actuary although wispp 774 funded september 30 2011 considered red zone projected deficiency funding standard account within one year wispp utilize extended amortization provisions calculation zone status result red zone status wispp adopted rehabilitation plan requires annual contribution rate increases 6 rehabilitation plan adopted contributing employers company required pay surcharge wispp company contributed 2 million wispp years ended august 31 2012 2011 2010 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels based actuarial valuation wispp october 1 2011 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 652 targeted funding ratio specified agreement irs result wispp process seeking relief specified funding requirement irs wispp cannot obtain relief revocation irs amortization extension retroactively 2002 plan year could occur result material liability company’s share resulting funding deficiency extent currently cannot estimated company contributions multiemployer plans 4 million 3 million 3 million years ended august 31 2012 2011 2010 respectively defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million 3 million 1 million years ended august 31 2012 2011 2010 respectively note 17 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 59 million available future grants august 31 2012 sharebased compensation expense 9 million 14 million 11 million years ended august 31 2012 2011 2010 respectively tax benefits used option exercises vesting restricted stock units material periods presented restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2012 2011 2010 compensation committee granted 146481 rsus 135255 rsus 153986 rsus respectively key employees officers employee directors plan rsus fiveyear term vest 20 per year commencing june 1 year grant except immaterial number awards granted different terms estimated fair value rsus granted years ended august 31 2012 2011 2010 6 million 7 million 7 million respectively 66 schnitzer steel industries inc form 10k 2012 summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 7 million 7 million 5 million years ended august 31 2012 2011 2010 respectively august 31 2012 total unrecognized compensation costs related unvested rsus amounted 9 million expected recognized weighted average period 26 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reporting segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2010 2012 performance share awards compensation committee approved performancebased awards plan grant date november 20 2009 compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion target awards fiscal 2011 2013 performance share awards compensation committee approved performancebased awards plan grant date december 3 2010 compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion awards 67 schnitzer steel industries inc form 10k 2012 fiscal 2013 2014 performance share awards compensation committee approved performancebased awards plan grant date july 24 2012 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 1 million 6 million 3 million years ended august 31 2012 2011 2010 respectively august 31 2012 unrecognized compensation costs related nonvested performance shares amounted 7 million expected recognized weighted average period 15 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2012 2011 2010 total 18202 shares 17459 shares 30834 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2012 2011 2010 well unrecognized compensation expense august 31 2012 material stock options plan stock options granted employees exercise prices set sole discretion board directors fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest 68 schnitzer steel industries inc form 10k 2012 rate derived us treasury yield curve effect time grant expected term options based analysis expected postvesting exercise behavior including historical exercise patterns available stock options granted year ended august 31 2012 vest twoyear anniversary grant date contractual term five years exercise price set 20 premium compared companys stock price date grant estimated fair value granted options 3 million determined using blackscholes option pricing model following assumptions options granted years ended august 31 2011 2010 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options august 31 2012 total number unvested stock options 322658 aggregate intrinsic value stock options exercised less 1 million 1 million 1 million years ended august 31 2012 2011 2010 respectively represents difference exercise price value company’s stock time exercise total fair value stock options vested compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised material years ended august 31 2012 2011 2010 august 31 2012 unrecognized compensation costs related nonvested stock options amounted 3 million expected recognized weighted average period two years note 18 income taxes income continuing operations income taxes follows years ended august 31 thousands 69 schnitzer steel industries inc form 10k 2012 income tax expense continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows fiscal 2012 effective tax rate differed us federal statutory rate 350 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates fourth quarter fiscal 2011 company recorded adjustment correct error originated prior period pertaining deferred tax liabilities related company’s investment subsidiary correction error resulted reduction income tax expense increase net income 3 million year ended august 31 2011 management determined error material previously reported consolidated financial statements resulting correction material consolidated financial statements year ended august 31 2011 70 schnitzer steel industries inc form 10k 2012 deferred tax assets liabilities comprised following august 31 thousands august 31 2012 foreign operating loss carryforwards 18 million expire used 2013 2031 state credit carryforwards expire used 2013 2021 accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2008 prior years internal revenue service currently examining company’s federal income tax returns fiscal years 2009 2010 canadian several state tax authorities currently examining company’s income tax returns fiscal years 2005 2009 71 schnitzer steel industries inc form 10k 2012 note 19 net income per share following table sets forth information used compute basic diluted net income per share attributable ssi years ended august 31 thousands common stock equivalent shares 69081 39820 50702 considered antidilutive excluded calculation diluted net income per share years ended august 31 2012 2011 2010 respectively note 20 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 41 million 48 million 29 million years ended august 31 2012 2011 2010 respectively advances payments joint ventures less 1 million 2 million less 1 million years ended august 31 2012 2011 2010 respectively company owed 2 million joint ventures august 31 2012 2011 november 2010 company joint venture partner entered series agreements facilitate expansion joint venture operations order increase flow scrap mrb yards order fund growth company joint venture partner contributed additional 2 million equity joint venture connection acquisition metals recycling business assets amix salvage sales ltd march 2011 company entered series agreements obtain barging services lease property entities owned minority shareholder company’s subsidiary operates mrb facilities vancouver british columbia alberta canada company paid 9 million 3 million primarily barging services agreements years ended august 31 2012 2011 respectively amounts payable entities affiliated minority shareholder less 1 million august 31 2012 amounts payable august 31 2011 connection acquisition metals recycling business fiscal 2011 company entered agreement selling parties one employee company whereby selling parties agreed indemnify company property improvements excess contractually defined threshold property owned selling parties leased company received payments less 1 million selling parties fiscal 2012 recognized amount receivable 1 million august 31 2012 agreement thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership totaled 2 million years ended august 31 2012 2011 2010 partnership leases properties entities mr klauer ownership interests agreements expire december 2015 options renew leases upon expiration multiple fiveyear periods rent paid partnership entities mr klauer ownership interests 1 million years ended august 31 2012 2011 2010 certain members schnitzer family significant interests related owners schnitzer investment corp “sic” october 1 2012 renamed mmgl corp engaged real estate business subsidiary company prior 1989 sic considered related party financial reporting purposes company sic potentially 72 schnitzer steel industries inc form 10k 2012 responsible parties respect portland harbor designated superfund site since december 2000 company sic worked together response portland harbor matters company paid legal consulting fees joint defense part due environmental indemnity obligation sic respect portland scrap metal operations property costs increased substantially last two years company sic agreed equitable cost sharing arrangement respect defense costs sic pay 50 legal consulting costs net insurance recoveries amounts receivable payable sic vary periodtoperiod timing incurring legal consulting fees payments cost reimbursements insurance recoveries amounts receivable sic agreement less 1 million august 31 2012 2011 company’s restated articles incorporation bylaws obligate indemnify current former directors officers fullest extent prohibited law obligates advance expenses incurred defending pending threatened proceeding person advance final disposition matters involved officer director affirms good faith belief entitlement indemnification undertakes repay expenses ultimately determined court person entitled indemnified connection continuing investigation certain former employees related company’s past practice making improper payments purchasing managers customers asia robert w philip former chairman president chief executive officer company requested advancement expenses provided required undertaking company advanced 1 million mr philip legal expenses connection investigation fiscal 2010 fiscal 2010 company reimbursed insurance carrier approximately 3 million amounts advanced former officers directors william furman director company chairman chief executive officer greenbrier companies subsidiaries “greenbrier” years ended august 31 2011 2010 company engaged series transactions greenbrier company sold well purchased goods arm’s length’s basis years ended august 31 2011 2010 company sold goods greenbrier amount less 1 million 1 million respectively purchases goods greenbrier less 1 million years ended august 31 2011 2010 note 21 segment information accounting standards reporting information operating segments define operating segments components enterprise separate financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance company’s chief operating decision maker chief executive officer company organized line business chief executive officer evaluates results number different ways line business management structure primary basis allocation resources financial results assessed aforementioned criteria company operates three operating reporting segments metal purchasing processing recycling selling mrb used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales mrb smb made rates approximate export market prices shipments west coast us addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses operating income loss measure segment performance company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments addition company allocate restructuring charges segment operating income loss management include information measurement performance operating segments unallocated income expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business amounts presented exclude results operations company’s discontinued fullservice used auto parts operation 73 schnitzer steel industries inc form 10k 2012 following summary company’s total assets august 31 thousands 1 mrb total assets include 17 million august 31 2012 2011 investments joint venture partnerships 2 property plant equipment net includes 67 million 49 million august 31 2012 2011 respectively canadian locations 74 schnitzer steel industries inc form 10k 2012 table illustrates company’s results reporting segment years ended august 31 thousands 1 mrb operating income includes 2 million 5 million 3 million income joint ventures accounted equity method fiscal 2012 2011 2010 respectively 75 schnitzer steel industries inc form 10k 2012 following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2012 2011 2010 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold applicable 76 schnitzer steel industries inc form 10k 2012 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts fourth quarter fiscal 2012 company approved certain restructuring initiatives aimed reducing operating costs resulted recognition restructuring charges aggregate effect restructuring charges recorded fourth quarter fiscal 2012 reduction operating income 5 million fourth quarter fiscal 2011 company recorded adjustment correct error originated prior period pertaining deferred tax liabilities related company’s investment subsidiary correction error resulted reduction income tax expense increase net income attributable ssi 3 million fourth quarter fiscal 2011 77 schnitzer steel industries inc form 10k 2012 schedule ii valuation qualifying accounts years ended august 31 2012 2011 2010 thousands 78 schnitzer steel industries inc form 10k 2012 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2013 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2013 stated report included herein 45 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2013 2012 results operations cash flows three years period ended august 31 2013 conformity accounting principles generally accepted united states america addition opinion financial statement schedule index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 29 2013 46 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 47 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements 48 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc consolidated statements comprehensive income loss thousands 1 net tax expense benefit 387 thousand 109 thousand 876 thousand respective period 2 net tax expense benefit 23 thousand 24 thousand 52 thousand respective period 3 net tax expense benefit 1890 thousand 1290 thousand 564 thousand respective period see notes consolidated financial statements 49 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc consolidated statements equity thousands 50 schnitzer steel industries inc form 10k 2013 1 net income attributable noncontrolling interests august 31 2013 2012 2011 excludes 903 thousand 1163 thousand 100 thousand respectively allocable redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets august 31 2012 2011 see note 13 redeemable noncontrolling interest detail 2 comprehensive income loss net tax years ended august 31 2013 2012 2011 excludes 1030 thousand 350 thousand 509 thousand respectively relating redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets august 31 2012 2011 see note 13 redeemable noncontrolling interest detail see notes consolidated financial statements 51 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc consolidated statements cash flows thousands see notes consolidated financial statements 52 schnitzer steel industries inc form 10k 2013 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one nation’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reporting segments follows metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb buys collects processes recycles sells brokers recycled metal operating one largest metal recycling businesses united states “us” apb one country’s leading selfservice used auto parts networks additionally apb supplier ferrous nonferrous material including autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products august 31 2013 company’s facilities located us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 31 million 38 million august 31 2013 2012 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectability accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 3 million 4 million august 31 2013 2012 respectively inventories net company’s inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product nonferrous arising manufacturing process used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily 53 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements detect variances metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately predict remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2013 useful lives used depreciation amortization follows longlived assets subject impairment assessment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related asset impairment recorded difference carrying amount fair value asset material impairments carrying value longlived assets years ended august 31 2013 2012 2011 investments joint venture partnerships august 31 2013 2012 company five 50owned joint venture interests accounted equity method accounting presented part mrb operations company’s investments equity method joint ventures resulted cumulative undistributed earnings 11 million august 31 2013 2012 loss value investment joint venture partnership temporary decline recognized management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal year ended august 31 2013 company recorded impairment charge related investment joint venture partnership 2 million reported within asset impairment charges consolidated statements operations see note 20 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually second fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred component company determined reporting units goodwill allocated equivalent company’s operating segments components operating segment meet criteria aggregation new accounting guidance issued fasb september 2011 effective company fiscal 2013 company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company 54 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements required perform twostep quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium company tests indefinitelived intangible assets impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeds projected discounted cash flows attributed indefinitelived intangible asset carrying value longer considered recoverable company record impairment company tests intangible assets subject amortization impairment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related asset impairment recorded difference carrying amount fair value asset see note 7 goodwill intangibles assets net detail acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balances result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred assets company’s assets exclusive prepaid expenses consist primarily receivables insurers notes contractual receivables assets held sale assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers recorded time company records liability insured loss receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible notes receivable consist primarily loans entities business extracting scrap metal demolition activities repayment loans either cash scrap metal contractual receivables consist primarily amounts due scrap demolition entities financial guarantee arrangements company performs periodic reviews notes contractual receivables identify credit risks assess overall collectability receivables typically involves consideration value collateral form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds 55 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements recoverable amount impairment recorded difference fiscal year ended august 31 2013 company recorded impairment charge related contractual receivables 8 million represents full amount allowance credit losses notes contractual receivables august 31 2013 reported within asset impairment charges consolidated statements operations longlived asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell impairment loss recognized initial subsequent writedown asset fair value less cost sell company determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions fiscal year ended august 31 2013 company recorded impairment charge related assets held sale 3 million reported within asset impairment charges consolidated statements operations asset impairment charges following impairment charges recorded within asset impairment charges consolidated statements operations fiscal 2013 thousand restructuring charges restructuring charges consist severance contract termination exit costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability exit costs measured fair value period liability incurred see note 12 restructuring charges detail accrued workers’ compensation costs company selfinsured workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 10 million 11 million estimated cost workers’ compensation claims august 31 2013 2012 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery actually realized amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses 56 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 11 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due short term nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 7 goodwill intangible assets net note 10 fair value measurements note 13 redeemable noncontrolling interest note 15 derivative financial instruments detail derivatives company records derivative instruments assets liabilities consolidated balance sheets fair value changes fair value either recognized accumulated comprehensive income loss consolidated balance sheets net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive income loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 15 derivative financial instruments detail derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive income loss separate component ssi shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally required recognized determination net income loss period company records gains losses income net statements operations net realized unrealized foreign currency transaction gains losses material years ended august 31 2013 2012 2011 57 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements redeemable noncontrolling interest company issued common stock one subsidiaries noncontrolling interest holder subsidiary prior company’s purchase interest march 8 2013 redeemable option holder upon occurrence event solely within company’s control since redemption noncontrolling interest outside company’s control interest presented consolidated balance sheets mezzanine section caption redeemable noncontrolling interest redeemed company would required purchase interest fair value date redemption prior purchase company march 8 2013 redeemable noncontrolling interest presented greater carrying amount adjusted noncontrolling interest’s share allocation income loss subsidiary dividends contributions noncontrolling interest fair value measurement date adjustments carrying amount redeemable noncontrolling interest changes fair value prior company’s purchase interest march 2013 recorded retained earnings see note 13 redeemable noncontrolling interest detail common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company responsible fulfillment including acceptability products purchased customer apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipments historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sale recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenue shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold 58 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements sharebased compensation company recognizes compensation cost relating sharebased payment transactions vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 17 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 18 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income loss per share attributable ssi computed dividing net income loss weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income loss per share antidilutive however options awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive net income loss continuing operations attributable ssi purposes calculating net income loss per share see note 19 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities goodwill intangible asset valuation investments joint venture partnerships asset valuation inventory valuation redeemable noncontrolling interest valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2013 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits letters credit collateral monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 94 million 37 million open letters credit august 31 2013 2012 respectively 59 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements note 3 recent accounting pronouncements december 2011 accounting standard update issued increasing disclosures regarding offsetting assets liabilities financial instruments derivative instruments standard requires disclosure gross amounts recognized assets liabilities amounts offset balance sheet amounts subject offsetting requirements offset balance sheet standard effective company fiscal year 2014 interim periods therein applied retrospectively adoption standard expected significant impact company’s consolidated financial position results operations cash flows july 2012 accounting standard update issued simplifies entity tests indefinitelived intangible assets impairment allowing entity first assess qualitative factors determine whether necessary perform quantitative impairment test entity believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required revised standard effective annual interim indefinitelived intangible asset impairment tests performed fiscal years beginning september 15 2012 company earlyadopted standard annual impairment test performed second quarter fiscal 2013the adoption standard significant impact company’s consolidated financial position results operations cash flows february 2013 accounting standards update issued amends reporting amounts reclassified accumulated comprehensive income standard change current requirements reporting net income comprehensive income financial statements however guidance requires entity provide information amounts reclassified accumulated comprehensive income component either face financial statement net income presented notes financial statements standard effective company fiscal 2014 applied prospectively adoption standard expected significant impact company’s consolidated financial position results operations cash flows note 4 inventories net inventories net consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization assets capital leases 78 million 77 million 68 million years ended august 31 2013 2012 2011 respectively note 6 business combinations 60 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements fiscal 2013 company made following acquisitions • december 2012 company acquired substantially assets ralph’s auto supply bc ltd used auto parts business four stores richmond surrey british columbia expanded apb’s presence western canada near mrb’s operations surrey british columbia • december 2012 company acquired substantially assets upickit inc used auto parts business two stores kansas city metropolitan area missouri kansas expanded apb’s presence midwestern us • december 2012 company acquired equity interests freetown self serve used auto parts llc freetown transfer facility llc millis used auto parts inc millis industries inc together operated used auto parts scrap metal recycling business two stores massachusetts acquisition established new apb presence northeastern us expanded nearby mrb operations • june 2013 company acquired substantially assets bill’s auto parts inc perkins horseshoe works inc operated used auto parts business one store rhode island acquisition expanded apb’s presence northeastern us near mrb’s operations aggregate consideration paid acquisitions 26 million allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate consideration paid fair value identifiable net assets acquired 20 million recorded goodwill 18 million expected deductible tax purposes since dates acquisition acquired operations generated aggregate revenues sales third parties 11 million operating losses 4 million august 31 2013 excluding benefits realized integrating acquired businesses existing operations located geographic proximity acquisitions completed fiscal 2013 material individually aggregate company’s financial position results operations pro forma operating results acquisitions presented since aggregate results would significantly different reported results fiscal 2012 company made following acquisition • june 2012 company acquired substantially assets rocky mountain salvage ltd metals recycler hinton alberta expanded mrb’s presence western canada acquisition completed fiscal 2012 material company’s financial position results operations pro forma operating results fiscal 2012 acquisition presented since aggregate results would significantly different reported results fiscal 2011 company made following acquisitions • september 2010 company acquired substantially assets sos metals island recycling llc metals recycler maui hawaii provide additional source scrap metal mrb hawaii facility • november 2010 company acquired substantially assets utilized specialized parts planet inc stockton california used auto parts facility expanded apb’s presence western us • december 2010 company acquired substantially assets waco upull inc used auto parts store waco texas expanded apb’s presence southwestern us • december 2010 company acquired substantially assets macon iron paper stock co metals recycler two yards macon georgia expanded mrb’s presence southeastern us • december 2010 company acquired substantially assets steel pacific recycling inc metals recycler six yards vancouver island british columbia canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition marked mrb’s initial expansion canada • january 2011 company acquired substantially assets state line scrap co inc metals recycler one yard attleboro massachusetts expanded mrb’s presence northeastern us • january 2011 company acquired substantially mobile car crushing assets northwest recycling inc based portland oregon provides scrap metal mrb’s portland oregon facility • february 2011 company acquired substantially assets ferrill’s auto parts inc used auto parts business three stores seattle washington expanded apb’s presence northwestern us • march 2011 company acquired substantially metals recycling business assets amix salvage sales ltd operated four metals recycling yards british columbia canada two metals recycling 61 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements yards alberta canada previously supplied ferrous scrap mrb’s tacoma washington facility acquisition expanded mrb’s presence western canada part consideration paid company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary • april 2011 company acquired substantially assets american metal group inc certain affiliates metals recycler yards san jose santa clara california previously supplied ferrous scrap mrb’s oakland california facility acquisition expanded mrb’s presence western us aggregate consideration paid acquisitions 316 million comprising 294 million cash 22 million noncash consideration 20 million shares subsidiary 2 million contingent consideration subsequently paid cash third quarter fiscal 2012 allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate purchase price fair value identifiable net assets acquired 253 million recorded goodwill 245 million expected deductible tax purposes following unaudited pro forma summary presents effect consolidated financial results company businesses acquired year ended august 31 2011 though businesses acquired beginning fiscal 2010 thousands 1 excludes nonrecurring executive compensation paid management acquired companies incurred future pro forma results necessarily indicative actual results would acquisitions occurred periods presented addition pro forma results intended projection future results reflect synergies may achieved combining operations following summary aggregate fair values assets acquired liabilities assumed acquisitions completed year ended august 31 2011 thousands 1 acquisitions completed fiscal 2013 2012 material individually aggregate company’s financial position results operations 62 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements following table presents fair value intangible assets acquired acquisitions completed year ended august 31 2011 dollars thousands 1 intangible assets subject amortization include supply contracts permits licenses leasehold interests 2 indefinitelived intangible assets include tradenames real property options company paid premium ie goodwill fair value net tangible identified intangible assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses increase company’s market presence new existing regions • company anticipates cost savings efficiencies synergies note 7 goodwill intangible assets net second quarter fiscal 2013 company performed annual goodwill impairment testing proceeding directly twostep quantitative impairment test comparing fair value reporting unit carrying value including goodwill result test company determined fair value reporting unit goodwill allocated excess respective carrying value therefore goodwill impairment identified fourth quarter fiscal 2013 management identified combination continued challenging market conditions constrained supply raw materials company’s recent financial performance lack recovery company’s market capitalization triggering event requiring interim impairment test goodwill allocated reporting units first step impairment test showed fair value mrb reporting unit less carrying amount indicating potential impairment based second step impairment test company concluded implied fair value goodwill mrb reporting unit less carrying amount resulting partial impairment charge mrb’s goodwill totaling 321 million determination fair value reporting units used perform first step impairment test requires judgment involves significant estimates assumptions expected future cash flows impact market conditions assumptions due inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact company’s assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates company’s reporting units’ fair value although management believes assumptions used testing company’s reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions current levels trend weaker anticipated company financial performance including pace extent operating margin volume recovery decline company’s share price current levels increase marketbased wacc among factors could significantly impact impairment analysis may result goodwill impairment charges incurred could material adverse effect company’s financial condition results operations 63 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements gross changes carrying amount goodwill reporting segment years ended august 31 2013 2012 follows thousands accumulated goodwill impairment charges 321 million zero august 31 2013 2012 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include tradenames marketing agreements employment agreements leasehold interests permits licenses real property options 2 indefinitelived intangibles include tradenames permits licenses real property options total intangible asset amortization expense 5 million years ended august 31 2013 2012 7 million year ended august 31 2011 estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands 64 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements note 8 shortterm borrowings company unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2014 interest rates set bank time borrowing interest rate amounts outstanding credit line 21 august 31 2013 company 9 million borrowings outstanding credit line august 31 2013 borrowings outstanding august 31 2012 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio note 9 longterm debt longterm debt consisted following august 31 thousands company’s credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant unsecured committed bank credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based company’s option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied company’s leverage ratio company borrowings outstanding credit facility 360 million 325 million august 31 2013 2012 respectively weighted average interest rate amounts outstanding facility 198 206 august 31 2013 2012 respectively credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds august 31 2013 2012 company 18 million outstanding arrangements 65 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements note 10 fair value measurements following table presents information company’s assets liabilities measured fair value august 31 2013 indicates fair value hierarchy valuation techniques utilized company type measurement material assets liabilities measured fair value august 31 2012 note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 rent expense 28 million fiscal 2013 2012 respectively 25 million fiscal 2011 table sets forth company’s future minimum obligations noncancelable operating leases august 31 2013 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2013 2012 follows thousands 1 fiscal 2013 2012 company recorded 3 million 8 million respectively purchase accounting environmental liabilities related properties acquired leased connection business combinations 66 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements metals recycling business august 31 2013 mrb environmental liabilities 31 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team entered allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment march 30 2012 lwg submitted epa made available website draft feasibility study “draft fs” site based approximately ten years work 100 million costs classified lwg investigation related draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs reviewed likely subject revisions could significant prior approval epa draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa expect issue final rod selecting remedy site least 2015 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely reasonably possible company may incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently known available detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined 67 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements mrb sites august 31 2013 company environmental liabilities related various mrb sites portland harbor 30 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site auto parts business august 31 2013 company environmental liabilities related various apb sites 19 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars domestic firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 since renewed february 1 2018 smb environmental liabilities august 31 2013 portland harbor superfund site discussed management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period addition company party various legal proceedings arising normal course business management believes adequate provisions made contingencies company anticipate resolution legal proceedings arising normal course business material adverse effect results operations financial condition cash flows note 12 restructuring charges fourth quarter fiscal 2012 company undertook number restructuring initiatives designed extract greater synergies significant acquisitions technology investments made recent years achieve integration mrb apb realign company’s organization support future growth decrease operating expenses streamlining functions reducing organizational layers company incurred restructuring charges 8 million 5 million fiscal 2013 2012 respectively remaining charges expected incurred end fiscal 2017 vast majority restructuring charges require company make cash payments following illustrates reconciliation restructuring liability major type costs years ended august 31 2013 2012 thousands 68 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges reporting segment follows thousands note 13 redeemable noncontrolling interest march 2011 company whollyowned acquisition subsidiary acquired substantially metals recycling business assets amix salvage sales ltd part purchase consideration company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary terms agreement related acquisition noncontrolling interest holder right require company purchase interest company’s acquisition subsidiary fair value noncontrolling interest becomes redeemable within 60 days later third anniversary date acquisition ii date certain principals minority shareholder longer employed company march 8 2013 company entered agreement noncontrolling interest holder purchase outstanding noncontrolling interest company’s subsidiary 25 million second quarter fiscal 2013 company adjusted redeemable noncontrolling interest fair value corresponding purchase price 25 million difference adjusted carrying value fair value recorded reduction retained earnings prior second quarter fiscal 2013 noncontrolling interest presented adjusted carrying value approximated fair value company determined fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis determination fair value requires management apply significant judgment formulating estimates assumptions used discounted cash flow model including primarily revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements terminal year growth rates appropriate discount rate present value future cash flows determined using marketbased weighted average cost capital including subjectcompany risk premium company also used market approach based earnings multiple data corroborate fair value estimates noncontrolling interest determined using discounted cash flow model following reconciliation changes redeemable noncontrolling interest years ended august 31 thousands note 14 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 thousands 69 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements note 15 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company may enter foreign currency forward contracts stabilize us dollar amount transaction settlement contracts designated hedging instruments accounting purposes realized unrealized gains losses settled unsettled forward contracts measured fair value recognized income expense consolidated statements operations company entered forward contracts mitigate exposure exchange rate fluctuations eurodenominated fixed asset purchases designated qualifying cash flow hedges accounting purposes foreign currency forward contracts measured using forward exchange rates based observable exchange rates quoted active market classified level 2 fair value measurements fair value hierarchy first quarter fiscal 2012 company determined certain forecasted transactions longer probable dedesignated contracts hedges subsequently terminated contracts nominal amount fair value contracts amounts reclassified accumulated comprehensive loss realized losses recorded income net material consolidated financial statements natural gas price risk management order minimize volatility natural gas costs smb entered takeorpay natural gas contract obligated purchase minimum 2000 mmbtus per day october 31 2010 whether amount utilized contract expired may 31 2011 contract met definition derivative instrument carried fair value determined using forward price curve based observable market price quotations major natural gas trading hub consideration non performance risk considered level 2 fair value measurement fair value hierarchy portion natural gas contract equivalent 20000 mmbtu per month designated cash flow hedge amounts recognized effective ineffective portion hedge undesignated portion natural gas contract material fiscal 2011 note 16 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss net periodic pension benefit cost material years ended august 31 2013 2012 2011 fair value plan assets 17 million august 31 2013 2012 projected benefit obligation 15 million 18 million august 31 2013 2012 respectively plan fully funded plan assets exceeding projected benefit obligation 3 million august 31 2013 underfunded projected benefit obligation exceeding plan assets 1 million august 31 2012 plan assets comprised 17 million level 1 investments august 31 2013 16 million level 1 investments 1 million level 2 investments august 31 2012 level 1 investments valued based quoted market prices identical securities principal market level 2 investments valued net asset value fund provided fund’s manager independent administrator contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 473 367 august 70 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements 31 2013 2012 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 2 million august 31 2013 2012 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 3 million 4 million august 31 2013 2012 respectively net periodic cost serbp material years ended august 31 2013 2012 2011 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 13 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees smb covered collective bargaining agreement expire march 31 2016 wispp certified zone status required pension protection act 2006 red plan’s yearend september 30 2012 2011 respectively zone status based information company received plan’s administrator certified plan’s actuary wispp considered red zone projected deficiency funding standard account within one year wispp utilize extended amortization provisions calculation zone status result red zone status wispp adopted rehabilitation plan requires annual contribution rate increases 6 rehabilitation plan adopted contributing employers company required pay surcharge wispp company contributed 3 million wispp year ended august 31 2013 2 million years ended august 31 2012 2011 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels based actuarial valuation wispp october 1 2012 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 723 targeted funding ratio specified agreement irs result wispp process seeking relief specified funding requirement irs wispp cannot obtain relief revocation irs amortization extension retroactively 2002 plan year could occur result material liability company’s share resulting funding deficiency extent currently cannot estimated company contributions multiemployer plans 4 million years ended august 31 2013 2012 3 million year ended august 31 2011 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 2 million year ended august 31 2013 3 million years ended august 31 2012 2011 note 17 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 57 million available future grants august 31 2013 sharebased compensation expense 11 million 9 million 14 million 71 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements years ended august 31 2013 2012 2011 respectively tax benefits used option exercises vesting restricted stock units material periods presented restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2013 2012 2011 compensation committee granted 217001 rsus 146481 rsus 135255 rsus respectively key employees officers employee directors plan rsus fiveyear term vest 20 per year commencing june 1 year grant except immaterial number awards granted different terms estimated fair value rsus granted years ended august 31 2013 2012 2011 7 million 6 million 7 million respectively summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 6 million year ended august 31 2013 7 million years ended august 31 2012 2011 august 31 2013 total unrecognized compensation costs related unvested rsus amounted 8 million expected recognized weighted average period 26 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reporting segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed 72 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements fiscal 2011 2013 performance share awards compensation committee approved performancebased awards plan grant date december 3 2010 compensation committee established performance targets based company’s earnings per share weighted 50 average return capital employed divisional basis weighted 50 three years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2013 2014 performance share awards compensation committee approved performancebased awards plan grant date july 24 2012 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2014 2015 performance share awards compensation committee approved performancebased awards plan grant date august 13 2013 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 3 million 1 million 6 million years ended august 31 2013 2012 2011 respectively august 31 2013 unrecognized compensation costs related nonvested performance shares amounted 7 million expected recognized weighted average period 15 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards 73 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2013 2012 2011 total 29167 shares 18202 shares 17459 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2013 2012 2011 well unrecognized compensation expense august 31 2013 material stock options plan stock options granted employees exercise prices set sole discretion board directors fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected term options based analysis expected postvesting exercise behavior including historical exercise patterns available stock options granted year ended august 31 2012 vest twoyear anniversary grant date contractual term five years exercise price set 20 premium compared company’s stock price date grant estimated fair value granted options 3 million determined using blackscholes option pricing model following assumptions options granted fiscal 2013 2011 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options 74 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2013 total number unvested stock options 307855 aggregate intrinsic value stock options exercised less 1 million years ended august 31 2013 2012 respectively 1 million year ended august 31 2011 represents difference exercise price value company’s stock time exercise stock options vested years ended august 31 2013 2012 total fair value stock options vested immaterial year ended august 31 2011 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised material years ended august 31 2013 2012 2011 august 31 2013 unrecognized compensation costs related nonvested stock options amounted 1 million expected recognized weighted average period one year note 18 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows fiscal 2013 effective tax rate differed us federal statutory rate 35 primarily due recognition valuation allowance 29 million deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 impairment charge goodwill net operating 75 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements losses subsidiary valuation allowance recognized result negative evidence including recent losses subsidiary outweighing subjective positive evidence indicating likely associated tax benefit realized realization foreign subsidiary’s deferred tax assets dependent upon company generating consistent trend profitability objectively forecast sufficient taxable income foreign tax jurisdiction future years obtain benefit reversal net deductible temporary differences utilization net operating losses management believes likely company realize benefits deferred tax assets net valuation allowances august 31 2013 fiscal 2012 effective tax rate differed us federal statutory rate 35 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates fourth quarter fiscal 2011 company recorded adjustment correct error originated prior period pertaining deferred tax liabilities related company’s investment subsidiary correction error resulted reduction income tax expense increase net income 3 million year ended august 31 2011 management determined error material previously reported consolidated financial statements resulting correction material consolidated financial statements year ended august 31 2011 deferred tax assets liabilities comprised following august 31 thousands august 31 2013 foreign operating loss carryforwards 48 million expire used 2014 2033 state credit carryforwards expire used 2014 2025 accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands 76 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2009 prior years canadian multiple state tax authorities currently examining company’s income tax returns fiscal years 2005 2012 note 19 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 957235 69081 39820 considered antidilutive excluded calculation diluted net income loss per share years ended august 31 2013 2012 2011 respectively note 20 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 26 million 41 million 48 million years ended august 31 2013 2012 2011 respectively advances payments joint ventures 2 million less 1 million 2 million years ended august 31 2013 2012 2011 respectively company owed 3 million 2 million joint ventures august 31 2013 2012 respectively amounts receivable joint venture partners 1 million august 31 2013 2012 november 2010 company joint venture partner entered series agreements facilitate expansion joint venture operations order increase flow scrap mrb yards order fund growth company joint venture partner contributed additional 2 million equity joint venture connection acquisition metals recycling business assets amix salvage sales ltd march 2011 company entered series agreements obtain barging services lease property entities owned minority shareholder company’s subsidiary operates mrb facilities vancouver british columbia alberta canada march 8 2013 company purchased noncontrolling interest subsidiary result entities common ownership former minority shareholder ceased related parties company prior purchase noncontrolling interest company paid 5 million 9 million 3 million primarily barging services 77 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements agreements years ended august 31 2013 2012 2011 respectively amounts payable entities affiliated minority shareholder less 1 million august 31 2012 connection acquisition metals recycling business fiscal 2011 company entered agreement selling parties one employee company whereby selling parties agreed indemnify company property improvements excess contractually defined threshold property owned selling parties leased company recognized amount receivable 1 million august 31 2012 agreement payment received first quarter fiscal 2013 thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership totaled 1 million year ended august 31 2013 2 million years ended august 31 2012 2011 partnership leases properties entities mr klauer ownership interests agreements expire march 2016 options renew leases upon expiration multiple periods rent paid partnership entities mr klauer ownership interests 1 million years ended august 31 2013 2012 2011 certain members schnitzer family significant interests related owners mmgl corp “mmgl” formerly known schnitzer investment corp engaged real estate business subsidiary company prior 1989 mmgl considered related party financial reporting purposes company mmgl potentially responsible parties respect portland harbor designated superfund site since december 2000 company mmgl worked together response portland harbor matters company paid legal consulting fees joint defense part due environmental indemnity obligation mmgl respect portland scrap metal operations property company mmgl agreed equitable cost sharing arrangement respect defense costs mmgl pay 50 legal consulting costs net insurance recoveries amounts receivable payable mmgl vary periodtoperiod timing incurring legal consulting fees payments cost reimbursements insurance recoveries amounts receivable mmgl agreement less 1 million august 31 2013 2012 william furman director company chairman chief executive officer greenbrier companies subsidiaries “greenbrier” year ended august 31 2011 company engaged series transactions greenbrier company sold well purchased goods arm’s length’s basis year ended august 31 2011 company sold goods greenbrier amount less 1 million purchases goods greenbrier less 1 million year ended august 31 2011 note 21 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance company’s chief operating decision maker chief executive officer company organized line business chief executive officer evaluates results number different ways line business management structure primary basis allocation resources financial results assessed aforementioned criteria company operates three operating reporting segments metal purchasing processing recycling selling mrb used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales mrb smb made rates approximate export market prices shipments west coast us addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties 78 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income loss measure segment performance company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments addition company allocate restructuring charges segment operating income loss management include information measurement performance operating segments unallocated income expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business amounts presented exclude results operations company’s discontinued fullservice used auto parts operation following summary company’s total assets august 31 thousands 1 mrb total assets include 15 million 17 million august 31 2013 2012 respectively investments joint venture partnerships 2 property plant equipment net includes 85 million 67 million august 31 2013 2012 respectively canadian locations 79 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results reporting segment years ended august 31 thousands 1 mrb operating income loss includes 1 million 2 million 5 million income joint ventures accounted equity method fiscal 2013 2012 2011 respectively mrb operating loss fiscal 2013 also includes goodwill impairment charge 321 million asset impairment charges 13 million 80 schnitzer steel industries inc form 10k 2013 table contents schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2013 2012 2011 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold disclosure applicable 81 schnitzer steel industries inc form 10k 2013 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts fourth quarter fiscal 2013 company recorded goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 3 million valuation allowance deferred tax assets 29 million see note 2 summary significant accounting policies note 7 goodwill intangible assets net note 18 income taxes detail fourth quarter fiscal 2012 company approved certain restructuring initiatives aimed reducing operating costs resulted recognition restructuring charges aggregate effect restructuring charges recorded fourth quarter fiscal 2012 reduction operating income 5 million 82 schnitzer steel industries inc form 10k 2013 schedule ii valuation qualifying accounts years ended august 31 2013 2012 2011 thousands 83 schnitzer steel industries inc form 10k 2013 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2014 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2014 stated report included herein 45 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2014 2013 results operations cash flows three years period ended august 31 2014 conformity accounting principles generally accepted united states america addition opinion financial statement schedule index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2014 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedules company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 28 2014 46 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 47 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc consolidated statements operations thousands except per share amounts see notes consolidated financial statements 48 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc consolidated statements comprehensive income loss thousands 1 net tax expense benefit 0 thousand 387 thousand 109 thousand respective period 2 net tax expense benefit 5 thousand 23 thousand 24 thousand respective period 3 net tax expense benefit 468 thousand 1890 thousand 1290 thousand respective period see notes consolidated financial statements 49 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc consolidated statements equity thousands 50 schnitzer steel industries inc form 10k 2014 1 net income attributable noncontrolling interests august 31 2013 2012 excludes 903 thousand 1163 thousand respectively allocable redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets see note 13 redeemable noncontrolling interest detail 2 comprehensive loss net tax years ended august 31 2013 2012 excludes 1030 thousand 350 thousand respectively relating redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets see note 13 redeemable noncontrolling interest detail see notes consolidated financial statements 51 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc consolidated statements cash flows thousands 52 schnitzer steel industries inc form 10k 2014 see notes consolidated financial statements 53 schnitzer steel industries inc form 10k 2014 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal leading recycler used salvaged vehicles manufacturer finished steel products company operates three reporting segments follows metals recycling business “mrb” auto parts business “apb” steel manufacturing business “smb” mrb buys collects processes recycles sells brokers recycled metal operation one largest metals recycling businesses north america apb one country’s leading networks selfservice used auto parts stores additionally apb supplier ferrous nonferrous material including autobodies mrb processes autobodies sellable recycled metal smb purchases recycled metal mrb uses minimill process recycled metal finished steel products august 31 2014 company’s facilities located united states “us” territories canada note 2 summary significant accounting policies revision previously issued financial statements first quarter fiscal 2014 error identified classification cash outflow 247 million purchase noncontrolling interest subsidiary use cash investing activities generally accepted accounting principles reflected use cash financing activities company’s consolidated statement cash flows included previously reported financial statements year ended august 31 2013 included 2013 annual report form 10k company assessed materiality classification error guidance asc 25010 relating sec’s staff accounting bulletin “sab” 99 materiality concluded previously issued financial statements year ended august 31 2013 materially misstated company also evaluated impact correcting error adjustment financial statements concluded based guidance within asc 25010 relating sab 108 considering effects prior year misstatements quantifying misstatements current year financial statements revise previously issued financial statements reflect impact correction classification error consolidated statement cash flows year ended august 31 2013 presented accompanying consolidated financial statements corrected revision impact company’s consolidated balance sheets consolidated results operations earnings loss per share net cash provided operating activities consolidated statement cash flows effect revision line items within company’s consolidated statement cash flows year ended august 31 2013 follows thousands principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation 54 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements accounting changes february 2013 accounting standards update issued amends reporting amounts reclassified accumulated comprehensive income standard change current requirements reporting net income comprehensive income financial statements however guidance requires entity provide information amounts reclassified accumulated comprehensive income component either face financial statement net income presented notes financial statements company adopted new requirement first quarter fiscal 2014 impact consolidated financial statements except change presentation company elected present amounts reclassified accumulated comprehensive income notes financial statements see note 14 accumulated comprehensive loss detail first quarter fiscal 2014 company elected change annual goodwill impairment testing date february 28 july 1 year see note 7 goodwill intangible assets net detail cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 35 million 31 million august 31 2014 2013 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectability accounts receivable based combination factors including whether sales made pursuant letters credit cases management aware circumstances may impair specific customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 3 million august 31 2014 2013 inventories net company’s inventories primarily consist scrap metal ferrous nonferrous processed unprocessed nonferrous recovered joint product nonferrous arising manufacturing process used salvaged vehicles semifinished steel products billets finished steel products primarily rebar merchant bar wire rod inventories stated lower cost market mrb determines cost ferrous nonferrous inventories using average cost method capitalizes substantially direct costs yard costs inventory mrb allocates material production costs joint products using gross margin method apb determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based weighted average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory mrb generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets leasehold improvements amortized shorter estimated useful lives remaining lease term 55 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2014 useful lives used depreciation amortization follows longlived assets held used company subject impairment assessment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related assets impairment recorded difference carrying value fair value assets year ended august 31 2014 company recorded impairment charge longlived assets held used 1 million portion reported within asset impairment charges remainder reported within restructuring charges exitrelated costs consolidated statements operations material impairments carrying value longlived assets held used years ended august 31 2013 2012 investments joint venture partnerships august 31 2014 2013 company five 50owned joint venture interests accounted equity method accounting presented part mrb operations company’s investments equity method joint ventures resulted cumulative undistributed earnings 10 million 11 million august 31 2014 2013 respectively loss value investment joint venture partnership temporary decline recognized management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal year ended august 31 2013 company recorded impairment charge related investment joint venture partnership 2 million reported within asset impairment charges consolidated statements operations see note 20 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred component company determined reporting units goodwill allocated equivalent company’s operating segments components operating segment meet criteria aggregation testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company required perform twostep quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined 56 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium years ended august 31 2014 2013 accordance accounting standard update adopted fiscal 2013 company tested indefinitelived intangible assets first assessing qualitative factors determine whether necessary perform quantitative impairment test adopted standard company believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required year ended august 31 2012 using standard place prior fiscal 2013 company tested indefinitelived intangible assets impairment either comparing carrying value intangible projected discounted cash flows intangible using relief royalties method carrying value exceeded projected discounted cash flows attributed indefinitelived intangible asset carrying value longer considered recoverable company recorded impairment company record material impairment charges indefinitelived intangible assets periods presented company tests intangible assets subject amortization impairment certain triggering events circumstances indicate carrying value may impaired carrying value exceeds company’s estimate future undiscounted cash flows operations related assets impairment recorded difference carrying value fair value asset company record impairment charges intangible assets subject amortization periods presented see note 7 goodwill intangible assets net detail acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balances result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred see note 6 business combinations detail assets company’s assets exclusive prepaid expenses consist primarily receivables insurers notes contractual receivables assets held sale assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers recorded time company records liability insured loss receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible notes receivable consist primarily loans entities business extracting scrap metal demolition activities repayment loans either cash scrap metal contractual receivables consist primarily amounts due scrap demolition entities financial guarantee arrangements company performs periodic reviews notes contractual receivables identify credit risks assess overall collectability receivables typically involves consideration value collateral form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference fiscal year ended august 31 2013 company 57 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements recorded impairment charge related contractual receivables 8 million represents full amount allowance credit losses notes contractual receivables august 31 2014 2013 reported within asset impairment charges fiscal 2013 consolidated statement operations longlived asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell impairment loss recognized initial subsequent writedown asset fair value less cost sell company determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions fiscal years ended august 31 2014 2013 company recorded impairment charge related assets held sale 1 million 3 million respectively reported within asset impairment charges consolidated statements operations asset impairment charges following impairment charges recorded within asset impairment charges consolidated statements operations years ended august 31 thousands restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred see note 12 restructuring charges exitrelated costs detail accrued workers’ compensation costs company selfinsured workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 9 million 10 million estimated cost unpaid workers’ compensation claims august 31 2014 2013 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation 58 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 11 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due short term nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value derivative contracts reported fair value see note 10 fair value measurements note 15 derivative financial instruments detail fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 7 goodwill intangible assets net note 10 fair value measurements note 13 redeemable noncontrolling interest note 15 derivative financial instruments detail derivatives company records derivative instruments prepaid expenses current assets accrued liabilities consolidated balance sheets fair value changes fair value either recognized comprehensive income loss consolidated statements comprehensive income loss net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur period derivative terminated cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 10 fair value measurements note 15 derivative financial instruments detail derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive loss separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency company us dollar gains losses foreign currency transactions generally included determining net income loss period company records gains losses income net consolidated statements operations net realized unrealized foreign currency transaction gains losses material periods presented 59 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements redeemable noncontrolling interest company issued common stock one subsidiaries noncontrolling interest holder subsidiary prior company’s purchase interest march 8 2013 redeemable option holder upon occurrence event solely within company’s control since redemption noncontrolling interest outside company’s control interest presented consolidated balance sheets mezzanine section caption redeemable noncontrolling interest redeemed company would required purchase interest fair value date redemption prior purchase company march 8 2013 redeemable noncontrolling interest presented greater carrying amount adjusted noncontrolling interest’s share allocation income loss subsidiary dividends contributions noncontrolling interest fair value measurement date adjustments carrying amount redeemable noncontrolling interest changes fair value prior company’s purchase interest march 2013 recorded retained earnings see note 13 redeemable noncontrolling interest detail common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed price title risk loss transfer buyer collectibility reasonably assured title recycled metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company responsible fulfillment including acceptability products purchased customer apb retail revenues recognized customers pay parts wholesale product revenues recognized customer weight certificates received following shipments historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sales recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenues shown liability consolidated balance sheets remitted 60 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes compensation cost relating sharebased payment transactions employees nonemployee directors vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 17 sharebased compensation detail company recognizes service cost relating sharebased payment transactions nonemployees classified equity instruments based fair value equity instruments issued period performance services complete performance conditions met obligation compensate nonemployee exists may align timing legal vesting equity instruments income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 18 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income loss per share attributable ssi computed dividing net income weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income per share antidilutive however options awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive net income loss continuing operations attributable ssi purposes calculating net income loss per share attributable ssi income per share discontinued operations attributable ssi presented separately consolidated statements operations see note 19 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles us america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities goodwill intangible asset valuation investments joint venture partnerships asset valuation inventory valuation redeemable noncontrolling interest valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables derivative financial instruments majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2014 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits letters 61 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 74 million 94 million open letters credit august 31 2014 2013 respectively counterparties companys derivative financial instruments major financial institutions discontinued operations fourth quarter fiscal 2014 company released environmental liability associated component disposed sale prior period release result periodic review companys estimate future environmental remediation costs associated disposed sites bears responsibility based contractual agreements release resulted gain 1 million net tax less 1 million classified within discontinued operations consolidated statements operations environmental liabilities related discontinued operations immaterial august 31 2014 2013 note 3 recent accounting pronouncements july 2013 accounting standard update issued clarifies financial statement presentation certain unrecognized tax benefits amendments require unrecognized tax benefit presented reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except extent carryforwards losses available reporting date tax law applicable jurisdiction settle additional income taxes would result disallowance tax position tax law applicable jurisdiction require entity use entity intend use deferred tax asset purpose case unrecognized tax benefit presented financial statements liability standard effective company beginning first quarter fiscal 2015 upon adoption standard impact presentation certain unrecognized tax benefits companys consolidated balance sheet impact consolidated results operations cash flows april 2014 accounting standard update issued amends requirements reporting discontinued operations may include component entity group components entity amendments limit discontinued operations reporting disposals components entity represent strategic shifts major effect entitys operations financial results amendments require expanded disclosure assets liabilities revenues expenses discontinued operations amendments require entity disclose pretax profit loss individually significant component disposed qualify discontinued operations reporting standard effective company applied prospectively disposals classifications held sale components occur beginning first quarter fiscal 2016 interim periods within fiscal year businesses acquisition classified held sale occur beginning first quarter fiscal 2016 interim periods within fiscal year upon adoption standard impact company assesses reports discontinued operations may 2014 accounting standard update issued clarifies principles recognizing revenue guidance applicable contracts customers regardless industryspecific transactionspecific fact patterns guidance requires improved disclosures help users financial statements better understand nature amount timing uncertainty revenue recognized standard effective company beginning first quarter fiscal 2018 including interim periods within fiscal year early application permitted upon becoming effective company apply amendments updated standard either retrospectively prior reporting period presented retrospectively cumulative effect initially applying guidance recognized date initial application company evaluating impact adopting standard consolidated financial position results operations cash flows june 2014 accounting standard update issued resolves diverse accounting treatment sharebased payment awards require specific performance target achieved order awards vest amendments require performance target affects vesting could achieved requisite service period treated performance condition accordingly performance target reflected estimating grantdate fair value award compensation cost recognized period becomes probable performance target achieved represent compensation cost attributable periods requisite service already rendered standard effective company beginning first quarter fiscal 2017 company expects impact adopting standard company already accounts type sharebased payment award manner consistent amendments note 4 inventories net inventories net consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense assets capital leases 75 million 78 million 77 million years ended august 31 2014 2013 2012 respectively note 6 business combinations fiscal 2014 company made following acquisition • november 2013 company acquired equity interests pick part inc used auto parts business one store olympia metropolitan area washington expanded auto parts business’ presence pacific northwest near metals recycling business’ operations tacoma washington fiscal 2013 company made following acquisitions • december 2012 company acquired substantially assets ralph’s auto supply bc ltd used auto parts business four stores richmond surrey british columbia expanded apb’s presence western canada near mrb’s operations surrey british columbia • december 2012 company acquired substantially assets upickit inc used auto parts business two stores kansas city metropolitan area missouri kansas expanded apb’s presence midwestern us • december 2012 company acquired equity interests freetown self serve used auto parts llc freetown transfer facility llc millis used auto parts inc millis industries inc together operated used auto parts scrap metal recycling business two stores massachusetts acquisition established new apb presence northeastern us expanded nearby mrb operations • june 2013 company acquired substantially assets bill’s auto parts inc perkins horseshoe works inc operated used auto parts business one store rhode island acquisition expanded apb’s presence northeastern us near mrb’s operations aggregate consideration paid fiscal 2013 acquisitions 26 million allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate consideration paid fair value identifiable net assets acquired 20 million recorded 62 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements goodwill 18 million expected deductible tax purposes dates acquisition august 31 2013 acquired operations generated aggregate revenues sales third parties 11 million operating losses 4 million excluding benefits realized integrating acquired businesses existing operations located geographic proximity fiscal 2012 company made following acquisition • june 2012 company acquired substantially assets rocky mountain salvage ltd metals recycler hinton alberta expanded mrb’s presence western canada acquisitions completed fiscal 2014 2013 2012 respectively material company’s financial position results operations pro forma operating results fiscal 2014 2013 2012 acquisitions presented since aggregate results would significantly different reported results company paid premium ie goodwill fair value net tangible identified intangible assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses increase company’s market presence new existing regions • company anticipates cost savings efficiencies synergies note 7 goodwill intangible assets net second quarter fiscal 2013 company performed annual goodwill impairment testing proceeding directly first step quantitative impairment test comparing fair value reporting unit carrying value including goodwill result test company determined fair value reporting unit goodwill allocated excess respective carrying value therefore goodwill impairment identified fourth quarter fiscal 2013 management identified combination continued challenging market conditions constrained supply raw materials company’s recent financial performance lack recovery company’s market capitalization triggering event requiring interim impairment test goodwill allocated reporting units first step impairment test showed fair value mrb reporting unit less carrying amount indicating potential impairment based second step impairment test company concluded implied fair value goodwill mrb reporting unit less carrying amount resulting partial impairment charge mrb’s goodwill totaling 321 million first quarter fiscal 2014 company elected change annual goodwill impairment testing date february 28 july 1 year company believes new testing date preferable allows company better align annual goodwill impairment testing procedures company’s yearend financial reporting well annual budgeting cycle allows company visibility fourth quarter operating results typically significant annual performance change accounting principle delay accelerate cause company avoid impairment charge fourth quarter fiscal 2014 company performed annual goodwill impairment testing proceeding directly first step quantitative impairment test comparing fair value reporting unit carrying value including goodwill mrb reporting unit goodwill 147 million july 1 2014 calculated fair value exceeded carrying value approximately 13 projections used income approach mrb took consideration challenging market conditions recycled metals including continued constrained supply scrap metal level competition domestic markets generally weak macroeconomic indicators markets customers based cyclical nature industry projections assumed recovery operating margins multiyear period eventually returning levels profitability range average historical levels marketbased wacc used income approach mrb 1287 included additional company risk premium 1 reflect uncertainty connection extent pace improvements market conditions future company performance terminal growth rate used discounted cash flow model 2 based longterm domestic economic growth expectations assuming components fair value estimate held constant increase wacc excess 1 weaker anticipated improvements either operating margins volumes could result failure step 1 quantitative impairment test mrb reporting unit 63 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements apb reporting unit goodwill 180 million july 1 2014 calculated fair value exceeded carrying value approximately 17 projections used income approach apb took consideration impact weak market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles trends selfserve parts sales certain regional markets projections assumed recovery operating margins current levels multiyear period less peak levels operating margin experienced fiscal years 2010 2011 marketbased wacc used income approach apb 1119 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc excess 125 weaker anticipated improvements operating margins could result failure step 1 quantitative impairment test apb reporting unit company also used market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations company reconciled market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest implied control premium resulting difference companys market capitalization based average trading price class common stock twoweek period ended july 1 2014 higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing metals industries company identified specific reconciling items including market participant synergies supported implied control premium july 1 2014 determination fair value reporting units used perform first step impairment test requires judgment involves significant estimates assumptions expected future cash flows impact market conditions assumptions due inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact company’s assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates company’s reporting units’ fair value although management believes assumptions used testing company’s reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions metals recycling industry current levels trend weaker anticipated company financial performance including pace extent operating margin volume recovery lack recovery company’s share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect company’s financial condition results operations gross changes carrying amount goodwill reporting segment years ended august 31 2014 2013 follows thousands accumulated goodwill impairment charges 321 million august 31 2014 2013 64 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include trade names marketing agreements employment agreements leasehold interests permits licenses real property options 2 indefinitelived intangibles include trade names permits licenses real property options total intangible asset amortization expense 4 million year ended august 31 2014 5 million years ended august 31 2013 2012 estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 8 shortterm borrowings company unsecured uncommitted 25 million credit line wells fargo bank na expires march 1 2015 company borrowings outstanding credit line august 31 2014 9 million borrowings outstanding august 31 2013 interest rates set bank time borrowing interest rate amounts outstanding credit line 21 august 31 2013 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio note 9 longterm debt longterm debt consisted following august 31 thousands 65 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements company’s unsecured committed bank credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based company’s option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied company’s leverage ratio company borrowings outstanding credit facility 305 million 360 million august 31 2014 2013 respectively weighted average interest rate amounts outstanding facility 191 198 august 31 2014 2013 respectively credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds august 31 2014 2013 company 16 million 18 million outstanding arrangements note 10 fair value measurements following table presents information company’s assets liabilities measured fair value august 31 2014 2013 indicates fair value hierarchy valuation techniques utilized company type measurement 66 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 rent expense 27 million fiscal 2014 28 million fiscal 2013 2012 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2014 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2014 2013 follows thousands 1 fiscal 2013 company recorded 3 million purchase accounting environmental liabilities related properties acquired leased connection business combinations amounts recorded purchase accounting fiscal 2014 immaterial 67 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements metals recycling business august 31 2014 mrb environmental liabilities 30 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team entered allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment march 30 2012 lwg submitted epa made available website draft feasibility study “draft fs” site based approximately ten years work 100 million costs classified lwg investigation related draft fs identifies ten possible remedial alternatives range estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly estimates range two 28 years implement remedial work depending selected alternative draft fs determine responsible remediation costs define precise cleanup boundaries select remedies draft fs revised epa revisions may significant could materially impact scope cost remediation draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” currently available information indicates epa expect issue final rod selecting remedy site least 2017 commence remediation activities 2024 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely reasonably possible company may incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently known available detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined 68 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements mrb sites august 31 2014 company environmental liabilities related various mrb sites portland harbor 29 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site auto parts business august 31 2014 company environmental liabilities related various apb sites 18 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firm applies treatment allows eaf dust delisted hazardous waste disposed nonhazardous solid waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 since renewed february 1 2018 smb environmental liabilities august 31 2014 portland harbor superfund site discussed management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period addition company party various legal proceedings arising normal course business management believes adequate provisions made contingencies company anticipate resolution legal proceedings arising normal course business material adverse effect results operations financial condition cash flows note 12 restructuring charges exitrelated costs fourth quarter fiscal 2012 company undertook number restructuring initiatives designed extract greater synergies significant acquisitions technology investments made recent years achieve integration mrb apb realign company’s organization support future growth decrease operating expenses streamlining functions reducing organizational layers “q412 plan” first quarter fiscal 2014 company announced began implementing additional restructuring initiatives reduce annual operating expenses headcount reductions productivity improvements procurement savings operational efficiencies “q114 plan” company expects incur restructuring charges 6 million connection initiatives substantially charges incurred end fiscal 2014 company incurred restructuring charges associated q412 plan q114 plan 6 million 8 million 5 million fiscal 2014 2013 2012 respectively remaining charges expected incurred end fiscal 2017 vast majority restructuring charges require company make cash payments addition restructuring charges recorded connection initiatives company incurred exitrelated costs 1 million consisting asset impairments related site closures 69 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated costs comprised following thousands following illustrates reconciliation restructuring liability major type costs years ended august 31 2014 2013 thousands 70 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated costs reporting segment follows thousands company allocate restructuring charges exitrelated costs segments operating results management include information measurement performance operating segments note 13 redeemable noncontrolling interest march 2011 company whollyowned acquisition subsidiary acquired substantially metals recycling assets canadian business part purchase consideration company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary terms agreement related acquisition noncontrolling interest holder right require company purchase interest company’s acquisition subsidiary fair value upon occurrence certain triggering events march 8 2013 company entered agreement noncontrolling interest holder purchase outstanding noncontrolling interest company’s subsidiary 25 million second quarter fiscal 2013 company adjusted redeemable noncontrolling interest fair value corresponding purchase price 25 million prior purchase noncontrolling interest presented adjusted carry value approximated fair value company determined fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis following reconciliation changes redeemable noncontrolling interest year ended august 31 2013 thousands 71 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements note 14 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2014 2013 thousands note 15 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company may enter foreign currency forward contracts stabilize us dollar amount transaction settlement contracts designated hedging instruments accounting purposes realized unrealized gains losses settled unsettled forward contracts measured fair value recognized income expense consolidated statements operations fiscal 2014 company entered series foreign currency exchange forward contracts sell us dollars order hedge portion exposure fluctuating rates exchange anticipated us dollardenominated sales canadian subsidiary functional currency canadian dollar company utilized intercompany foreign currency derivatives offsetting derivatives external counterparties order designate intercompany derivatives hedging instruments us dollardenominated sales recognized corresponding receivables collected company utilized foreign currency exchange forward contracts sell canadian dollars achieving result similar net settling contracts sell us dollars foreign currency exchange forward contracts sell canadian dollars designated hedging instruments august 31 2014 company foreign currency exchange forward contracts external counterparties buy canadian dollars total notional amount 22 million various settlement dates december 31 2014 foreign currency exchange forward contracts external counterparties sell canadian dollars total notional amount 6 million settlement date september 30 2014 contracts external counterparties reported fair value consolidated balance sheets measured using quoted foreign currency exchange rates see note 10 fair value measurements detail fair value derivative instruments consolidated balance sheets follows thousands 72 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements following tables summarizes results foreign currency exchange derivatives year ended august 31 2014 thousands company material derivatives activity years ended august 31 2013 2012 company entered forward contracts mitigate exposure exchange rate fluctuations eurodenominated fixed asset purchases designated qualifying cash flow hedges accounting purposes foreign currency forward contracts measured using forward exchange rates based observable exchange rates quoted active market classified level 2 fair value measurements fair value hierarchy first quarter fiscal 2012 company determined certain forecasted transactions longer probable dedesignated contracts hedges subsequently terminated contracts nominal amount fair value contracts amounts reclassified accumulated comprehensive loss realized losses recorded income net material consolidated financial statements note 16 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss net periodic pension benefit cost material years ended august 31 2014 2013 2012 fair value plan assets 18 million 17 million august 31 2014 2013 respectively projected benefit obligation 14 million 15 million august 31 2014 2013 respectively plan fully funded plan assets exceeding projected benefit obligation 4 million 3 million august 31 2014 2013 respectively plan assets comprised entirely level 1 investments august 31 2014 2013 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 405 473 august 31 2014 2013 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 3 million 2 million august 31 2014 2013 respectively trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 4 million 3 million august 31 2014 2013 respectively net periodic pension cost serbp material years ended august 31 2014 2013 2012 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 13 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension 73 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees smb covered collective bargaining agreement expire march 31 2016 october 1 2012 wispp accumulated funding deficiency ie failure satisfy minimum funding requirements certified red zone status defined pension protection act 2006 october 1 2013 wispp longer red zone status certified plan’s actuaries green zone company contributed 3 million wispp years ended august 31 2014 2013 2 million year ended august 31 2012 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels based actuarial valuation wispp october 1 2013 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 766 targeted funding ratio specified agreement irs 2014 wispp obtained relief specified funding requirements irs without irs could revoked amortization extension retroactively 2002 plan year resulting material liability company’s share resulting funding deficiency company contributions multiemployer plans 4 million years ended august 31 2014 2013 2012 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 2 million years ended august 31 2014 2013 3 million year ended august 31 2012 note 17 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 56 million available future grants august 31 2014 sharebased compensation expense 15 million 11 million 9 million years ended august 31 2014 2013 2012 respectively tax benefits used option exercises vesting restricted stock units material periods presented restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2014 2013 2012 compensation committee granted 219504 rsus 217001 rsus 146481 rsus respectively key employees officers employee directors plan rsus fiveyear term vest 20 per year commencing october 31 june 1 year grant except immaterial number awards granted different terms estimated fair value rsus granted years ended august 31 2014 2013 2012 7 million 7 million 6 million respectively 74 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 6 million 6 million 7 million years ended august 31 2014 2013 2012 respectively august 31 2014 total unrecognized compensation costs related unvested rsus amounted 7 million expected recognized weighted average period 23 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reporting segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2013 2014 performance share awards compensation committee approved performancebased awards plan grant date july 24 2012 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2014 2015 august performance share awards compensation committee approved performancebased awards plan grant date august 13 2013 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards 75 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements fiscal 2014 2015 november performance share awards compensation committee approved performancebased awards plan grant date november 21 2013 compensation committee established performance targets based divisional volume metrics weighted 50 divisional operating income metrics weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 6 million 3 million 1 million years ended august 31 2014 2013 2012 respectively august 31 2014 unrecognized compensation costs related nonvested performance shares amounted 6 million expected recognized weighted average period 09 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2014 2013 2012 total 30848 shares 29167 shares 18202 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2014 2013 2012 well unrecognized compensation expense august 31 2014 material stock options plan stock options granted employees exercise prices set sole discretion board directors fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest 76 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements rate derived us treasury yield curve effect time grant expected term options based analysis expected postvesting exercise behavior including historical exercise patterns available stock options granted year ended august 31 2012 vest twoyear anniversary grant date contractual term five years exercise price set 20 premium compared company’s stock price date grant estimated fair value granted options 3 million determined using blackscholes option pricing model following assumptions options granted fiscal 2014 2013 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options outstanding stock options vested august 31 2014 aggregate intrinsic value stock options exercised immaterial year ended august 31 2014 less 1 million years ended august 31 2013 2012 represents difference exercise price value company’s stock time exercise 307855 stock options vested year ended august 31 2014 stock options vested years ended august 31 2013 2012 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised material years ended august 31 2014 2013 2012 august 31 2014 unrecognized compensation cost related stock options 77 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements note 18 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows fiscal 2014 effective tax rate lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state 78 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized fiscal 2013 effective tax rate differed us federal statutory rate 35 primarily due recognition valuation allowance 29 million deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 impairment charge goodwill net operating losses subsidiary valuation allowance recognized result negative evidence including recent losses subsidiary outweighing subjective positive evidence indicating likely associated tax benefit realized fiscal 2012 effective tax rate differed us federal statutory rate 35 primarily due state tax benefits research development credits partially offset adverse impact foreign subsidiaries’ results taxed different tax rates realization foreign subsidiaries’ deferred tax assets dependent upon company generating sufficient taxable income tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses management believes likely company realize benefits deferred tax assets net valuation allowances august 31 2014 deferred tax assets liabilities comprised following august 31 thousands august 31 2014 foreign operating loss carryforwards 38 million expire used 2015 2033 state credit carryforwards expire used 2015 2025 accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands 79 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada federal statute limitations expired fiscal 2010 prior years us canada multiple state tax authorities currently examining company’s income tax returns fiscal years 2009 2012 note 19 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 618348 957235 69081 considered antidilutive excluded calculation diluted net income loss per share years ended august 31 2014 2013 2012 respectively note 20 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 30 million 26 million 41 million years ended august 31 2014 2013 2012 respectively net advances joint ventures 3 million 2 million less 1 million years ended august 31 2014 2013 2012 respectively company immaterial balances due joint ventures august 31 2014 owed 3 million joint ventures august 31 2013 amounts receivable joint venture partners 1 million august 31 2014 2013 connection acquisition metals recycling business assets amix salvage sales ltd march 2011 company entered series agreements obtain barging services lease property entities owned minority shareholder company’s subsidiary operates mrb facilities vancouver british columbia alberta canada march 8 2013 company purchased noncontrolling interest subsidiary result entities common ownership former minority shareholder ceased related parties company prior purchase noncontrolling interest company paid 5 million 9 million primarily barging services agreements years ended august 31 2013 2012 respectively connection acquisition metals recycling business fiscal 2011 company entered agreement selling parties one employee company whereby selling parties agreed indemnify company property improvements excess contractually defined threshold property owned selling parties leased company recognized amount receivable 1 million august 31 2012 agreement payment received first quarter fiscal 2013 thomas klauer jr president company’s auto parts business sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership totaled 2 million 1 million 2 million years ended august 31 2014 2013 2012 respectively partnership leases properties entities mr klauer ownership interests agreements expire march 2016 options renew leases upon expiration multiple 80 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements periods rent paid partnership entities mr klauer ownership interests 1 million years ended august 31 2014 2013 2012 certain members schnitzer family significant interests related owners mmgl corp “mmgl” formerly known schnitzer investment corp engaged real estate business subsidiary company prior 1989 mmgl considered related party financial reporting purposes company mmgl potentially responsible parties respect portland harbor designated superfund site since december 2000 company mmgl worked together response portland harbor matters company paid legal consulting fees joint defense part due environmental indemnity obligation mmgl respect portland scrap metal operations property company mmgl agreed equitable cost sharing arrangement respect defense costs mmgl pay 50 legal consulting costs net insurance recoveries amounts receivable payable mmgl vary periodtoperiod timing incurring legal consulting fees payments cost reimbursements insurance recoveries amounts receivable mmgl agreement 1 million less 1 million august 31 2014 2013 respectively note 21 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance company’s chief operating decision maker chief executive officer company organized line business chief executive officer evaluates results number different ways line business management structure primary basis allocation resources financial results assessed aforementioned criteria company operates three operating reporting segments metal purchasing processing recycling selling mrb used auto parts apb minimill steel manufacturing smb additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal mrb buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb mrb also purchases ferrous metal processors shipment directly smb apb purchases used salvaged vehicles sells parts vehicles retail facilities wholesale operations sells remaining portion vehicles metal recyclers including mrb smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales mrb smb made rates approximate export market prices shipments west coast us addition company intersegment sales autobodies apb mrb rates approximate market prices intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income loss measure segment performance company allocate corporate interest income expense income taxes income expenses related corporate activity corporate expense management administrative services benefit three segments addition company allocate restructuring charges exitrelated costs segment operating income loss management include information measurement performance operating segments unallocated income expense operating income loss reporting segment reflect operating income loss reporting segment would report standalone business amounts presented exclude results operations company’s discontinued fullservice used auto parts operation 81 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements following summary company’s total assets august 31 thousands 1 mrb total assets include 15 million august 31 2014 2013 investments joint venture partnerships 2 property plant equipment net includes 75 million 85 million august 31 2014 2013 respectively canadian locations 82 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results reporting segment years ended august 31 thousands 1 mrb operating income loss includes 1 million 1 million 2 million income joint ventures accounted equity method fiscal 2014 2013 2012 respectively mrb operating loss fiscal 2013 also includes goodwill impairment charge 321 million asset impairment charges 13 million 83 schnitzer steel industries inc form 10k 2014 table contents schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2014 2013 2012 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold disclosure applicable 84 schnitzer steel industries inc form 10k 2014 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts fourth quarter fiscal 2013 company recorded goodwill impairment charge 321 million asset impairment charges 13 million restructuring charges 3 million valuation allowance deferred tax assets 29 million see note 2 summary significant accounting policies note 7 goodwill intangible assets net note 18 income taxes detail 85 schnitzer steel industries inc form 10k 2014 schedule ii valuation qualifying accounts years ended august 31 2014 2013 2012 thousands 86 schnitzer steel industries inc form 10k 2014 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2015 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2015 stated report included herein 48 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2015 2014 results operations cash flows three years period ended august 31 2015 conformity accounting principles generally accepted united states america addition opinion financial statement schedule index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedules maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedules companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 27 2015 49 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 50 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc consolidated statements operations thousands except per share amounts 1 may foot due rounding see notes consolidated financial statements 51 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc consolidated statements comprehensive income loss thousands 1 net tax expense benefit 0 387 thousand respective period 2 net tax expense benefit 89 thousand 5 thousand 23 thousand respective period 3 net tax expense benefit 62 thousand 468 thousand 1890 thousand respective period see notes consolidated financial statements 52 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc consolidated statements equity thousands 53 schnitzer steel industries inc form 10k 2015 1 net income attributable noncontrolling interests august 31 2013 excludes 903 thousand allocable redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets see note 13 redeemable noncontrolling interest detail 2 comprehensive loss net tax year ended august 31 2013 excludes 1030 thousand relating redeemable noncontrolling interest prior purchase march 8 2013 reported mezzanine section consolidated balance sheets see note 13 redeemable noncontrolling interest detail see notes consolidated financial statements 54 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc consolidated statements cash flows thousands 55 schnitzer steel industries inc form 10k 2015 see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2015 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products prior fourth quarter fiscal 2015 companys internal organizational reporting structure supported three operating reportable segments metals recycling business mrb auto parts business apb steel manufacturing business smb fourth quarter fiscal 2015 accordance plan announced april 2015 company combined integrated auto parts metals recycling businesses single operating platform resulted realignment chief executive officer considered companys chief operating decision maker reviews performance makes decisions resource allocation change companys internal organizational reporting structure resulted formation new operating reportable segment auto metals recycling amr business replacing former mrb apb segments company began reporting new segment fourth quarter fiscal 2015 reflected annual report form 10k segment data comparable periods presented recast conform current period presentation activities amr recasting historical information impact companys consolidated financial performance periods presented amr buys collects processes recycles sells brokers scrap metal operation one largest metals recycling businesses north america operates one countrys leading networks selfservice used auto parts stores supplies amrs shredding facilities autobodies processed saleable recycled metal smb purchases recycled metal amr uses minimill process recycled metal finished steel products august 31 2015 company’s facilities located united states “us” territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation accounting changes july 2013 accounting standards update issued clarifies financial statement presentation certain unrecognized tax benefits amendments require unrecognized tax benefit presented reduction deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward except extent carryforwards losses available reporting date tax law applicable jurisdiction settle additional income taxes would result disallowance tax position tax law applicable jurisdiction require entity use entity intend use deferred tax asset purpose case unrecognized tax benefit presented financial statements liability company adopted new requirement first quarter fiscal 2015 material impact consolidated financial statements see note 18 income taxes detail february 2013 accounting standards update issued amends reporting amounts reclassified accumulated comprehensive income standard change current requirements reporting net income comprehensive income financial statements however guidance requires entity provide information amounts reclassified accumulated comprehensive income component either face financial statement net income presented notes financial statements company adopted new requirement first quarter fiscal 2014 impact consolidated financial statements except change presentation company elected present amounts reclassified accumulated comprehensive income notes financial statements see note 14 accumulated comprehensive loss detail first quarter fiscal 2014 company elected change annual goodwill impairment testing date february 28 july 1 year see note 7 goodwill intangible assets net detail 57 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements discontinued operations results discontinued operations presented separately net tax results ongoing operations periods presented expenses included results discontinued operations direct operating expenses incurred disposed components may reasonably segregated costs ongoing operations company see note 10 discontinued operations detail cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 11 million 35 million august 31 2015 2014 respectively accounts receivable net accounts receivable represent amounts due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectability accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 2 million 3 million august 31 2015 2014 respectively inventories company’s inventories primarily consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar merchant bar wire rod used salvaged vehicles reported within finished goods inventories stated lower cost market amr determines cost ferrous nonferrous inventories using average cost method capitalizes substantially direct costs yard costs inventory amr allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost inventory smb determines cost finished steel product inventory based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory amr generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations product density holding period production processes utilized manufacture product physical inventories necessarily detect variances metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expenses depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term 58 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2015 useful lives used depreciation amortization follows longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2015 company recorded impairment charges longlived tangible intangible assets associated certain regional metals recycling operations used auto parts store locations charges reported consolidated statements operations within asset impairment charges discontinued operations related component company qualifying discontinued operations reporting impairment charges longlived assets follows year ended august 31 thousands material impairments carrying value longlived assets held used years ended august 31 2014 2013 investments joint ventures august 31 2015 2014 company five 50owned joint venture interests accounted equity method accounting presented part amr operations company’s investments equity method joint ventures resulted cumulative undistributed earnings 11 million 10 million august 31 2015 2014 respectively loss value investment joint venture temporary decline recognized management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal year ended august 31 2013 company recorded impairment charge related investment joint venture 2 million reported within asset impairment charges consolidated statements operations see note 20 related party transactions detail transactions joint ventures 59 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually fourth fiscal quarter upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results prior fourth quarter fiscal 2015 companys reporting units goodwill allocated equivalent companys operating segments mrb apb components operating segment met criteria aggregation fourth quarter fiscal 2015 company changed internal organizational reporting structure combine auto metals recycling businesses resulted formation new operating reportable segment amr replacing mrb apb operating segments change reporting structure led identification components within amr based disaggregation financial information regularly reviewed segment management geographic area accordance accounting guidance company aggregated components similar economic characteristics reporting units reassigned companys goodwill reporting units affected using relative fair value approach based fair values affected reporting units date reassessment july 1 2015 company measured relative fair values reporting units allocated goodwill market approach using guideline public company technique based earnings multiple data beginning date reassessment july 1 2015 companys goodwill carried two regionallydefined reporting units testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company required perform twostep quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium see note 7 goodwill intangible assets net detail including recognition goodwill impairment charges 141 million 321 million fiscal years ended august 31 2015 2013 respectively company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record material impairment charges indefinitelived intangible assets periods presented acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balance result information received regarding valuation assets liabilities 60 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred see note 6 business combinations detail assets company’s assets exclusive prepaid expenses consist primarily receivables insurers notes contractual receivables assets held sale assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers recorded time company records liability insured loss receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible notes receivable consist primarily loans entities business extracting scrap metal demolition activities repayment loans either cash scrap metal contractual receivables consist primarily amounts due scrap demolition entities financial guarantee arrangements company performs periodic reviews notes contractual receivables identify credit risks assess overall collectability receivables typically involves consideration value collateral form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference fiscal year ended august 31 2013 company recorded impairment charge related contractual receivables 8 million represents full amount allowance credit losses notes contractual receivables august 31 2014 2013 reported within asset impairment charges fiscal 2013 consolidated statement operations fiscal 2015 contractual receivables 8 million allowance credit losses recorded written longlived asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell august 31 2015 2014 company reported 2 million 3 million assets held sale within prepaid expenses current assets consolidated balance sheets impairment loss recognized initial subsequent writedown asset fair value less cost sell company determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions see asset impairment charges section note tabular presentation impairment charges recorded company fiscal years ended august 31 2015 2014 2013 assets held sale asset impairment charges following impairment charges recorded within asset impairment charges consolidated statements operations years ended august 31 thousands restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred 61 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred see note 12 restructuring charges exitrelated costs detail accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 10 million 9 million estimated cost unpaid workers’ compensation claims august 31 2015 2014 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 11 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due short term nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value derivative contracts reported fair value see note 15 derivative financial instruments detail fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 7 goodwill intangible assets net note 13 redeemable noncontrolling interest note 15 derivative financial instruments detail 62 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements derivatives company records derivative instruments prepaid expenses current assets accrued liabilities consolidated balance sheets fair value changes fair value either recognized comprehensive income loss consolidated statements comprehensive income loss net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur period derivative terminated cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices foreign currency exchange rates related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 15 derivative financial instruments detail derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive loss separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income loss period company records gains losses income net consolidated statements operations net realized unrealized foreign currency transaction gains 3 million year ended august 31 2015 material years ended august 31 2014 2013 redeemable noncontrolling interest company issued common stock one subsidiaries noncontrolling interest holder subsidiary prior company’s purchase interest march 8 2013 redeemable option holder upon occurrence event solely within company’s control since redemption noncontrolling interest outside company’s control interest presented consolidated balance sheets mezzanine section caption redeemable noncontrolling interest redeemed company would required purchase interest fair value date redemption prior purchase company march 8 2013 redeemable noncontrolling interest presented greater carrying amount adjusted noncontrolling interest’s share allocation income loss subsidiary dividends contributions noncontrolling interest fair value measurement date adjustments carrying amount redeemable noncontrolling interest changes fair value prior company’s purchase interest march 2013 recorded retained earnings see note 13 redeemable noncontrolling interest detail common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares shareholder rights plan shareholder rights plan company issued dividend distribution one preferred share purchase right “right” share class common stock class b common stock held shareholders record close business april 4 2006 rights generally become exercisable person group acquired 15 company’s outstanding 63 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements common stock announces tender offer exchange offer consummated would result ownership person group 15 company’s outstanding common stock “acquiring person” right entitles shareholders buy one onethousandth share series participating preferred stock “series shares” company exercise price 110 subject adjustments holders rights acquiring person entitled receive upon exercise series shares lieu thereof class common stock company value twice right’s thencurrent exercise price series shares redeemable company voting privileges certain dividend liquidation preferences rights expire march 21 2016 unless date extended rights redeemed exchanged earlier date share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title recycled metal finished steel products transfers based contract terms significant portion company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company responsible fulfillment including acceptability products purchased customer retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions made sales recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenues shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes compensation cost relating sharebased payment transactions employees nonemployee directors vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 17 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 18 income taxes detail 64 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements net income loss per share basic net income loss per share attributable ssi computed dividing net income loss weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” diluted net income loss per share attributable ssi computed dividing net income weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income per share antidilutive however options awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive income loss continuing operations attributable ssi purposes calculating income loss per share continuing operations attributable ssi loss per share discontinued operations attributable ssi presented separately consolidated statements operations see note 19 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities goodwill longlived asset indefinitelived intangible asset valuation investments joint ventures asset valuation inventory valuation redeemable noncontrolling interest valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables derivative financial instruments majority cash equivalents maintained two major financial institutions bank america wells fargo bank na balances institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2015 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 33 million 74 million open letters credit august 31 2015 2014 respectively counterparties companys derivative financial instruments major financial institutions reclassifications certain prior year amounts reclassified conform current year presentation reclassifications impact companys consolidated results operations note 3 recent accounting pronouncements april 2014 accounting standard update issued amends requirements reporting discontinued operations may include component entity group components entity amendments limit discontinued operations reporting disposals components entity represent strategic shifts major effect entitys operations financial results amendments require expanded disclosure assets liabilities revenues expenses discontinued operations amendments require entity disclose pretax profit loss individually significant component disposed qualify discontinued operations reporting standard effective company applied prospectively disposals classifications held sale components occur beginning first quarter fiscal 2016 interim periods within fiscal year businesses acquisition classified held sale occur beginning first quarter fiscal 2016 interim periods within fiscal year upon adoption standard impact company assesses reports discontinued operations may 2014 accounting standard update issued clarifies principles recognizing revenue guidance applicable contracts customers regardless industryspecific transactionspecific fact patterns guidance requires improved disclosures help users financial statements better understand nature amount timing uncertainty revenue recognized standard effective company beginning first quarter fiscal 2018 including 65 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements interim periods within fiscal year early application permitted upon becoming effective company apply amendments updated standard either retrospectively prior reporting period presented retrospectively cumulative effect initially applying guidance recognized date initial application company evaluating impact adopting standard consolidated financial position results operations cash flows april 2015 accounting standard update issued amends requirements presenting debt issuance costs guidance requires debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability consistent presentation debt discount applicable debt issuance costs related lineofcredit arrangements specified related accounting standard update issued august 2015 standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year applied retrospectively prior reporting period presented company evaluating impact adopting standard consolidated financial position april 2015 accounting standard update issued clarifies accounting cloud computing arrangements include software licenses guidance requires cloud computing arrangement includes software license accounted manner acquisition software licenses cloud computing arrangement include software license accounted service contract standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year company evaluating impact adopting standard consolidated financial position results operations cash flows july 2015 accounting standard update issued requires entity measure certain types inventory including inventory measured using firstin first fifo average cost method lower cost net realizable value amendments apply inventory measured using lastin firstout lifo retail inventory method standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year company evaluating impact adopting standard consolidated financial position results operations cash flows september 2015 accounting standard update issued eliminates requirement retrospectively adjust provisional amounts recognized business acquisition recorded previous reporting periods amendments instead require acquirer recognize adjustments provisional amounts identified oneyear measurement period reporting period adjustment amount determined acquirer required also record periods financial statements effect earnings changes depreciation amortization income effects result change provisional amounts calculated accounting completed acquisition date standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year company evaluating impact adopting standard consolidated financial position results operations cash flows note 4 inventories consisted following august 31 thousands 66 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense assets capital leases 66 million 75 million 78 million years ended august 31 2015 2014 2013 respectively included amounts depreciation expense 1 million period presented reported within discontinued operations note 6 business combinations company complete significant acquisitions fiscal 2015 fiscal 2014 company made following acquisition • november 2013 company acquired equity interests pick part inc used auto parts business one store olympia metropolitan area washington expanded amrs presence pacific northwest near metals recycling operations tacoma washington fiscal 2013 company made following acquisitions • december 2012 company acquired substantially assets ralph’s auto supply bc ltd used auto parts business four stores richmond surrey british columbia expanded amrs presence western canada near metals recycling operations surrey british columbia • december 2012 company acquired substantially assets upickit inc used auto parts business two stores kansas city metropolitan area missouri kansas expanded amrs presence midwestern us • december 2012 company acquired equity interests freetown self serve used auto parts llc freetown transfer facility llc millis used auto parts inc millis industries inc together operated used auto parts scrap metal recycling business two stores massachusetts acquisition expanded amrs presence northeastern us near metals recycling operations region • june 2013 company acquired substantially assets bill’s auto parts inc perkins horseshoe works inc operated used auto parts business one store rhode island acquisition expanded amrs presence northeastern us near metals recycling operations region aggregate consideration paid fiscal 2013 acquisitions 26 million allocated tangible identifiable intangible assets acquired liabilities assumed based respective estimated fair values date acquisition excess aggregate consideration paid fair value identifiable net assets acquired 20 million recorded goodwill 18 million expected deductible tax purposes dates acquisition august 31 2013 acquired operations generated aggregate revenues sales third parties 11 million operating losses 4 million excluding benefits realized integrating acquired businesses existing operations located geographic proximity acquisitions completed fiscal 2014 2013 respectively material company’s financial position results operations pro forma operating results fiscal 2014 2013 acquisitions presented since aggregate results would significantly different reported results 67 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements company paid premium ie goodwill fair value net tangible identified intangible assets acquired transactions described number reasons including limited following • company benefit assets capabilities acquisitions including additional resources skills industry expertise • acquired businesses increase company’s market presence new existing regions • company anticipates cost savings efficiencies synergies note 7 goodwill intangible assets net second quarter fiscal 2013 company performed annual goodwill impairment test determined fair value reporting unit goodwill allocated excess respective carrying value therefore goodwill impairment identified fourth quarter fiscal 2013 management identified triggering event requiring interim impairment test goodwill allocated reporting units based results impairment test company concluded implied fair value goodwill mrb reporting unit less carrying amount resulting partial impairment charge mrb’s goodwill totaling 321 million first quarter fiscal 2014 company elected change annual goodwill impairment testing date february 28 july 1 year company believes new testing date preferable allows company better align annual goodwill impairment testing procedures company’s yearend financial reporting well annual budgeting cycle allows company visibility fourth quarter operating results typically significant annual performance change accounting principle delay accelerate cause company avoid impairment charge fourth quarter fiscal 2014 company performed annual goodwill impairment test determined fair value reporting unit goodwill allocated excess respective carrying value therefore goodwill impairment identified mrb reporting unit goodwill 147 million july 1 2014 calculated fair value exceeded carrying value approximately 13 projections used income approach mrb took consideration challenging market conditions recycled metals including continued constrained supply scrap metal level competition companys domestic markets generally weak macroeconomic indicators markets companys customers based cyclical nature industry projections assumed recovery operating margins multiyear period eventually returning levels profitability range average historical levels assuming components fair value estimate held constant increase wacc excess 1 weakerthananticipated improvements either operating margins volumes could resulted failure step one quantitative impairment test mrb reporting unit second quarter fiscal 2015 management identified combination significant weakening market conditions continued constrained supply raw materials due lower price environment negatively impacted volumes planned idling closure certain production facilities retail stores company’s recent financial performance decline company’s market capitalization first half fiscal 2015 triggering event requiring interim impairment test goodwill allocated reporting units connection interim impairment test performed second quarter fiscal 2015 company used measurement date february 1 2015 mrb reporting unit goodwill 141 million february 1 2015 first step impairment test showed fair value mrb reporting unit less carrying amount indicating potential impairment based second step impairment test company concluded implied fair value goodwill remained mrb reporting unit resulting impairment entire carrying amount mrb’s goodwill totaling 141 million apb reporting unit goodwill 176 million february 1 2015 estimated fair value reporting unit exceeded carrying value approximately 20 projections used income approach apb took consideration impact current market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles recent trends selfserve parts sales projections assumed recovery operating margins current depressed levels multiyear period including benefits recently initiated productivity improvements costsaving measures remaining significantly level operating margins experienced fiscal years 2010 2011 marketbased wacc used income approach apb 1037 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc 15 weakerthananticipated improvements operating margins could resulted failure step one quantitative impairment test apb reporting unit 68 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements fourth quarter fiscal 2015 immediately prior change reporting units goodwill allocated corresponding formation amr operating segment replaced mrb apb operating segments company performed annual impairment test remaining carrying value goodwill held apb reporting unit measurement date july 1 2015 apb reporting unit goodwill 177 million july 1 2015 estimated fair value reporting unit exceeded carrying value approximately 22 therefore goodwill impairment identified projections used income approach apb took consideration impact current market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles recent trends selfservice parts sales projections assumed recovery operating margins current depressed levels multiyear period including benefits recently initiated productivity improvements costsaving measures remaining significantly level operating margins experienced fiscal years 2010 2011 marketbased wacc used income approach apb 1043 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc 15 weakerthananticipated improvements operating margins could resulted failure step one quantitative impairment test apb reporting unit performing impairment test goodwill assigned reporting units company also used market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations company reconciled market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest respect two goodwill impairment tests performed fiscal 2015 measurement dates february 1 2015 july 1 2015 implied control premium resulting difference companys market capitalization based average trading price class common stock twoweek period ended february 1 2015 july 1 2015 respectively higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing metals industries company identified specific reconciling items including market participant synergies supported implied control premium february 1 2015 july 1 2015 performing annual test goodwill carried apb reporting unit july 1 2015 result change operating segments redefinition companys reporting units date management evaluated likely fair value either two regionallydefined reporting units allocated goodwill carrying value july 1 2015 would indicate triggering event requiring goodwill impairment test based managements assessment july 1 2015 likely fair value reporting unit allocated goodwill carrying value determination fair value reporting units used perform first step impairment test requires judgment involves significant estimates assumptions expected future cash flows impact market conditions assumptions due inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact company’s assumptions future revenue growth rates pace extent operating margin volume recovery marketbased wacc factors may result changes estimates company’s reporting units’ fair value although management believes assumptions used testing company’s reporting units’ goodwill impairment reasonable possible market economic conditions could deteriorate improve expected additional declines lack recovery market conditions metals recycling industry current levels trend weaker anticipated financial performance reporting units including pace extent operating margin volume recovery decline company’s share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect company’s financial condition results operations 69 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements gross changes carrying amount goodwill reportable segment years ended august 31 2015 2014 follows thousands accumulated goodwill impairment charges 462 million 321 million respectively august 31 2015 2014 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include trade names marketing agreements employment agreements leasehold interests permits licenses real property options 2 indefinitelived intangibles include trade names permits licenses real property options total intangible asset amortization expense 2 million 4 million 5 million respectively years ended august 31 2015 2014 2013 included amounts amortization expense less 1 million period presented reported within discontinued operations impairments intangible assets immaterial periods presented estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands 70 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements note 8 shortterm borrowings company unsecured uncommitted 25 million credit line wells fargo bank na expires april 1 2016 interest rates set bank time borrowing company borrowings outstanding credit line august 31 2015 2014 credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio note 9 longterm debt longterm debt consisted following august 31 thousands company’s unsecured committed bank credit facility provides revolving loans 670 million c30 million matures april 2017 pursuant credit agreement bank america na administrative agent lenders party thereto interest rates outstanding indebtedness agreement based company’s option either london interbank offered rate canadian equivalent plus spread 125 225 amount spread based pricing grid tied company’s leverage ratio greater prime rate federal funds rate plus 05 british bankers association libor rate plus 175 addition annual commitment fees payable unused portion credit facility rates 015 035 based pricing grid tied company’s leverage ratio company borrowings outstanding credit facility 215 million 305 million august 31 2015 2014 respectively weighted average interest rate amounts outstanding facility 195 191 august 31 2015 2014 respectively credit agreement contains various representations warranties events default financial covenants including covenants regarding maintenance minimum fixed charge coverage ratio maximum leverage ratio june 25 2015 company amended credit agreement revise definition ebitda used calculate consolidated fixed charge coverage ratio exclude expenses incurred connection implementation business realignment cost containment productivity improvement programs losses associated discontinued operations amendments impact companys borrowing capacity terms credit agreement principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands 71 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 16 million outstanding arrangements august 31 2015 2014 note 10 discontinued operations fiscal 2015 company ceased operations seven auto parts stores six qualified discontinued operations reporting operations six qualifying stores previously reported within amr reportable segment fiscal 2014 company released environmental liability 1 million associated component disposed sale prior period release result periodic review companys estimate future environmental remediation costs associated disposed sites bears responsibility based contractual agreements operating results discontinued operations comprised following years ended august 31 thousands note 11 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 rent expense 26 million 27 million 28 million fiscal 2015 2014 2013 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2015 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2015 2014 follows thousands auto metals recycling august 31 2015 amr environmental liabilities 46 million potential remediation locations conducted business environmental liabilities historical recent activities 72 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team entered allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damage council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment march 30 2012 lwg submitted epa made available website draft feasibility study “draft fs” site based approximately ten years work 100 million costs classified lwg investigation related however epa largely rejected draft fs took drafting process epa provided revised draft fs lwg key stakeholders sections final section made available august 2015 revised draft fs identifies five possible remedial alternatives range estimated cost approximately 550 million 119 billion net present value least costly alternative approximately 171 billion 367 billion net present value costly estimates range four 18 years implement remedial work depending selected alternative company stakeholders identified number concerns regarding epas cost estimates scheduling assumptions conclusions regarding effectiveness remediation technologies revised draft fs determine responsible remediation costs define precise cleanup boundaries select remedies revised draft fs important step epa’s development proposed plan addressing site final decision nature extent required remediation occur epa prepared proposed plan public review issued record decision “rod” epa process presenting conceptual remedy lwg epas partners national remedy review board scheduled november 2015 stated expects release proposed cleanup plan public review comment spring 2016 currently available information indicates epa expect issue final rod selecting remedy site least 2017 commence remediation activities 2024 responsibility implementing funding epa’s selected remedy determined separate allocation process currently underway determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely reasonably possible company may incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation mitigation natural resource damages claims connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases 73 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined amr sites august 31 2015 company environmental liabilities related various amr sites portland harbor 45 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firm applies treatment allows eaf dust delisted hazardous waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 since renewed february 1 2018 smb environmental liabilities august 31 2015 portland harbor superfund site discussed management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period addition company party various legal proceedings arising normal course business management believes adequate provisions made contingencies company anticipate resolution legal proceedings arising normal course business material adverse effect results operations financial condition cash flows note 12 restructuring charges exitrelated costs company implemented number restructuring initiatives designed reduce operating expenses improve profitability achieve integration synergistic cost efficiencies operating platform charges incurred company related restructuring initiatives pertain four separate plans announced fourth quarter fiscal 2012 “q4’12 plan” “q1’14 plan” “q1’15 plan” q215 plan q412 plan designed achieve integration companys existing businesses realign company’s organization support future growth decrease operating expenses streamlining functions reducing organizational layers q114 plan designed reduce companys annual operating expenses headcount reductions productivity improvements procurement savings operational efficiencies q115 plan included additional productivity initiatives improve profitability combination revenue drivers cost reduction initiatives end second quarter fiscal 2015 company initiated additional restructuring exitrelated initiatives undertaking strategic actions consisting idling underutilized metals recycling assets initiating closure seven auto parts stores closely align companys business prevalent market conditions company expanded initiatives april 2015 announcing measures aimed reducing companys annual operating expenses primarily selling general administrative expenses corporate amr headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures collectively initiatives referred q215 plan company incurred restructuring charges 11 million 6 million 8 million fiscal 2015 2014 2013 respectively remaining charges relating initiatives expected substantially incurred end fiscal 2017 significant majority restructuring charges require company make cash payments 74 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements addition restructuring charges recorded connection initiatives company incurred exitrelated costs 7 million 1 million fiscal 2015 2014 respectively consisting asset impairments accelerated depreciation due shortened useful lives connection site closures restructuring charges exitrelated costs comprised following thousands following illustrates reconciliation restructuring liability major type costs years ended august 31 2015 2014 thousands 75 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements due immateriality activity liability balances q412 plan q114 plan q115 plan reconciliation restructuring liability plans provided aggregate restructuring charges exitrelated costs reportable segment follows thousands company allocate restructuring charges exitrelated costs segments operating results management include information measurement performance operating segments note 13 redeemable noncontrolling interest march 2011 company whollyowned acquisition subsidiary acquired substantially metals recycling assets canadian business part purchase consideration company issued seller common shares equal 20 issued outstanding capital stock company’s acquisition subsidiary terms agreement related acquisition noncontrolling interest holder right require company purchase interest company’s acquisition subsidiary fair value upon occurrence certain triggering events march 8 2013 company entered agreement noncontrolling interest holder purchase outstanding noncontrolling interest company’s subsidiary 25 million second quarter fiscal 2013 company adjusted redeemable noncontrolling interest fair value corresponding purchase price 25 million prior purchase noncontrolling interest presented adjusted carry value approximated fair value company determined fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis 76 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements following reconciliation changes redeemable noncontrolling interest year ended august 31 2013 thousands note 14 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2015 2014 thousands note 15 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company may enter foreign currency forward contracts stabilize us dollar amount transaction settlement contracts designated hedging instruments accounting purposes realized unrealized gains losses settled unsettled forward contracts measured fair value recognized income expense consolidated statements operations 77 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements company entered series foreign currency exchange forward contracts sell us dollars order hedge portion exposure fluctuating rates exchange anticipated us dollardenominated sales canadian subsidiary functional currency canadian dollar company utilized intercompany foreign currency derivatives offsetting derivatives external counterparties order designate intercompany derivatives hedging instruments us dollardenominated sales recognized corresponding receivables collected company utilized foreign currency exchange forward contracts sell canadian dollars achieving result similar net settling contracts sell us dollars foreign currency exchange forward contracts sell canadian dollars designated hedging instruments august 31 2015 company foreign currency exchange forward contract external counterparty buy canadian dollars total notional amount 5 million settlement date september 30 2015 foreign currency exchange forward contracts external counterparty sell canadian dollars total notional amount 2 million settlement date september 30 2015 contracts external counterparties reported fair value consolidated balance sheets measured using quoted foreign currency exchange rates fair value derivative instruments consolidated balance sheets follows thousands following table summarizes results foreign currency exchange derivatives years ended august 31 thousands note 16 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material years ended august 31 2015 2014 2013 fair value plan assets 15 million 18 million august 31 2015 2014 respectively projected benefit obligation 13 million 14 million august 31 2015 2014 respectively plan fully funded plan assets exceeding projected benefit obligation 2 million 4 million august 31 2015 2014 respectively plan assets comprised entirely level 1 investments august 78 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements 31 2015 2014 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 410 405 august 31 2015 2014 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 3 million august 31 2015 2014 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 4 million august 31 2015 2014 net periodic pension cost serbp material years ended august 31 2015 2014 2013 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 13 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees smb covered collective bargaining agreement expire march 31 2016 october 1 2012 wispp accumulated funding deficiency ie failure satisfy minimum funding requirements certified red zone status defined pension protection act 2006 october 1 2013 wispp longer red zone status certified plan’s actuaries green zone company contributed 3 million wispp years ended august 31 2015 2014 2013 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs without irs could revoked amortization extension retroactively 2002 plan year resulting material liability company’s share resulting funding deficiency based actuarial valuation wispp october 1 2014 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 782 minimum funded ratio specified funding relief agreement irs company contributions multiemployer plans 4 million years ended august 31 2015 2014 2013 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million year ended august 31 2015 2 million years ended august 31 2014 2013 note 17 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 56 million available future grants august 31 2015 sharebased compensation expense 10 million 15 million 11 million years ended august 31 2015 2014 2013 respectively tax benefits used option exercises vesting restricted stock units 2 million year ended august 31 2015 immaterial years ended august 31 2014 2013 79 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2015 2014 2013 compensation committee granted 287180 rsus 219504 rsus 217001 rsus respectively key employees officers employee directors plan rsus fiveyear term vest 20 per year commencing october 31 june 1 year grant except immaterial number awards granted different terms estimated fair value rsus granted years ended august 31 2015 2014 2013 6 million 7 million 7 million respectively summary company’s restricted stock unit activity follows 1 amounts represent value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 7 million 6 million 6 million years ended august 31 2015 2014 2013 respectively august 31 2015 total unrecognized compensation costs related unvested rsus amounted 5 million expected recognized weighted average period 19 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reportable segments participant works awards paid class common stock soon practicable october 31 following end performance period company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2014 2015 august performance share awards 80 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements compensation committee approved performancebased awards plan grant date august 13 2013 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2014 2015 november performance share awards compensation committee approved performancebased awards plan grant date november 21 2013 compensation committee established performance targets based divisional volume metrics weighted 50 divisional operating income metrics weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2015 2016 performance share awards compensation committee approved performancebased awards plan grant date november 25 2014 performance targets based companys ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 2 million 6 million 3 million years ended august 31 2015 2014 2013 respectively august 31 2015 unrecognized compensation costs related nonvested performance shares amounted 2 million expected recognized weighted average period 06 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan one dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan 81 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements dsus granted years ended august 31 2015 2014 2013 total 48590 shares 30848 shares 29167 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2015 2014 2013 well unrecognized compensation expense august 31 2015 material stock options plan stock options granted employees exercise prices set sole discretion board directors fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected term options based analysis expected postvesting exercise behavior including historical exercise patterns available options granted fiscal 2015 2014 2013 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options outstanding stock options vested august 31 2015 aggregate intrinsic value stock options exercised zero year ended august 31 2015 immaterial years ended august 31 2014 2013 represents difference exercise price value company’s stock time exercise stock options vested year ended august 31 2015 307855 stock options vested year ended august 31 2014 stock options vested year ended august 31 2013 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised zero year ended august 31 2015 material years ended august 31 2014 2013 82 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements note 18 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows companys effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses 83 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements companys effective tax rate continuing operations fiscal 2014 expense 172 lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization foreign subsidiaries deferred tax assets dependent upon generating sufficient taxable income foreign tax jurisdiction future years benefit reversal net deductible temporary differences utilization net operating losses companys effective tax rate continuing operations fiscal 2013 benefit 171 differed us federal statutory rate 350 primarily due recognition valuation allowance 29 million deferred tax assets mainly related foreign subsidiary impact nondeductible portion goodwill impairment charge impact foreign tax rate differential operating losses recorded foreign subsidiaries deferred tax assets foreign subsidiary valuation allowance recorded related primarily deductible temporary differences created fiscal 2013 impairment charge goodwill net operating losses subsidiary company continue regularly assess realizability deferred tax assets changes historical earnings performance future earnings projections among factors may cause company adjust valuation allowance deferred tax assets would impact companys results operations period determine factors changed august 31 2015 company believes likely realize benefits deferred tax assets net valuation allowances deferred tax assets liabilities comprised following august 31 thousands august 31 2015 company federal net operating loss carryforwards 40 million expire used 2035 foreign operating loss carryforwards 29 million expire used 2022 2035 state credit carryforwards expire used 2016 2025 accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands 84 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements company anticipate material changes reserve next 12 months reserves pertaining positions claimed fiscal year 2013 2014 2015 tax returns would result net operating loss offsets event positions successfully challenged pursuant fasbs accounting standards update 201311 reserves netted deferred tax assets related net operating loss carryforwards august 31 2015 recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2011 2014 remain subject examination time company examination taxing jurisdictions note 19 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 1124362 618348 957235 considered antidilutive excluded calculation diluted net income loss per share attributable ssi years ended august 31 2015 2014 2013 respectively note 20 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 22 million 30 million 26 million years ended august 31 2015 2014 2013 respectively net advances joint ventures zero 3 million 2 million years ended august 31 2015 2014 2013 respectively amounts receivable joint venture partners zero august 31 2015 1 million august 31 2014 2013 connection acquisition assets amix salvage sales ltd march 2011 company entered series agreements obtain barging services lease property entities owned minority shareholder company’s subsidiary operates amr facilities vancouver british columbia alberta canada march 8 2013 company purchased noncontrolling interest subsidiary result entities common ownership former minority shareholder ceased related parties company prior purchase noncontrolling interest company paid 5 million primarily barging services agreements year ended august 31 2013 85 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements thomas klauer jr president company’s former auto parts business prior retirement january 5 2015 sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership date retirement totaled 1 million 2 million 1 million years ended august 31 2015 2014 2013 respectively partnership leases properties entities mr klauer ownership interests agreements expire december 2020 options renew leases upon expiration multiple periods rent paid partnership entities mr klauer ownership interests date retirement less 1 million year ended august 31 2015 1 million years ended august 31 2014 2013 certain members schnitzer family significant interests related owners mmgl corp “mmgl” formerly known schnitzer investment corp engaged real estate business subsidiary company prior 1989 company mmgl involved cost sharing arrangement respect defense costs related portland harbor mmgl considered related party financial reporting purposes prior january 2015 due involvement kenneth novack former member companys board directors management mmgl january 2015 mr novack longer member companys board directors thus mmgl ceased related party august 31 2014 1 million receivable mmgl paid full first quarter fiscal 2015 note 21 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance prior fourth quarter fiscal 2015 internal organizational reporting structure supported three operating reportable segments metals recycling business mrb auto parts business apb steel manufacturing business smb fourth quarter fiscal 2015 accordance plan announced april 2015 company combined integrated auto parts metals recycling businesses single operating platform resulted realignment chief executive officer considered companys chief operating decision maker reviews performance makes decisions resource allocation change companys internal organizational reporting structure resulted formation new operating reportable segment auto metals recycling amr business replacing former mrb apb segments company began reporting new segment fourth quarter fiscal 2015 reflected annual report form 10k segment data comparable periods presented revised conform current period presentation activities amr recasting historical information impact companys consolidated financial performance periods presented additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal amr buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb amr also purchases ferrous metal processors shipment directly smb amr also procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales amr smb made rates approximate market prices shipments west coast us intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income reportable segments expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition company allocate restructuring charges exitrelated costs segment operating income management include information measurement performance operating segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented 86 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements following summary company’s total assets august 31 thousands 1 amr total assets include 15 million august 31 2015 2014 investments joint ventures 2 property plant equipment net includes 29 million 75 million august 31 2015 2014 respectively canadian locations table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 87 schnitzer steel industries inc form 10k 2015 table contents schnitzer steel industries inc notes consolidated financial statements 1 amr operating income loss includes 2 million 1 million 1 million income joint ventures accounted equity method fiscal 2015 2014 2013 respectively amr operating income loss fiscal 2015 2014 2013 includes goodwill impairment charge 141 million zero 321 million respectively asset impairment charges 44 million 1 million 13 million respectively following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2015 2014 2013 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold disclosure applicable 88 schnitzer steel industries inc form 10k 2015 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary present fairly results periods represented thousands except per share amounts net income attributable ssi fourth quarter fiscal 2015 included benefit 3 million net valuation allowances related realization foreign investment basis income tax purposes second quarter fiscal 2015 company recorded goodwill impairment charge 141 million asset impairment charges 44 million restructuring charges exitrelated costs 8 million see note 2 summary significant accounting policies note 7 goodwill intangible assets net note 18 income taxes detail 89 schnitzer steel industries inc form 10k 2015 schedule ii valuation qualifying accounts years ended august 31 2015 2014 2013 thousands 90 schnitzer steel industries inc form 10k 2015 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2016 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2016 stated report included herein 51 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2016 2015 results operations cash flows three years period ended august 31 2016 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 2 consolidated financial statements company changed manner classifies deferred income taxes fiscal 2016 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 25 2016 52 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 53 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc consolidated statements operations thousands except per share amounts 1 may foot due rounding see notes consolidated financial statements 54 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc consolidated statements comprehensive income loss thousands see notes consolidated financial statements 55 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc consolidated statements equity thousands see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc consolidated statements cash flows thousands 57 schnitzer steel industries inc form 10k 2016 see notes consolidated financial statements 58 schnitzer steel industries inc form 10k 2016 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products company two reportable segments follows auto metals recycling amr business steel manufacturing business smb amr buys collects processes recycles sells brokers scrap metal operation one largest metals recycling businesses north america operates one countrys leading networks selfservice used auto parts stores supplies amrs shredding facilities autobodies processed saleable recycled metal smb purchases substantially recycled metal amr uses minimill process recycled metal finished steel products august 31 2016 company’s facilities located united states “us” territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation accounting changes april 2014 accounting standard update issued amends requirements reporting discontinued operations may include component entity group components entity amendments limit discontinued operations reporting disposals components entity represent strategic shifts major effect entitys operations financial results amendments require expanded disclosure assets liabilities revenues expenses discontinued operations amendments require entity disclose pretax profit loss individually significant component disposed qualify discontinued operations reporting company adopted new requirement first quarter fiscal 2016 impact consolidated financial statements standard applied prospectively disposals classifications held sale components businesses acquisition classified held sale occur beginning first quarter fiscal 2016 interim periods within fiscal year november 2015 accounting standard update issued requires deferred tax liabilities assets classified noncurrent statement financial position simplify presentation companys deferred tax liabilities assets along valuation allowances deferred tax assets company earlyadopted new requirement beginning first quarter fiscal 2016 applying amendments prospectively adoption new requirement impacted classification companys deferred tax liabilities assets reported consolidated balance sheet beginning november 30 2015 impact consolidated results operations cash flows comparative period consolidated balance sheet retrospectively adjusted april 2015 accounting standard update issued clarifies accounting cloud computing arrangements include software licenses guidance requires cloud computing arrangement includes software license accounted manner acquisition software licenses cloud computing arrangement include software license accounted service contract reduce complexity evaluating accounting fees paid cloud computing arrangement company earlyadopted new requirement beginning third quarter fiscal 2016 applying amendments prospectively arrangements entered materially modified adoption new requirement results recognition software licenses acquired part cloud computing arrangement within property plant equipment companys consolidated balance sheet recognition amortization expense within either cost goods sold selling general administrative expense depending nature software license companys consolidated statement operations new requirement represent substantial change manner company accounted fees paid cloud computing arrangements prior adoption 59 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements discontinued operations results discontinued operations presented separately net tax results ongoing operations periods presented expenses included results discontinued operations direct operating expenses incurred disposed components may reasonably segregated costs ongoing operations company asset impairments related disposed components also included results discontinued operations see note 8 discontinued operations asset impairment charges section note detail cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 3 million 11 million august 31 2016 2015 respectively accounts receivable net accounts receivable represent amounts primarily due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectability accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces net recognized receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 2 million august 31 2016 2015 inventories company’s inventories primarily consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles reported within finished goods inventories stated lower cost market amr determines cost ferrous nonferrous inventories using average cost method capitalizes substantially direct costs yard costs inventory amr allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory based average price company pays vehicle capitalizes vehicle cost substantially production costs inventory smb determines cost finished steel product inventory based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company considers estimated future selling prices determining estimated net realizable value inventory amr generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due variations scrap metal product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expense gains losses sales assets related exit activity reported within restructuring charges exitrelated activities consolidated statements operations depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term 60 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2016 useful lives used depreciation amortization follows assets company’s assets exclusive prepaid expenses consist primarily receivables insurers debt issuance costs notes contractual receivables suppliers assets held sale assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible debt issuance costs consist primarily costs incurred company enter modify revolving credit facility company reports deferred debt issuance costs within assets consolidated balance sheets amortizes interest expense straightline basis contractual term arrangement notes contractual receivables suppliers consist primarily advances entities business extracting scrap metal demolition activities repayment advances either cash scrap metal company performs periodic reviews notes contractual receivables suppliers identify credit risks assess overall collectability receivables typically involves consideration value collateral form scrap metal extracted demolition construction projects note contractual receivable supplier considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable supplier identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference longlived asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell august 31 2016 2015 company reported less 1 million 2 million respectively assets held sale within prepaid expenses current assets consolidated balance sheets impairment loss recognized initial subsequent writedown asset fair value less cost sell company determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions see asset impairment charges section note tabular presentation impairment charges recorded company fiscal years ended august 31 2016 2015 2014 assets held sale 61 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities companys metals recycling operations asset group generally comprised regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group companys auto parts operations generally auto parts store asset group companys steel manufacturing business single asset group company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2016 2015 company recorded impairment charges longlived tangible intangible assets associated certain regional metals recycling operations used auto parts store locations respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based companys current plans dispose abandon asset end original useful life depreciation accelerated beginning determination made fiscal 2016 2015 company recognized accelerated depreciation due shortened useful lives connection site closures idled equipment see asset impairment charges section note tabular presentation longlived asset impairment charges accelerated depreciation longlived asset impairment charges accelerated depreciation reported consolidated statements operations within 1 asset impairment charges 2 restructuring charges exitrelated activities related site closure qualifying discontinued operations reporting 3 discontinued operations related component company qualifying discontinued operations reporting investments joint ventures august 31 2016 2015 company five 50owned joint venture interests accounted equity method accounting presented part amr operations company’s investments equity method joint ventures resulted cumulative undistributed earnings 11 million august 31 2016 2015 joint ventures sell recycled metal amr smb prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties loss value investment joint venture temporary decline recognized management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal 2016 company recorded impairment charge 2 million related investment joint venture reported within asset impairment charges consolidated statements operations see note 17 related party transactions detail transactions joint ventures 62 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements asset impairment charges following asset impairment charges excluding goodwill impairment charges discussed note recorded consolidated statements operations thousands 1 asset impairment charges incurred amr reportable segment except 79 thousand 745 thousand 532 thousand impairment charges assets related corporate recorded fiscal 2016 2015 2014 respectively 2224 thousand impairment charges supplies inventory related smb recorded fiscal 2016 goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results fourth quarter fiscal 2015 company changed internal organizational reporting structure combine auto metals recycling businesses resulted formation new operating reportable segment amr replacing former metals recycling business mrb auto parts business apb operating segments change led identification components within amr based disaggregation financial information regularly reviewed segment management geographic area components similar economic characteristics aggregated reporting units goodwill reassigned affected reporting units using relative fair value approach date reassessment july 1 2015 beginning date companys goodwill carried two regionallydefined reporting units one consisting single component 168 million allocated goodwill consisting two components similar economic characteristics aggregated reporting unit 9 million allocated goodwill 63 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company required perform twostep quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly twostep quantitative impairment test first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeds fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeds implied fair value goodwill impairment loss recognized amount equal excess company estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium see note 6 goodwill intangible assets net detail including recognition goodwill impairment charges 9 million 141 million fiscal years ended august 31 2016 2015 respectively company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment likely fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record impairment charges indefinitelived intangible assets periods presented acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balance result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred company complete significant acquisitions fiscal 2016 2015 fiscal 2014 company acquired equity interests used auto parts business acquisition material companys financial position results operations pro forma operating results acquisition presented since aggregate results would significantly different reported results restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred see note 10 restructuring charges exitrelated activities detail 64 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 10 million estimated cost unpaid workers’ compensation claims august 31 2016 2015 included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 9 commitments contingencies detail loss contingencies company subject certain legal proceedings contingencies addition related environmental liabilities discussed note outcomes subject significant uncertainty company accrues estimated losses probable liability incurred amount loss reasonably estimated company uses judgment evaluates whether loss contingency arising litigation unasserted claim disclosed recorded outcome legal proceedings contingencies inherently uncertain often difficult estimate accordingly outcome legal proceedings contingencies different amount accrued company would record difference previously recorded amount full amount matter resolved earnings period resolved august 31 2016 2015 accruals legal contingencies net corresponding receivables insurers material financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt derivative contracts company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due shortterm nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value derivative contracts reported fair value see note 12 derivative financial instruments detail 65 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available see note 6 goodwill intangible assets net note 12 derivative financial instruments detail derivatives company records derivative instruments prepaid expenses current assets accrued liabilities consolidated balance sheets fair value changes fair value either recognized comprehensive income loss consolidated statements comprehensive income loss net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur period derivative terminated cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices foreign currency exchange rates related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 12 derivative financial instruments detail derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive loss separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income loss period company records gains losses income net consolidated statements operations net realized unrealized foreign currency transaction gains losses material fiscal years ended august 31 2016 2015 2014 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient 66 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements revenue recognition company recognizes revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title recycled metal finished steel products transfers based contract terms nearly company’s ferrous export sales recycled metal made letters credit reducing credit risk however domestic recycled ferrous metal sales nonferrous sales finished steel generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenues partially loaded shipments detailed documents support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company responsible fulfillment including acceptability products purchased customer retail revenues recognized customers pay parts historically sales returns adjustments impact ultimate collection revenues therefore material provisions returns made sales recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenues shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold sharebased compensation company recognizes compensation cost relating sharebased payment transactions employees nonemployee directors vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 14 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 15 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” meeting certain criteria diluted net income loss per share attributable ssi computed dividing net income loss weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance shares dsu rsu awards using treasury stock method certain company’s stock options rsus performance share awards excluded calculation diluted net income loss per share antidilutive however options awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive income loss continuing operations attributable ssi purposes calculating income loss per share continuing operations attributable ssi loss per share discontinued operations attributable ssi presented separately consolidated statements operations see note 16 net income loss per share detail 67 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include valuation assets received acquisitions revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities legal liabilities goodwill longlived asset indefinitelived intangible asset valuation investments joint ventures valuation certain sharebased awards asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables suppliers derivative financial instruments majority cash equivalents maintained one major financial institution balances certain institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2016 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 40 million 33 million open letters credit august 31 2016 2015 respectively note 3 recent accounting pronouncements may 2014 accounting standard update issued clarifies principles recognizing revenue contracts customers update supersede existing standard recognizing revenue additional updates issued since may 2014 amending aspects initial update providing implementation guidance applicable contracts customers regardless industryspecific transactionspecific fact patterns guidance requires improved disclosures help users financial statements better understand nature amount timing uncertainty revenue recognized standard effective company beginning first quarter fiscal 2019 including interim periods within fiscal year upon becoming effective company apply amendments standard either retrospectively prior reporting period presented retrospectively cumulative effect initially applying guidance recognized date initial application company evaluating impact adopting standard consolidated financial position results operations cash flows april 2015 accounting standard update issued amends requirements presenting debt issuance costs guidance requires debt issuance costs related recognized debt liability presented balance sheet direct deduction debt liability consistent presentation debt discount applicable debt issuance costs related lineofcredit arrangements specified related accounting standard update issued august 2015 standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year applied retrospectively prior reporting period presented adoption standard expected material impact companys consolidated financial position july 2015 accounting standard update issued requires entity measure certain types inventory including inventory measured using firstin first fifo average cost method lower cost net realizable value current accounting standard requires entity measure inventory lower cost market whereby market could replacement cost net realizable value net realizable value less approximately normal profit margin amendments apply inventory measured using lastin firstout lifo retail inventory method standard effective company beginning first quarter fiscal 2018 including interim periods within fiscal year adoption standard expected material impact companys consolidated financial position results operations cash flows 68 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements september 2015 accounting standard update issued eliminates requirement retrospectively adjust provisional amounts recognized business acquisition recorded previous reporting periods amendments instead require acquirer recognize adjustments provisional amounts identified oneyear measurement period reporting period adjustment amount determined acquirer required also record periods financial statements effect earnings changes depreciation amortization income effects result change provisional amounts calculated accounting completed acquisition date standard effective company beginning first quarter fiscal 2017 including interim periods within fiscal year adoption standard expected material impact companys consolidated financial position results operations cash flows february 2016 accounting standard issued supersede existing lease standard requiring lessee recognize lease liability lease asset balance sheet leases including classified operating leases existing lease standard update also expands required quantitative qualitative disclosures surrounding leases standard effective company beginning first quarter fiscal 2020 including interim periods within fiscal year standard applied using modified retrospective transition approach leases existing entered beginning earliest comparative period presented financial statements company evaluating impact adopting standard consolidated financial position results operations cash flows march 2016 accounting standard update issued amends several aspects accounting sharebased payments including accounting income taxes forfeitures statutory tax withholding requirements classification within statement cash flows standard effective company beginning first quarter fiscal 2018 including interim periods within fiscal year early adoption permitted interim annual period however company elects early adoption must adopt amendments period company expect adoption immediate material impact consolidated financial position results operations cash flows june 2016 accounting standard update issued amends guidance reporting credit losses assets held amortized cost basis available sale debt securities assets held amortized cost basis include trade receivables loans financial instruments update eliminates probable initial recognition threshold current gaap instead requires entity reflect current estimate expected credit losses available sale debt securities credit losses measured manner similar current gaap however update requires credit losses presented allowance rather writedown standard effective company beginning first quarter fiscal 2021 including interim periods within fiscal year standard applied using modified retrospective transition approach cumulativeeffect adjustment retained earnings beginning first reporting period guidance effective company evaluating impact adopting standard consolidated financial position results operations cash flows august 2016 accounting standard update issued addresses certain cash receipts cash payments presented classified statement cash flows among cash flow matters addressed update payments costs related debt prepayments extinguishments payments related settlement certain types debt instruments payments contingent consideration made business combination proceeds insurance claims corporateowned life insurance policies distributions received equity method investees among others standard effective company beginning first quarter fiscal 2019 including interim periods within fiscal year early adoption permitted including adoption interim period entity early adopts amendments interim period adjustments reflected beginning fiscal year includes interim period amendments must adopted together period amendments applied using retrospective transition method period presented unless impracticable specific cash flow matters case amendments would applied prospectively earliest date practicable company evaluating impact adopting standard consolidated statement cash flows 69 schnitzer steel industries inc form 10k 2016 note 4 inventories consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense assets capital leases 53 million 66 million 75 million years ended august 31 2016 2015 2014 respectively included amounts depreciation expense 1 million reported within discontinued operations years ended august 31 2015 2014 respectively depreciation expense reported within discontinued operations year ended august 31 2016 note 6 goodwill intangible assets net fourth quarter fiscal 2014 company performed annual goodwill impairment test determined fair value reporting unit goodwill allocated excess respective carrying value therefore goodwill impairment identified former mrb reporting unit goodwill 147 million july 1 2014 calculated fair value exceeded carrying value approximately 13 projections used income approach mrb took consideration challenging market conditions recycled metals including continued constrained supply scrap metal level competition companys domestic markets generally weak macroeconomic indicators markets companys customers based cyclical nature industry projections assumed recovery operating margins multiyear period eventually returning levels profitability range average historical levels assuming components fair value estimate held constant increase wacc excess 100 basis points weakerthananticipated improvements either operating margins volumes could resulted failure step one quantitative impairment test mrb reporting unit second quarter fiscal 2015 management identified combination significant weakening market conditions continued constrained supply raw materials due lower price environment negatively impacted volumes planned idling closure certain production facilities retail stores company’s recent financial performance decline company’s market capitalization first half fiscal 2015 triggering event requiring interim impairment test goodwill allocated reporting units connection interim impairment test performed second quarter fiscal 2015 company used measurement date february 1 2015 70 schnitzer steel industries inc form 10k 2016 former mrb reporting unit goodwill 141 million february 1 2015 first step impairment test showed fair value mrb reporting unit less carrying amount indicating potential impairment based second step impairment test company concluded implied fair value goodwill remained mrb reporting unit resulting impairment entire carrying amount mrb’s goodwill totaling 141 million impairment charge reported within results amr report former apb reporting unit goodwill 176 million february 1 2015 estimated fair value reporting unit exceeded carrying value approximately 20 projections used income approach apb took consideration impact current market conditions ferrous nonferrous commodities cost obtaining adequate supply flows endoflife vehicles recent trends selfserve parts sales projections assumed recovery operating margins current depressed levels multiyear period including benefits recently initiated productivity improvements costsaving measures remaining significantly level operating margins experienced fiscal years 2010 2011 marketbased wacc used income approach apb 1037 terminal growth rate used discounted cash flow model 1 assuming components fair value estimate held constant increase wacc 150 basis points weakerthananticipated improvements operating margins could resulted failure step one quantitative impairment test apb reporting unit fourth quarter fiscal 2015 company changed internal organizational reporting structure combine auto metals recycling businesses resulted formation new operating reportable segment amr replacing former mrb apb operating segments change led identification components within amr based disaggregation financial information regularly reviewed segment management geographic area components similar economic characteristics aggregated reporting units goodwill reassigned affected reporting units using relative fair value approach date reassessment july 1 2015 beginning date companys goodwill carried two regionallydefined reporting units one consisting single component 168 million allocated goodwill consisting two components similar economic characteristics aggregated reporting unit 9 million allocated goodwill second quarter fiscal 2016 management identified combination sustained weak market conditions including adverse effects lower commodity selling prices constraining impact lower price environment supply raw materials negatively impacted volumes company’s recent financial performance decline company’s market capitalization triggering event requiring interim impairment test goodwill allocated reporting units connection interim impairment test performed second quarter fiscal 2016 company used measurement date february 1 2016 reporting unit 9 million goodwill february 1 2016 first step impairment test showed fair value reporting unit less carrying amount indicating potential impairment based second step impairment test company concluded implied fair value goodwill remained reporting unit resulting impairment entire carrying amount reporting units goodwill totaling 9 million reporting unit 166 million goodwill february 1 2016 estimated fair value reporting unit exceeded carrying value approximately 27 projections used income approach reporting unit took consideration impact current market conditions ferrous nonferrous recycled metals cost obtaining adequate supply flows scrap metal including endoflife vehicles recent trends selfserve parts sales projections assumed limited recovery operating margins current depressed levels multiyear period including benefits recently initiated costsaving productivity improvement measures marketbased wacc used income approach reporting unit 112 terminal growth rate used discounted cash flow model 2 assuming components fair value estimate held constant increase wacc 200 basis points weaker anticipated improvements operating margins could resulted failure step one quantitative impairment test reporting unit company also used market approach based earnings multiple data company’s market capitalization corroborate reporting units’ valuations company reconciled market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest implied control premium resulting difference companys market capitalization based average trading price companys class common stock twoweek period ended february 1 2016 higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing metals industries company identified specific reconciling items including market participant synergies supported implied control premium february 1 2016 71 schnitzer steel industries inc form 10k 2016 fourth quarter fiscal 2016 company performed annual goodwill impairment test july 1 2016 testing date balance companys goodwill 167 million carried single reporting unit within amr operating segment company elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment company concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required determination fair value reporting units used perform first step impairment test requires judgment involves significant estimates assumptions expected future cash flows impact market conditions assumptions due inherent uncertainty associated forming estimates actual results could differ estimates future events changing market conditions may impact company’s assumptions future revenue operating margin growth rates marketbased wacc factors may result changes estimates company’s reporting units’ fair value although management believes assumptions used testing company’s reporting units’ goodwill impairment reasonable declines market conditions current levels trend weaker anticipated financial performance reporting unit allocated goodwill decline company’s share price current levels sustained period time increase marketbased wacc among factors could significantly impact impairment analysis may result future goodwill impairment charges incurred could material adverse effect company’s financial condition results operations gross changes carrying amount goodwill reportable segment years ended august 31 2016 2015 follows thousands accumulated goodwill impairment charges 471 million 462 million respectively august 31 2016 2015 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include leasehold interests permits licenses 2 indefinitelived intangibles include trade names permits licenses real property options total intangible asset amortization expense 1 million 2 million 4 million respectively years ended august 31 2016 2015 2014 included amounts amortization expense less 1 million reported within discontinued operations years ended august 31 2015 2014 amortization expense reported within discontinued operations year ended august 31 2016 impairments intangible assets immaterial periods presented 72 schnitzer steel industries inc form 10k 2016 estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 7 debt consisted following august 31 thousands april 6 2016 company certain subsidiaries entered third amended restated credit agreement amended credit agreement bank america na administrative agent lenders party thereto amends restates company’s existing unsecured credit agreement amended credit agreement provides 335 million c15 million senior secured revolving credit facilities maturing april 2021 subject terms conditions amended credit agreement company may request commitments us credit facility increased aggregate amount exceeding 100 million certain conditions met including preapproval lenders achievement certain pro forma financial results prior amendment renewal credit agreement provided revolving loans 670 million c30 million maturing april 2017 company 198 million borrowings outstanding credit agreement april 5 2016 prior amendment renewal august 31 2016 2015 borrowings outstanding credit facility 180 million 215 million respectively weighted average interest rate amounts outstanding facility 301 195 august 31 2016 2015 respectively interest rates outstanding indebtedness amended credit agreement based company’s option either london interbank offered rate libor canadian equivalent plus spread 175 275 amount spread based pricing grid tied company’s leverage ratio less 250 fiscal quarters ended ending may 31 2016 august 31 2016 november 30 2016 greater prime rate federal funds rate plus 050 daily rate equal onemonth libor plus 175 case plus spread zero 100 based pricing grid tied companys leverage ratio addition commitment fees payable unused portion credit facilities rates 020 040 based pricing grid tied company’s leverage ratio amended credit agreement contains certain customary covenants including covenants limit ability company subsidiaries enter certain types transactions financial covenants include covenants requiring maintenance minimum fixed charge coverage ratio maximum leverage ratio minimum asset coverage ratio company’s obligations amended credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain companys subsidiaries’ assets including equipment inventory accounts receivable 73 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2016 2015 company 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 company exercised option redeem bonds prior maturity company repaid bonds full september 2016 obligation reported current liability within shortterm borrowings august 31 2016 consolidated balance sheet principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 16 million outstanding arrangements august 31 2016 2015 company also unsecured uncommitted 25 million credit line wells fargo bank na expired april 1 2016 interest rates set bank time borrowing company borrowings outstanding credit line august 31 2015 note 8 discontinued operations fiscal 2015 company ceased operations seven auto parts stores six qualified discontinued operations reporting accordance accounting standards effect time prior adopting accounting standard update discontinued operations reporting first quarter fiscal 2016 operations six qualifying stores previously reported within apb reportable segment subsequently replaced amr reportable segment fourth quarter fiscal 2015 fiscal 2016 2015 company recorded impairment charges accelerated depreciation 1 million 3 million respectively longlived assets discontinued auto parts stores impaired assets fiscal 2016 consisted primarily capital lease assets associated buildings two leased properties fiscal 2014 company released environmental liability 1 million associated component disposed sale prior period release result periodic review companys estimate future environmental remediation costs associated disposed sites bears responsibility based contractual agreements operating results discontinued operations comprised following years ended august 31 thousands 74 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements note 9 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 rent expense 24 million 26 million 27 million fiscal 2016 2015 2014 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2016 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2016 2015 follows thousands auto metals recycling august 31 2016 amr environmental liabilities 46 million potential remediation locations conducted business environmental liabilities historical recent activities portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved process followed cleanup allocation costs cleanup among responsible parties yet determined process identifying additional prps beginning allocation costs underway unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs company also joined 80 prps including lwg voluntary process establish allocation costs site parties selected allocation team entered allocation process design agreement lwg also commenced federal court litigation stayed seeking bring additional parties allocation process 75 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment march 30 2012 lwg submitted epa made available website draft feasibility study “fs” site based approximately ten years work 100 million costs classified lwg investigationrelated draft fs submitted lwg identified ten possible remedial alternatives ranged estimated cost approximately 170 million 250 million net present value least costly alternative approximately 108 billion 176 billion net present value costly alternative estimated range two 28 years implement remedial work depending selected alternative however epa largely rejected draft fs took drafting process epa provided revised draft fs lwg key stakeholders sections final section made available august 2015 revised draft fs identified five possible remedial alternatives ranged estimated cost approximately 550 million 119 billion net present value least costly alternative approximately 171 billion 367 billion net present value costly alternative estimated range four 18 years implement remedial work depending selected alternative november 2015 epa region 10 presented preferred alternative remedy national remedy review board nrrb peer review group established review proposed superfund cleanup decisions consistency superfund statute regulations guidance epa region 10’s preferred alternative presented nrrb modified version one alternatives alternative e revised draft fs epa region 10 estimated preferred alternative would take seven years implement estimated cost 14 billion net present value june 2016 epa issued proposed plan cleanup inriver portion site proposed plan epa identified preferred alternative includes combination dredging capping enhanced natural recovery epa estimates take approximately seven years construct additional time monitored natural recovery occur cost estimated 746 million net present value approximately half estimated 14 billion net present value cost similar preferred alternative epa region 10 presented november 2015 proposed plan also describes alternatives considered criteria epa used compare alternatives including estimated costs construction timelines conjunction proposed plan epa issued final fs june 2016 final fs identifies eight possible remedial alternatives contain two disposal alternatives total 13 possible alternative remedial scenarios ranged estimated cost approximately 316 million 677 million net present value least costly alternative approximately 121 billion 267 billion net present value costly alternative epa screen estimates range four 19 years implement remedial work depending selected alternative final fs includes one alternative h would involve cappingdredging entire site estimated cost range approximately 661 billion 1429 billion 62 years implement epa screened alternative h due implementability cost considerations draft final fs also contains action alternative considered baseline comparison alternatives fs proposed plan determine allocate responsibility remediation costs issuance proposed plan part continuing process evaluation remediation site 90day public comment period proposed plan closed september 6 2016 approximately 5300 commenters submitted comments following review consideration comments epa prepare summary responding submitted comments select remedy site record decision “rod” epa indicated plans issue rod end 2016 early january 2017 rod epa may modify preferred alternative select different alternative presented proposed plan based new information public comments uncertain whether preferred alternative identified epa proposed plan selected remedy rod whether epa able maintain proposed schedule issuing rod even rod issued likely continue significant uncertainty regarding costs selected remedy 76 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements company stakeholders identified number serious concerns regarding epas risk remedial alternatives assessments epas cost estimates scheduling assumptions conclusions regarding feasibility effectiveness community impact assignment remediation technologies epa’s fs proposed plan based data decade old may accurately represent site background conditions proposed plan epa acknowledged assumptions used estimate costs remedial alternatives developed based existing data finalized remedial design level data refine baseline conditions obtained addition fs proposed plan provide sitewide cost estimates provide sufficient detail regarding costs specific sediment management areas accordingly anticipated additional preremedial design investigative work need occur rod issued order provide rebaseline costs determine particular remedial actions specific areas within site next phase process following rod remedial design remedial design phase engineering phase additional technical information data collected identified incorporated technical drawings specifications developed subsequent remedial action epa seeking new coalition prps perform remedial design activities remediation activities expected commence number years responsibility implementing funding epa’s selected remedy determined separate allocation process allocation process currently underway epas fs approach proposed alternative remedies raised questions uncertainty allocation process proceed determination total cost investigations remediation required amount natural resource damages costs ongoing investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation mitigation natural resource damages claims connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined amr sites august 31 2016 company environmental liabilities related various amr sites portland harbor 45 million liabilities relate potential future remediation soil contamination groundwater contamination storm water runoff issues individually material site steel manufacturing business smb’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firm applies treatment allows eaf dust delisted hazardous waste smb operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 since renewed february 1 2018 smb environmental liabilities august 31 2016 portland harbor superfund site discussed management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period 77 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements addition company party various legal proceedings arising normal course business management believes adequate provisions made contingencies company anticipate resolution legal proceedings arising normal course business taking consideration expected insurance recoveries material adverse effect results operations financial condition cash flows note 10 restructuring charges exitrelated activities company implemented number restructuring initiatives designed reduce operating expenses improve profitability achieve integration synergistic cost efficiencies operating platform restructuring charges incurred company periods presented pertain primarily three separate plans announced first quarter fiscal 2014 “q1’14 plan” q1’15 plan q215 plan q114 plan designed reduce companys annual operating expenses headcount reductions productivity improvements procurement savings operational efficiencies q115 plan included additional productivity initiatives improve profitability combination revenue drivers cost reduction initiatives end second quarter fiscal 2015 company commenced additional restructuring exitrelated initiatives undertaking strategic actions consisting idling underutilized assets amr initiating closure seven auto parts stores align companys business market conditions company expanded initiatives april 2015 also announced integration mrb apb businesses combined amr platform order achieve operational synergies reduce companys annual operating expenses primarily selling general administrative expenses headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures additional cost savings productivity improvement initiatives including additional reductions personnel savings procurement activities streamlining administrative supporting services functions adjustments operating capacity facility closures identified initiated fiscal 2016 collectively initiatives referred q215 plan company incurred restructuring charges 6 million 11 million 6 million fiscal 2016 2015 2014 respectively remaining charges relating initiatives expected substantially incurred end fiscal 2017 significant majority restructuring charges require company make cash payments addition restructuring charges related initiatives company incurred exitrelated activities 2 million 7 million 1 million fiscal 2016 2015 2014 respectively consisting primarily longlived asset impairments accelerated depreciation due shortened useful lives longlived assets including abandonment connection site closures idled equipment exitrelated activities fiscal 2016 also included 1 million gains recorded connection disposition business assets leading elimination certain auto metals recycling operations 78 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated activities comprised following thousands total restructuring charges date total expected restructuring charges presented throughout note include costs associated q114 q115 q215 plans fiscal 2014 restructuring charges also include immaterial amount costs incurred connection restructuring measures initiated prior fiscal 2014 following illustrates reconciliation restructuring liability major type activities years ended august 31 2016 2015 thousands 79 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements due individual immateriality activity liability balances q114 plan q115 plan disclosure restructuring activity reconciliation restructuring liability two plans provided aggregate plans restructuring charges exitrelated activities reportable segment follows thousands company allocate restructuring charges exitrelated activities segments operating results management include information measurement performance operating segments 80 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements note 11 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2016 2015 2014 thousands reclassifications accumulated comprehensive loss individually aggregate immaterial impacted captions consolidated statements operations periods presented 81 schnitzer steel industries inc form 10k 2016 note 12 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company entered foreign currency forward contracts stabilize us dollar amount transaction settlement company previously entered series foreign currency exchange forward contracts sell us dollars order hedge portion exposure fluctuating rates exchange anticipated us dollardenominated sales canadian subsidiary functional currency canadian dollar company utilized intercompany foreign currency derivatives offsetting derivatives external counterparties order designate intercompany derivatives hedging instruments us dollardenominated sales recognized corresponding receivables collected company utilized foreign currency exchange forward contracts sell canadian dollars achieving result similar net settling contracts sell us dollars foreign currency exchange forward contracts sell canadian dollars designated hedging instruments company foreign currency exchange forward contracts august 31 2016 results contracts expired fiscal 2016 immaterial accordingly results foreign currency exchange forward contracts fiscal 2016 excluded tabular disclosures fair value derivative instruments consolidated balance sheet august 31 2015 follows thousands following table summarizes results foreign currency exchange derivatives years ended august 31 thousands hedge ineffectiveness respect foreign currency exchange cash flow hedges periods presented 82 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements note 13 employee benefits company certain subsidiaries qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material years ended august 31 2016 2015 2014 fair value plan assets 15 million august 31 2016 2015 projected benefit obligation 15 million 13 million august 31 2016 2015 respectively plan fully funded plan assets exceeding projected benefit obligation 1 million 2 million august 31 2016 2015 respectively plan assets comprised entirely level 1 investments august 31 2016 2015 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 322 410 august 31 2016 2015 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 3 million august 31 2016 2015 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 4 million august 31 2016 2015 net periodic pension cost serbp material years ended august 31 2016 2015 2014 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 14 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees smb covered collective bargaining agreement expire march 31 2019 october 1 2012 wispp accumulated funding deficiency ie failure satisfy minimum funding requirements certified red zone status defined pension protection act 2006 october 1 2013 wispp longer red zone status certified plan’s actuaries green zone company contributed 3 million wispp years ended august 31 2016 2015 2014 contributions represented 5 total contributions wispp year 83 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs requires wispp meet minimum funded percentage valuation date achieve funded percentage 100 october 1 2029 based actuarial valuation wispp october 1 2015 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 743 satisfies minimum funded percentage requirements irs company contributions multiemployer plans 4 million years ended august 31 2016 2015 2014 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million 3 million 2 million respectively years ended august 31 2016 2015 2014 84 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements note 14 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 49 million available future grants august 31 2016 sharebased compensation expense 10 million 10 million 15 million years ended august 31 2016 2015 2014 respectively tax benefits used option exercises vesting restricted stock units 3 million 2 million years ended august 31 2016 august 31 2015 respectively immaterial year ended august 31 2014 restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2016 2015 2014 compensation committee granted 361131 rsus 287180 rsus 219504 rsus respectively key employees officers employee directors plan rsus vest 20 per year five years commencing october 31 june 1 year grant addition first quarter fiscal 2016 compensation committee granted 48163 rsus twoyear vesting term retirementeligibility provisions sip estimated fair value rsus granted years ended august 31 2016 2015 2014 7 million 6 million 7 million respectively summary company’s restricted stock unit activity follows 1 amounts represent weighted average value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 6 million 7 million 6 million years ended august 31 2016 2015 2014 respectively august 31 2016 total unrecognized compensation costs related unvested rsus amounted 6 million expected recognized weighted average period 28 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reportable segments participant works awards paid class common stock soon practicable october 31 following end performance period 85 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2014 2015 august performance share awards compensation committee approved performancebased awards plan grant date august 13 2013 compensation committee established performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2014 2015 november performance share awards compensation committee approved performancebased awards plan grant date november 21 2013 compensation committee established performance targets based divisional volume metrics weighted 50 divisional operating income metrics weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2015 2016 performance share awards compensation committee approved performancebased awards plan grant date november 25 2014 performance targets based companys ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2016 2018 november performance share awards first quarter fiscal 2016 compensation committee approved performancebased awards plan grant date november 9 2015 201702 performance share awards granted compensation committee comprised two separate distinct awards different vesting conditions compensation committee granted 99860 performance share awards based relative total shareholder return tsr metric performance period spanning november 9 2015 august 31 2018 award share payouts range threshold 50 maximum 200 based relative ranking companys tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level companys tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 2 million company estimated fair value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 101842 performance share awards threeyear performance period consisting company’s fiscal 2016 2017 2018 performance targets based companys cash flow return investment cfroi threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 2 million fiscal 2016 2018 april performance share awards third quarter fiscal 2016 compensation committee approved second half fiscal 2016 performancebased awards grant date april 27 2016 compensation committee granted 152221 performance share awards consisting 73546 tsr awards 78675 cfroi awards companys key employees officers plan terms substantially similar awards granted first quarter fiscal 2016 described note except performance period tsr awards started april 27 2016 cfroi awards march 1 2016 estimated fair value tsr awards cfroi awards date grant 2 million 86 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 4 million 2 million 6 million years ended august 31 2016 2015 2014 respectively august 31 2016 unrecognized compensation costs related nonvested performance shares amounted 5 million expected recognized weighted average period 13 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2016 2015 2014 total 57780 shares 48590 shares 30848 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2016 2015 2014 well unrecognized compensation expense august 31 2016 material stock options plan stock options granted employees exercise prices set sole discretion board directors fair value option grant plan estimated date grant using blackscholes option pricing model utilizes assumptions related volatility riskfree interest rate dividend yield employee exercise behavior expected volatilities utilized model based historical volatility company’s stock price riskfree interest rate derived us treasury yield curve effect time grant expected term options based analysis expected postvesting exercise behavior including historical exercise patterns available options granted fiscal 2016 2015 2014 87 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options outstanding stock options vested august 31 2016 2015 aggregate intrinsic value stock options exercised zero years ended august 31 2016 2015 immaterial year ended august 31 2014 represents difference exercise price value company’s stock time exercise stock options vested years ended august 31 2016 august 31 2015 307855 stock options vested year ended august 31 2014 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised zero years ended august 31 2016 2015 material year ended august 31 2014 88 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements note 15 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows 89 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements companys effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization foreign investment basis tax purposes company’s income tax expense comprised primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses companys effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized companys effective tax rate continuing operations fiscal 2014 expense 172 lower us federal statutory rate 35 effective tax rate benefited fixed asset tax basis study performed fiscal 2014 resulted recognition tax benefit 2 million well aggregate impact excluding income associated noncontrolling interests foreign income taxed different rates certain deductions credits significant items impacting effective tax rate included recognition valuation allowance certain foreign state deferred tax assets recognition liability unrecognized tax benefits 2 million valuation allowance deferred tax assets certain foreign state tax jurisdictions increased 2 million compared prior year recognized result negative evidence including recent losses certain foreign state jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization foreign subsidiaries deferred tax assets dependent upon generating sufficient taxable income foreign tax jurisdiction future years benefit reversal net deductible temporary differences utilization net operating losses deferred tax assets liabilities comprised following august 31 thousands august 31 2016 company federal net operating loss carryforwards 35 million expire used 2035 foreign operating loss carryforwards 32 million expire used 2022 2036 state credit carryforwards expire used 2017 2026 90 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months reserves pertaining positions claimed fiscal year 2014 2015 2016 tax returns would result net operating loss offsets event positions successfully challenged pursuant fasbs accounting standards update 201311 reserves netted deferred tax assets related net operating loss carryforwards recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2012 2015 remain subject examination statute limitations note 16 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 1016745 1018858 618348 considered antidilutive excluded calculation diluted net income loss per share attributable ssi years ended august 31 2016 2015 2014 respectively note 17 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 12 million 22 million 30 million years ended august 31 2016 2015 2014 respectively net advances joint ventures zero years ended august 31 2016 2015 3 million year ended august 31 2014 91 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements thomas klauer jr president company’s former auto parts business prior retirement january 5 2015 sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership date retirement totaled 1 million 2 million years ended august 31 2015 2014 respectively partnership leases properties entities mr klauer ownership interests agreements expire december 2020 options renew leases upon expiration multiple periods rent paid partnership entities mr klauer ownership interests date retirement less 1 million year ended august 31 2015 1 million year ended august 31 2014 certain members schnitzer family significant interests related owners mmgl corp “mmgl” formerly known schnitzer investment corp engaged real estate business subsidiary company prior 1989 company mmgl involved cost sharing arrangement respect defense costs related portland harbor mmgl considered related party financial reporting purposes prior january 2015 due involvement kenneth novack former member companys board directors management mmgl january 2015 mr novack longer member companys board directors thus mmgl ceased related party august 31 2014 1 million receivable mmgl paid full first quarter fiscal 2015 note 18 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance prior fourth quarter fiscal 2015 companys internal organizational reporting structure supported three operating reportable segments metals recycling business mrb auto parts business apb steel manufacturing business smb fourth quarter fiscal 2015 accordance plan announced april 2015 company combined integrated auto parts metals recycling businesses single operating platform resulted realignment chief executive officer considered companys chief operating decision maker reviews performance makes decisions resource allocation change companys internal organizational reporting structure resulted formation new operating reportable segment auto metals recycling amr business replacing former mrb apb segments company began reporting new segment fourth quarter fiscal 2015 reflected annual report form 10k year ended august 31 2015 segment data comparable periods presented prior segment change revised conform current period presentation activities amr recasting historical information impact companys consolidated financial performance periods presented additionally company noncontrolling partner joint ventures either metals recycling business suppliers unprocessed metal amr buys processes ferrous nonferrous metal sale foreign domestic steel producers representatives smb amr also purchases ferrous metal processors shipment directly smb amr also procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores smb operates steel minimill produces wide range finished steel products using recycled metal raw materials intersegment sales amr smb made rates approximate market prices shipments west coast us intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income reportable segments expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition company allocate restructuring charges exitrelated activities segment operating income management include information measurement performance operating segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented 92 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements following summary company’s total assets august 31 thousands 1 amr total assets include 14 million 15 million august 31 2016 2015 respectively investments joint ventures 2 substantial majority corporate eliminations total assets comprised corporate intercompany payables companys operating segments intercompany eliminations 3 property plant equipment net includes 19 million 29 million august 31 2016 2015 respectively canadian locations 93 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 1 amr operating income loss includes 1 million 2 million 1 million income joint ventures accounted equity method fiscal 2016 2015 2014 respectively amr operating income loss fiscal 2016 2015 2014 includes goodwill impairment charge 9 million 141 million zero respectively asset impairment charges 18 million 44 million 1 million respectively 2 smb operating income fiscal 2016 includes asset impairment charges 2 million 94 schnitzer steel industries inc form 10k 2016 table contents schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2016 2015 2014 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold 95 schnitzer steel industries inc form 10k 2016 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary fair statement results periods represented thousands except per share amounts second quarter fiscal 2016 operating results included goodwill impairment charge 9 million asset impairment charges 18 million restructuring charges exitrelated activities 5 million fourth quarter fiscal 2016 operating results included asset impairment charges 2 million insurance reimbursement gain 6 million net income attributable ssi fourth quarter fiscal 2015 included benefit 3 million net valuation allowances related realization foreign investment basis income tax purposes second quarter fiscal 2015 operating results included goodwill impairment charge 141 million asset impairment charges 44 million restructuring charges exitrelated activities 5 million see note 2 summary significant accounting policies note 6 goodwill intangible assets net note 8 discontinued operations note 9 commitments contingencies 96 schnitzer steel industries inc form 10k 2016 schedule ii valuation qualifying accounts years ended august 31 2016 2015 2014 thousands 97 schnitzer steel industries inc form 10k 2016 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso based assessment management determined company’s internal control financial reporting effective august 31 2017 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2017 stated report included herein 51 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income loss equity cash flows present fairly material respects financial position schnitzer steel industries inc subsidiaries august 31 2017 2016 results operations cash flows three years period ended august 31 2017 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting august 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions financial statements financial statement schedule companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 24 2017 52 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 53 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc consolidated statements operations thousands except per share amounts 1 may foot due rounding see notes consolidated financial statements 54 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc consolidated statements comprehensive income loss thousands see notes consolidated financial statements 55 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc consolidated statements equity thousands see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc consolidated statements cash flows thousands 57 schnitzer steel industries inc form 10k 2017 see notes consolidated financial statements 58 schnitzer steel industries inc form 10k 2017 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products prior fourth quarter fiscal 2017 companys internal organizational reporting structure supported two operating reportable segments auto metals recycling amr business steel manufacturing business smb fourth quarter fiscal 2017 accordance plan announced june 2017 company modified internal organizational reporting structure combine steel manufacturing operations reported smb segment oregon metals recycling operations reported within amr segment forming new division named cascade steel scrap css resulted realignment chief executive officer considered companys chief operating decision maker reviews performance makes decisions resource allocation company began reporting new segment structure fourth quarter fiscal 2017 reflected annual report form 10k segment data comparable periods presented recast conform current period presentation activities reorganized segments recasting historical information impact companys consolidated financial performance periods presented amr buys processes ferrous nonferrous scrap metal sale foreign domestic steel producers representatives procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply companys shredding facilities autobodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using recycled scrap metal raw materials csss steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations august 31 2017 company’s facilities located united states us territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control cost method accounting used investments entities company able exercise significant influence significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation discontinued operations results discontinued operations presented separately net tax results ongoing operations periods presented expenses included results discontinued operations direct operating expenses incurred disposed components may reasonably segregated costs ongoing operations company asset impairments related disposed components also included results discontinued operations see note 8 discontinued operations asset impairment charges recoveries net section note detail cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 21 million 3 million august 31 2017 2016 respectively 59 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements accounts receivable net accounts receivable represent amounts primarily due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectability accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 2 million august 31 2017 2016 inventories company’s inventories consist processed unprocessed scrap metal ferrous nonferrous recovered joint product arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost market company determines cost ferrous nonferrous scrap metal inventories using average cost method capitalizes substantially direct processing costs yard costs inventory company allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory auto parts stores reported within finished goods based average price company pays vehicle capitalizes vehicle cost substantially production costs inventory css determines cost semifinished finished steel product inventories based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company determines cost supplies inventory using average cost method reduces carrying value losses due obsolescence company considers estimated future selling prices determining estimated net realizable value inventory company generally sells export recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts orders company performs periodic physical inventories verify quantity inventory hand due inherent nature companys scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expense gains losses sales assets related exit activity reported within restructuring charges exitrelated activities consolidated statements operations depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2017 useful lives used depreciation amortization follows 60 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements assets company’s assets exclusive prepaid expenses consist primarily receivables insurers cost method investment debt issuance costs notes contractual receivables suppliers assets held sale assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible fiscal 2017 company invested 6 million privatelyheld waste recycling entity companys influence operating financial policies entity significant thus investment accounted cost method cost method investment carried cost adjusted otherthantemporary impairments certain distributions additional investments investment presented part amr reported within assets consolidated balance sheets company hold costmethod investments august 31 2017 company identified events changes circumstances may significant adverse effect fair value investment indicators otherthantemporary impairment debt issuance costs consist primarily costs incurred company enter modify credit facilities company reports deferred debt issuance costs within assets consolidated balance sheets amortizes interest expense straightline basis contractual term arrangement notes contractual receivables suppliers consist primarily advances entities business extracting scrap metal demolition activities repayment advances either cash scrap metal company performs periodic reviews notes contractual receivables suppliers identify credit risks assess overall collectability receivables typically involves consideration value collateral form scrap metal extracted demolition construction projects note contractual receivable supplier considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable supplier identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell adjustments depreciation impairment loss recognized initial subsequent writedown asset fair value less cost sell company generally determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions see asset impairment charges recoveries net section note tabular presentation impairment charges recorded company assets held sale periods presented fiscal 2017 company sold equipment assets classified held sale prior fully impaired fiscal 2015 company recorded gain sale 1 million fiscal 2017 reported within asset impairment charges recoveries net consolidated statements operations company assets held sale august 31 2017 august 31 2016 company reported less 1 million assets held sale within prepaid expenses current assets consolidated balance sheets 61 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities companys metals recycling operations reported within amr asset group generally comprised regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group companys auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group prior combination css fourth quarter fiscal 2017 companys steel manufacturing operations oregon metals recycling operations distinct asset groups company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2016 2015 company recorded impairment charges longlived asset groups associated certain regional metals recycling operations retail auto parts store locations respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based companys current plans dispose abandon asset end original useful life depreciation accelerated beginning determination made fiscal 2017 company recognized accelerated depreciation primarily due shortening useful lives idled decommissioned machinery equipment assets fiscal 2016 2015 company recognized accelerated depreciation due shortened useful lives connection site closures idled equipment see asset impairment charges recoveries net section note tabular presentation longlived asset impairment charges accelerated depreciation longlived asset impairment charges accelerated depreciation reported consolidated statements operations within 1 asset impairment charges recoveries net 2 restructuring charges exitrelated activities related site closure qualifying discontinued operations reporting 3 loss discontinued operations related component company qualifying discontinued operations reporting investments joint ventures august 31 2017 company four 50owned joint venture interests accounted equity method accounting three joint venture interests presented part amr operations one interest presented part css operations joint ventures sell recycled metal amr css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties august 31 2017 company’s investments equity method joint ventures generated 9 million cumulative undistributed earnings loss value investment joint venture recognized decline temporary management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal 2017 2016 company recorded impairment charges 1 million 2 million respectively related investments joint ventures reported within asset impairment charges recoveries net consolidated statements operations fiscal 2017 one companys joint venture interests sold real estate resulting recognition 6 million gain joint venture 3 million attributable companys investment companys share gain reported within income loss joint ventures consolidated statements operations also fiscal 2017 company sold one 50 joint venture interests presented part css operations resulting recognition 1 million gain sale gain represents recovery impairments recorded investment prior years reported within asset impairment charges recoveries net 62 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements see note 17 related party transactions detail transactions joint ventures asset impairment charges recoveries net following asset impairment charges subsequent recoveries excluding goodwill impairment charges discussed note recorded consolidated statements operations thousands goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results 63 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company required perform quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly quantitative impairment test accounting guidance effect company prior third quarter fiscal 2017 first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeded fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine implied goodwill value carrying amount reporting unit’s goodwill exceeded implied fair value goodwill impairment loss recognized amount equal excess beginning third quarter fiscal 2017 company adopted accounting standard update eliminates second step twostep goodwill impairment test impact consolidated financial statements revised guidance company applies onestep quantitative test records amount goodwill impairment excess reporting units carrying amount fair value exceed total amount goodwill allocated reporting unit new guidance amend optional qualitative assessment goodwill impairment company required perform quantitative goodwill impairment test estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium see note 6 goodwill intangible assets net detail including recognition goodwill impairment charges 9 million 141 million fiscal 2016 2015 respectively company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment likely fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record impairment charges indefinitelived intangible assets periods presented restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred see note 10 restructuring charges exitrelated activities detail accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 10 million estimated cost unpaid workers’ compensation claims august 31 2017 2016 included accrued liabilities consolidated balance sheets 64 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense made additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically site assessment remediation progresses individual sites adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 9 commitments contingencies detail loss contingencies company subject certain legal proceedings contingencies addition related environmental liabilities discussed note outcomes subject significant uncertainty company accrues estimated losses probable liability incurred amount loss reasonably estimated company uses judgment evaluates whether loss contingency arising litigation unasserted claim disclosed recorded outcome legal proceedings contingencies inherently uncertain often difficult estimate august 31 2017 2016 accruals legal contingencies net corresponding receivables insurers material financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due shortterm nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included within level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available 65 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements derivatives company records derivative instruments prepaid expenses current assets accrued liabilities consolidated balance sheets fair value changes fair value either recognized comprehensive income loss consolidated statements comprehensive income loss net income loss consolidated statements operations applicable depending nature underlying exposure whether derivative designated hedge designated hedge extent hedge effective amounts included accumulated comprehensive loss reclassified earnings period earnings impacted hedged items period hedged transaction deemed longer likely occur period derivative terminated cash flow hedges formal assessment made hedge’s inception ongoing basis determine whether derivatives designated hedging instruments highly effective offsetting changes cash flows hedged items whether derivatives may expected remain highly effective future periods extent hedge determined ineffective portion immediately recognized earnings available quoted market prices obtained external sources used measure derivative instrument’s fair value fair value instruments function underlying forward commodity prices foreign currency exchange rates related volatility counterparty creditworthiness duration contracts cash flows derivatives recognized consolidated statements cash flows manner consistent underlying transactions see note 12 derivative financial instruments detail derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive loss separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income loss period company reports gains losses within income net consolidated statements operations net realized unrealized foreign currency transaction gains losses material fiscal years 2017 2016 2015 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title recycled scrap metal finished steel products transfers based contract terms nearly company’s ferrous export sales made letters credit reducing credit risk however ferrous domestic sales nonferrous sales finished steel products generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectability prior revenue recognition additionally company recognizes revenue partially loaded shipments ferrous recycled scrap metal contractual terms support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company responsible fulfillment including acceptability products purchased customer retail auto parts revenue recognized customer pays part historically sales returns adjustments impact ultimate collection revenues therefore material provisions returns made sales 66 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenues shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold advertising costs company expenses advertising costs incurred advertising expense 6 million fiscal 2017 5 million fiscal 2016 2015 sharebased compensation company recognizes compensation cost relating sharebased payment transactions employees nonemployee directors vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 14 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 15 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss attributable ssi weighted average number outstanding common shares periods presented including vested deferred stock units “dsus” restricted stock units “rsus” meeting certain criteria diluted net income loss per share attributable ssi computed dividing net income loss attributable ssi weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance share dsu rsu awards using treasury stock method certain company’s stock options rsu performance share awards excluded calculation diluted net income loss per share attributable ssi antidilutive however certain rsu performance share awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive income loss continuing operations attributable ssi purpose calculating income loss per share continuing operations attributable ssi loss per share discontinued operations attributable ssi presented separately consolidated statements operations see note 16 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities legal liabilities goodwill longlived asset indefinitelived intangible asset valuation equity method cost method investments valuation certain sharebased awards asset valuation inventory valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts 67 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables suppliers majority cash equivalents maintained major financial institutions balances certain institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2017 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 48 million 40 million open letters credit august 31 2017 2016 respectively note 3 recent accounting pronouncements may 2014 accounting standard update issued clarifies principles recognizing revenue contracts customers update supersede existing standard recognizing revenue additional updates issued since may 2014 amending aspects initial update providing implementation guidance applicable contracts customers regardless industryspecific transactionspecific fact patterns guidance requires improved disclosures help users financial statements better understand nature amount timing uncertainty revenue recognized standard effective company beginning fiscal 2019 including interim periods within fiscal year upon becoming effective entity may adopt standard either retrospectively prior reporting period presented retrospectively cumulative effect initially applying guidance recognized date initial application company process examining current revenue streams significant contracts customers requirements new standard based progress examination date believe standard material impact financial position net income cash flows company currently examining certain scrap metal purchase sale arrangements determine principal agent transaction new guidance outcome could result different classification cost scrap metal purchased compared companys treatment existing revenue standard company also analyzing expanded disclosure requirements new standard method adoption potential changes accounting policies processes systems internal controls may required support new standard january 2016 accounting standard update issued amends certain aspects reporting model financial instruments prominent among amendments requirement equity investments certain exceptions including accounted equity method accounting measured fair value changes fair value recognized net income entity may choose measure equity investments readily determinable fair values certain cost method investments cost minus impairment plus minus changes resulting observable price changes amendments also require qualitative assessment identify impairment equity investments without readily determinable fair values standard effective company beginning fiscal 2019 including interim periods within fiscal year company evaluating impact adopting standard consolidated financial position results operations cash flows february 2016 accounting standard issued supersede existing lease standard requiring lessee recognize lease liability lease asset balance sheet leases including classified operating leases existing lease standard update also expands required quantitative qualitative disclosures surrounding leases standard effective company beginning fiscal 2020 including interim periods within fiscal year standard applied using modified retrospective transition approach leases existing entered beginning earliest comparative period presented financial statements company process identifying population leases within scope new accounting standard documenting salient lease terms support initial subsequent measurement lease liabilities lease assets company evaluating impact adopting standard financial position results operations cash flows disclosures march 2016 accounting standard update issued amends several aspects accounting sharebased payments including accounting income taxes forfeitures statutory tax withholding requirements classification within statement cash flows standard effective company beginning fiscal 2018 including interim periods within fiscal year company expect adoption immediate material impact consolidated financial position results operations cash flows august 2016 accounting standard update issued addresses certain cash receipts cash payments presented classified statement cash flows among cash flow matters addressed update payments costs related debt prepayments extinguishments payments related settlement certain types debt instruments payments contingent 68 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements consideration made business combination proceeds insurance claims corporateowned life insurance policies distributions received equity method investees among others standard effective company beginning first quarter fiscal 2019 including interim periods within fiscal year early adoption permitted including adoption interim period entity early adopts amendments interim period adjustments reflected beginning fiscal year includes interim period amendments must adopted together period amendments applied using retrospective transition method period presented unless impracticable specific cash flow matters case amendments would applied prospectively earliest date practicable company evaluating impact adopting standard consolidated statement cash flows october 2016 accounting standard update issued amends existing guidance accounting income tax effects intraentity transfers assets inventory current accounting standards prohibit recognition current deferred income taxes intraentity asset transfer asset sold outside party amendments update require entities recognize income tax effects intraentity transfer asset inventory transfer occurs amendments change accounting standards pretax effects intraentity asset transfer accounting standards applicable consolidation intraentity transfer inventory standard effective company beginning fiscal 2019 including interim periods within fiscal year early adoption permitted first interim period fiscal year amendments applied modified retrospective basis cumulativeeffect adjustment directly retained earnings beginning period adoption company evaluating impact adopting standard consolidated financial position results operations cash flows march 2017 accounting standard update issued modifies presentation requirements net periodic pension cost net periodic postretirement benefit cost within entitys income statement amendments update require employer report service cost component line item items compensation costs arising services rendered pertinent employees period amendments also require components net periodic pension cost net periodic postretirement benefit cost presented income statement separately service cost component outside subtotal income operations additionally service cost component eligible capitalization applicable standard effective company beginning fiscal 2019 including interim periods within fiscal year early adoption permitted beginning first quarter fiscal 2018 aspects update affecting income statement presentation must applied retrospectively aspects affecting capitalization service cost component assets must applied prospectively effective date company evaluating impact adopting standard consolidated financial position results operations cash flows note 4 inventories consisted following august 31 thousands 69 schnitzer steel industries inc form 10k 2017 note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense assets capital leases 49 million 53 million 66 million years ended august 31 2017 2016 2015 respectively depreciation expense 1 million reported within discontinued operations year ended august 31 2015 depreciation expense reported within discontinued operations years ended august 31 2017 2016 note 6 goodwill intangible assets net company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired second quarter fiscal 2015 management identified combination significant weakening market conditions time continued constrained supply raw materials due lower price environment negatively impacted volumes planned idling closure certain production facilities retail stores company’s financial performance decline company’s market capitalization first half fiscal 2015 triggering event requiring interim impairment test goodwill allocated reporting units resulted impairment remaining carrying amount reporting units goodwill totaling 141 million impairment charge reported within results amr report second quarter fiscal 2016 management identified combination sustained weak market conditions time including adverse effects lower commodity selling prices constraining impact lower price environment supply raw materials negatively impacted volumes company’s financial performance decline company’s market capitalization time triggering event requiring interim impairment test goodwill allocated reporting units resulted impairment entire carrying amount goodwill allocated reporting unit within amr totaling 9 million fourth quarter fiscal 2017 company performed annual goodwill impairment test july 1 2017 testing date balance companys goodwill 167 million carried single reporting unit within amr company elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment company concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required gross changes carrying amount goodwill reportable segment years ended august 31 2017 2016 follows thousands accumulated goodwill impairment charges 471 million august 31 2017 2016 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include leasehold interests permits licenses 2 indefinitelived intangibles include trade names permits licenses real property options total intangible asset amortization expense 1 million 1 million 2 million years ended august 31 2017 2016 2015 respectively amortization expense less 1 million reported within discontinued operations year ended august 31 2015 amortization expense reported within discontinued operations years ended august 31 2017 2016 impairments intangible assets immaterial periods presented estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 7 debt consisted following august 31 thousands companys senior secured revolving credit facilities provide revolving loans 335 million c15 million mature april 2021 pursuant credit agreement bank america na administrative agent lenders party thereto subject terms conditions agreement company may request commitments us credit facility increased aggregate amount exceeding 100 million certain conditions met including preapproval lenders achievement certain pro forma financial results august 31 2017 2016 borrowings outstanding 71 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements credit facilities 140 million 180 million respectively weighted average interest rate amounts outstanding credit facilities 348 301 august 31 2017 2016 respectively interest rates outstanding indebtedness credit agreement based company’s option either london interbank offered rate libor canadian equivalent plus spread 175 275 amount spread based pricing grid tied company’s leverage ratio less 250 fiscal quarters ended may 31 2016 august 31 2016 november 30 2016 greater prime rate federal funds rate plus 050 daily rate equal onemonth libor plus 175 case plus spread zero 100 based pricing grid tied companys leverage ratio addition commitment fees payable unused portion credit facilities rates 020 040 based pricing grid tied company’s leverage ratio credit agreement contains certain customary covenants including covenants limit ability company subsidiaries enter certain types transactions financial covenants include covenants requiring maintenance minimum fixed charge coverage ratio maximum leverage ratio minimum asset coverage ratio company’s obligations credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain companys subsidiaries’ assets including equipment inventory accounts receivable august 31 2016 company 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 company exercised option redeem bonds prior maturity company repaid bonds full september 2016 obligation reported current liability within shortterm borrowings august 31 2016 consolidated balance sheet 8 million repayment reported cash outflow financing activities fiscal year ended august 31 2017 consolidated statement cash flows principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 10 million outstanding arrangements august 31 2017 16 million august 31 2016 company also unsecured uncommitted 25 million credit line wells fargo bank na expired april 1 2016 note 8 discontinued operations fiscal 2015 company ceased operations seven auto parts stores six qualified discontinued operations reporting operations six qualifying stores previously reported within amr segment fiscal 2016 2015 company recorded impairment charges accelerated depreciation 1 million 3 million respectively longlived assets discontinued auto parts stores impaired assets fiscal 2016 consisted primarily capital lease assets associated buildings two leased properties 72 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements operating results discontinued operations comprised following years ended august 31 thousands note 9 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 majority companys facility lease agreements include renewal options rent escalation clauses rent expense 25 million 24 million 26 million fiscal 2017 2016 2015 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2017 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2017 2016 follows thousands portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup site parties involved timing specific remedial action allocation costs cleanup among responsible parties yet determined process site investigation remedy selection identification additional prps allocation costs underway number years significant uncertainties remain unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs lwg indicated incurred 115 million investigationrelated costs approximately 10 year period working rifs following submittal draft ri fs documents epa largely rejected epa took rifs process 73 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements company joined approximately 100 prps including lwg members voluntary process establish allocation costs site including costs incurred lwg rifs process lwg members also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 natural resource damages trustee council “trustees” portland harbor invited company prps participate funding implementing natural resource injury assessment site following meetings among trustees prps funding participation agreement negotiated participating prps agreed fund first phase natural resource damage assessment company joined phase agreement paid portion costs company participate funding second phase natural resource damage assessment former trustee confederated tribes bands yakama nation withdrew council 2009 filed suit january 30 2017 approximately 30 parties including company seeking reimbursement certain past future response costs connection remedial action site recovery assessment costs related natural resources damages releases site multnomah channel lower columbia river company intends defend claims sufficient information determine likelihood loss matter estimate amount damages sought amount damages could allocated company estimates cost remedial action cleanup inriver portion site various drafts fs epa’s final fs issued june 2016 varied widely approximately 170 million 25 billion net present value depending remedy alternative number factors addition company certain stakeholders identified number serious concerns regarding epas risk remedial alternatives assessments epas cost estimates scheduling assumptions conclusions regarding feasibility effectiveness assignment remediation technologies including epa’s fs based data decade old may accurately represent site background conditions january 2017 epa issued record decision “rod” identified selected remedy site selected remedy modified version one alternative remedies epa’s fs expands scope cleanup estimated cost significantly proposed plan identified epa final fs epa estimated total cost selected remedy 17 billion net present value cost 105 billion 7 discount rate estimated construction period 13 years following completion remedial designs rod epa stated cost estimate orderofmagnitude engineering estimate expected within 50 30 actual project cost changes cost elements likely occur result new information data collected engineering design company identified number concerns regarding epas estimated cost time required selected remedy questions regarding costeffectiveness concerns technical feasibility use stale data need new baseline data uncertain whether rod implemented issued addition rod determine allocate responsibility remediation costs rod epa acknowledged assumptions used estimate costs selected remedy developed based existing data finalized remedial design level data refine baseline conditions obtained moreover rod provides sitewide cost estimates provide sufficient detail ranges certainty finality estimate costs specific sediment management areas accordingly epa indicated company anticipates additional preremedial design investigative work new baseline sampling monitoring conducted order provide rebaseline delineated particular remedial actions specific areas within site rebaselining need occur prior proceeding next phase process remedial design remedial design phase engineering phase additional technical information data collected identified incorporated technical drawings specifications developed subsequent remedial action epa seeking new coalition prps perform rebaselining remedial design activities company considering whether become party new administrative order consent perform preremedial design investigative activities acceptable consent order finalized company believe share costs performing work would material company believes costs would allocable would reimbursable insurance policies discussed remediation activities expected commence number years responsibility implementing funding remedy determined separate allocation process allocation process currently underway discussed epas rod raised questions uncertainty allocation process proceed company would expect allocation process proceed additional preremedial design data collected determination specific remediation actions required amount natural resource damages costs investigations remedy natural resource damages allocated among prps company believes possible reasonably estimate amount range costs likely 74 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements reasonably possible incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remediation mitigation natural resource damages claims connection site although assurance policies cover costs company may incur company previously recorded liability estimated share costs investigation 1 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined recycling operations august 31 2017 2016 companys auto metals recycling operations environmental liabilities 48 million 46 million respectively potential remediation locations conducted business environmental liabilities historical recent activities liabilities relate investigation potential future remediation soil contamination groundwater contamination storm water runoff issues natural resource damages individually material site steel manufacturing operations companys steel manufacturing operations environmental liabilities august 31 2017 2016 steel mills electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firm applies treatment allows eaf dust delisted hazardous waste companys steel mill operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based upon annual production capacity 950 thousand tons permit first issued 1998 since renewed february 1 2018 legacy environmental loss contingencies company’s environmental loss contingencies august 31 2017 2016 portland harbor include actual possible investigation cleanup costs historical contamination sites currently formerly owned operated company sites company may responsibility costs due past disposal activities legacy environmental loss contingencies legacy environmental loss contingencies relate potential remediation waterways soil groundwater contamination may also involve natural resource damages governmental fines penalties claims third parties personal injury property damage company notified may potentially responsible party certain sites investigation cleanup activities ongoing may required future company recognizes liability matters loss probable reasonably estimated investigation cleanup activities ongoing company yet identified responsibility contamination yet identified reasonably possible company may need recognize additional liabilities connection sites company cannot currently reasonably estimate possible loss range loss absent additional information developments additional liabilities individually aggregate may material adverse effect companys results operations financial condition cash flows summary environmental contingencies portland harbor superfund site legacy environmental loss contingencies discussed separately management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect consolidated financial statements company whole historically amounts company ultimately paid remediation activities material given period 75 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements contingencies company party various legal proceedings arising normal course business company recognizes liability matters loss probable reasonably estimated legal proceedings include arising accidents involving companyowned vehicles including company tractor trailers instances accidents related litigation involve accidents resulted third party fatalities reasonably possible company may recognize additional losses connection lawsuits time losses probable reasonably estimated losses may material companys consolidated financial statements company believes losses incurred substantially covered existing insurance coverage company anticipate resolution legal proceedings arising normal course business taking consideration expected insurance recoveries material adverse effect results operations financial condition cash flows note 10 restructuring charges exitrelated activities company implemented number restructuring initiatives designed reduce operating expenses improve profitability achieve integration synergistic cost efficiencies operating platform restructuring charges incurred company periods presented pertain primarily plan announced second quarter fiscal 2015 expanded subsequent periods q215 plan end second quarter fiscal 2015 company commenced additional restructuring exitrelated initiatives undertaking strategic actions consisting idling underutilized assets amr initiating closure seven auto parts stores align companys business market conditions company expanded initiatives april 2015 also announced integration former metals recycling business auto parts business combined amr platform order achieve operational synergies reduce companys annual operating expenses primarily selling general administrative expenses headcount reductions reducing organizational layers consolidating shared service functions nonheadcount measures additional cost savings productivity improvement initiatives including additional reductions personnel savings procurement activities streamlining administrative supporting services functions adjustments operating capacity facility closures identified initiated subsequent periods collectively initiatives referred q215 plan company incurred restructuring charges less 1 million 6 million 11 million fiscal 2017 2016 2015 respectively charges relating initiatives substantially complete end fiscal 2017 however company may incur additional restructuring charges fiscal 2017 result remeasuring lease contract termination liabilities reflect changes contractual lease rentals sublease rentals currently estimable addition restructuring charges recorded related initiatives company recognized net gain exitrelated activities less 1 million fiscal 2017 primarily related gain recorded connection disposition business assets related elimination metals recycling feeder yard operation exitrelated activities fiscal 2016 also included 1 million gains recorded connection disposition business assets leading elimination certain auto metals recycling operations company incurred charges associated exitrelated activities 2 million 7 million fiscal 2016 2015 respectively consisting primarily asset impairments accelerated depreciation assets connection site closures 76 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated activities comprised following thousands following illustrates reconciliation restructuring liability major type cost years ended august 31 2017 2016 thousands 1 total charges date total expected charges major type cost reflect amounts related q215 plan remaining charges related prior plans expected material 77 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated activities reportable segment follows thousands 1 csss steel manufacturing operations formerly smb reportable segment incur restructuring charges periods presented csss metals recycling operations formerly part amr reportable segment incurred immaterial amount restructuring charges periods presented therefore company presents restructuring charges related amr css combined basis 2 total charges date total expected charges reportable segment discontinued operations reflect amounts related q215 plan remaining charges related prior plans expected material company allocate restructuring charges exitrelated activities segments operating results management include information measurement performance operating segments 78 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements note 11 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2017 2016 2015 thousands reclassifications accumulated comprehensive loss individually aggregate immaterial impacted captions consolidated statements operations periods presented 79 schnitzer steel industries inc form 10k 2017 note 12 derivative financial instruments foreign currency exchange rate risk management manage exposure foreign exchange rate risk company entered foreign currency forward contracts stabilize us dollar amount transaction settlement prior fiscal 2016 company entered series foreign currency exchange forward contracts sell us dollars order hedge portion exposure fluctuating rates exchange anticipated us dollardenominated sales canadian subsidiary functional currency canadian dollar company foreign currency exchange forward contracts august 31 2017 2016 results contracts expired fiscal 2016 immaterial accordingly results foreign currency exchange forward contracts fiscal 2017 2016 excluded tabular disclosures following table summarizes results foreign currency exchange derivatives year ended august 31 2015 thousands hedge ineffectiveness respect foreign currency exchange cash flow hedges period presented note 13 employee benefits company certain subsidiaries contribute qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material years ended august 31 2017 2016 2015 fair value plan assets 16 million 15 million august 31 2017 2016 respectively projected benefit obligation 13 million 15 million august 31 2017 2016 respectively plan fully funded plan assets exceeding projected benefit obligation 3 million 1 million august 31 2017 2016 respectively plan assets comprised entirely level 1 investments august 31 2017 2016 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligations 368 322 august 31 2017 2016 respectively company estimates future annual benefit payments 1 million 2 million per year 80 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets current portion pension liability included accrued liabilities noncurrent portion pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 3 million august 31 2017 2016 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 4 million august 31 2017 2016 net periodic pension cost serbp material years ended august 31 2017 2016 2015 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 14 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees companys steel manufacturing operations covered collective bargaining agreement expire march 31 2019 october 1 2016 wispp certified plan’s actuaries green zone defined pension protection act 2006 company contributed 3 million wispp years ended august 31 2017 2016 2015 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs requires wispp meet minimum funded percentage valuation date achieve funded percentage 100 october 1 2029 based actuarial valuation wispp october 1 2016 funded percentage based ratio market value assets accumulated benefits liability present value accrued benefits using valuation method prescribed irs 764 satisfies minimum funded percentage requirements irs company contributions multiemployer plans 4 million years ended august 31 2017 2016 2015 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 3 million years ended august 31 2017 2016 2015 81 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements note 14 sharebased compensation company’s 1993 stock incentive plan amended “the plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 43 million available future grants august 31 2017 sharebased compensation expense 11 million 10 million 10 million years ended august 31 2017 2016 2015 respectively restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2017 2016 2015 compensation committee granted 314862 rsus 361131 rsus 287180 rsus respectively key employees officers employee directors plan rsus generally vest 20 per year five years commencing october 31 year grant addition first quarter fiscal 2016 compensation committee granted 48163 rsus twoyear vesting term retirementeligibility provisions sip estimated fair value rsus granted years ended august 31 2017 2016 2015 7 million 7 million 6 million respectively summary company’s restricted stock unit activity follows 1 amounts represent weighted average value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 6 million 6 million 7 million years ended august 31 2017 2016 2015 respectively august 31 2017 total unrecognized compensation costs related unvested rsus amounted 7 million expected recognized weighted average period 25 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reportable segments participant works awards paid class common stock soon practicable october 31 following end performance period 82 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements company accrues compensation cost performance share awards based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance condition achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed fiscal 2015 2016 performance share awards compensation committee approved performancebased awards plan grant date november 25 2014 performance targets based companys ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2016 2018 november performance share awards first quarter fiscal 2016 compensation committee approved performancebased awards plan grant date november 9 2015 201702 performance share awards granted compensation committee comprised two separate distinct awards different vesting conditions compensation committee granted 99860 performance share awards based relative total shareholder return tsr metric performance period spanning november 9 2015 august 31 2018 award share payouts range threshold 50 maximum 200 based relative ranking companys tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level companys tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 2 million company estimated fair value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 101842 performance share awards threeyear performance period consisting company’s fiscal 2016 2017 2018 performance targets based companys cash flow return investment “cfroi” threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 2 million fiscal 2016 2018 april performance share awards third quarter fiscal 2016 compensation committee approved second half fiscal 2016 performancebased awards grant date april 27 2016 compensation committee granted 152221 performance share awards consisting 73546 tsr awards 78675 cfroi awards companys key employees officers plan terms substantially similar awards granted first quarter fiscal 2016 described note except performance period tsr awards started april 27 2016 cfroi awards march 1 2016 estimated fair value tsr awards cfroi awards date grant 2 million fiscal 2017 2019 november performance share awards first quarter fiscal 2017 compensation committee approved performancebased awards plan grant date november 1 2016 134899 performance share awards granted compensation committee comprised two separate distinct awards different vesting conditions compensation committee granted 65506 performance share awards based relative tsr metric performance period spanning november 1 2016 august 31 2019 award share payouts range threshold 50 maximum 200 based relative ranking companys tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level companys tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 2 million company estimated fair value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company 83 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 69393 performance share awards threeyear performance period consisting company’s fiscal 2017 2018 2019 performance targets based companys cash flow return investment cfroi threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 2 million fiscal 2017 2019 april performance share awards third quarter fiscal 2017 compensation committee approved second half fiscal 2017 performancebased awards grant date april 27 2017 compensation committee granted 167358 performance share awards consisting 81262 tsr awards 86096 cfroi awards companys key employees officers plan terms substantially similar awards granted first quarter fiscal 2017 described note except performance period tsr awards started april 27 2017 performance period cfroi awards started march 1 2017 estimated fair value tsr awards cfroi awards date grant 2 million summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performancebased awards calculated using management’s current estimate expected level achievement performance targets plan compensation expense anticipated awards based company’s financial performance 3 million 4 million 2 million years ended august 31 2017 2016 2015 respectively august 31 2017 unrecognized compensation costs related nonvested performance shares amounted 7 million expected recognized weighted average period 16 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan 84 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements dsus granted years ended august 31 2017 2016 2015 totaled 42771 shares 57780 shares 48590 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2017 2016 2015 well unrecognized compensation expense august 31 2017 material stock options granted fiscal 2017 2016 2015 options outstanding periods presented expired august 31 2017 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised zero years ended august 31 2017 2016 2015 summary company’s stock option activity related information follows 1 amounts represent difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options 85 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements note 15 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows companys effective tax rate continuing operations fiscal 2017 expense 27 lower us federal statutory rate 35 primarily due companys full valuation allowance positions federal income tax refund claims partially offset increases deferred tax liabilities indefinitelived assets jurisdictions valuation allowances companys deferred tax assets result negative objective evidence including effects historical losses tax jurisdictions outweighing positive objective subjective evidence indicating likely associated tax benefit realized 86 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements companys effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization deductible foreign investment basis tax purposes company’s income tax expense comprised primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized realization deferred tax assets dependent upon generating sufficient taxable income associated tax jurisdictions future years benefit reversal net deductible temporary differences utilization net operating losses companys effective tax rate continuing operations fiscal 2015 benefit 63 lower us federal statutory rate 35 effective tax rate reduced 33 valuation allowances deferred tax assets aggregate impact excluding foreign income taxed different rates expenses partially offset recognition 13 million benefit related realization deductible foreign investment basis tax purposes increase valuation allowance deferred tax assets recognized result negative evidence including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized deferred tax assets liabilities comprised following august 31 thousands august 31 2017 company federal net operating loss carryforwards 12 million expire used 2036 foreign operating loss carryforwards 27 million expire used 2024 2037 state credit carryforwards expire used 2018 2025 87 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months reserves pertaining positions claimed fiscal year 2013 2017 tax returns would result net operating loss offsets event positions successfully challenged pursuant fasbs accounting standards update 201311 reserves netted deferred tax assets related net operating loss carryforwards company believes reasonably possible approximately 2 million currently remaining unrecognized tax benefits may recognized end fiscal 2018 result lapse statute limitations recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2013 2016 remain subject examination statute limitations note 16 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 251899 1016745 1018858 considered antidilutive excluded calculation diluted net income loss per share attributable ssi years ended august 31 2017 2016 2015 respectively note 17 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 14 million 12 million 22 million years ended august 31 2017 2016 2015 respectively 88 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements thomas klauer jr president company’s former auto parts business prior retirement january 5 2015 sole shareholder corporation 25 minority partner partnership company 75 partner operates five selfservice stores northern california mr klauer’s 25 share profits partnership date retirement totaled 1 million year ended august 31 2015 partnership leases properties entities mr klauer ownership interests agreements expire december 2020 options renew leases upon expiration multiple periods rent paid partnership entities mr klauer ownership interests date retirement less 1 million year ended august 31 2015 certain members schnitzer family significant interests related owners mmgl corp “mmgl” formerly known schnitzer investment corp engaged real estate business subsidiary company prior 1989 company mmgl involved cost sharing arrangement respect defense costs related portland harbor mmgl considered related party financial reporting purposes prior january 2015 due involvement kenneth novack former member companys board directors management mmgl january 2015 mr novack longer member companys board directors thus mmgl ceased related party august 31 2014 1 million receivable mmgl paid full first quarter fiscal 2015 note 18 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance prior fourth quarter fiscal 2017 companys internal organizational reporting structure supported two operating reportable segments auto metals recycling amr business steel manufacturing business smb fourth quarter fiscal 2017 accordance plan announced june 2017 company modified internal organizational reporting structure combine steel manufacturing operations reported smb segment oregon metals recycling operations reported within amr segment forming new division named cascade steel scrap css resulted realignment chief executive officer considered companys chief operating decision maker reviews performance makes decisions resource allocation company began reporting new segment structure fourth quarter fiscal 2017 reflected annual report form 10k segment data comparable periods presented recast conform current period presentation activities reorganized segments recasting historical information impact companys consolidated financial performance periods presented amr buys processes ferrous nonferrous scrap metal sale foreign domestic steel producers representatives procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply companys shredding facilities autobodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using recycled scrap metal raw materials csss steel mill obtains substantially recycled scrap metal raw material requirements integrated metals recycling joint venture operations company holds noncontrolling ownership interests joint ventures either metals recycling business suppliers unprocessed metal companys allocable portion results joint ventures reported within segment results three joint venture interests presented part amr operations one interest presented part css operations joint ventures sell recycled scrap metal amr css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties intersegment sales amr css made prices approximate local market rates intercompany sales tend produce intercompany profits recognized finished products ultimately sold third parties 89 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income reportable segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments unallocated income expense operating income reportable segment reflect operating income reportable segment would report standalone business addition company allocate restructuring charges exitrelated activities segment operating income management include information measurement performance operating segments results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented following summary company’s total assets august 31 thousands 1 amr total assets include 5 million 6 million august 31 2017 2016 respectively investments joint ventures css total assets include 7 million 8 million august 31 2017 2016 respectively investment joint ventures 2 substantial majority corporate eliminations total assets comprised corporate intercompany payables companys operating segments intercompany eliminations 3 property plant equipment net includes 17 million 19 million august 31 2017 2016 respectively canadian locations 90 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 1 amr operating income loss includes 2 million less 1 million 1 million income joint ventures accounted equity method fiscal 2017 2016 2015 respectively amr operating income loss includes goodwill impairment charge 9 million fiscal 2016 asset impairment charges recoveries net less 1 million 16 million 44 million fiscal 2017 2016 2015 respectively 2 css operating income includes 1 million less 1 million 1 million income joint ventures accounted equity method fiscal 2017 2016 2015 respectively css operating income includes asset impairment charges recoveries net 1 million 4 million fiscal 2017 2016 respectively 91 schnitzer steel industries inc form 10k 2017 table contents schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2017 2016 2015 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold 92 schnitzer steel industries inc form 10k 2017 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary fair statement results periods represented thousands except per share amounts sum quarterly amounts may agree fullyear equivalent due rounding second quarter fiscal 2016 operating results included goodwill impairment charge 9 million asset impairment charges 18 million restructuring charges exitrelated activities 5 million fourth quarter fiscal 2016 operating results included asset impairment charges 2 million insurance reimbursement gain 6 million see note 2 summary significant accounting policies note 6 goodwill intangible assets net note 8 discontinued operations note 9 commitments contingencies 93 schnitzer steel industries inc form 10k 2017 schedule ii valuation qualifying accounts years ended august 31 2017 2016 2015 thousands 94 schnitzer steel industries inc form 10k 2017 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission “coso” based assessment management determined company’s internal control financial reporting effective august 31 2018 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2018 stated report included herein 52 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets schnitzer steel industries inc subsidiaries august 31 2018 2017 related consolidated statements operations comprehensive income loss equity cash flows three years period ended august 31 2018 including related notes financial statement schedule listed index appearing item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting august 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company august 31 2018 2017 results operations cash flows three years period ended august 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting august 31 2018 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states “pcaob” required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements 53 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp portland oregon october 24 2018 served company’s auditor since 1976 includes periods company became subject sec reporting requirements 54 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc consolidated balance sheets thousands see notes consolidated financial statements 55 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc consolidated statements operations thousands except per share amounts 1 may foot due rounding see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc consolidated statements comprehensive income loss thousands see notes consolidated financial statements 57 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc consolidated statements equity thousands see notes consolidated financial statements 58 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc consolidated statements cash flows thousands 59 schnitzer steel industries inc form 10k 2018 see notes consolidated financial statements 60 schnitzer steel industries inc form 10k 2018 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc “company” oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products company’s internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities autobodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets august 31 2018 company’s facilities located united states “us” territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts company majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control cost method accounting used investments entities company able exercise significant influence significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation accounting changes july 2015 accounting standards update issued requires entity measure certain types inventory including inventory measured using firstin first “fifo” average cost method lower cost net realizable value accounting standard effect time issuance update required entity measure inventory lower cost market whereby market could replacement cost net realizable value net realizable value less approximately normal profit margin amendments apply inventory measured using lastin firstout “lifo” retail inventory method company adopted new requirement applied prospectively beginning first quarter fiscal 2018 impact consolidated financial statements march 2016 accounting standards update issued amends several aspects accounting sharebased payments including accounting income taxes forfeitures statutory tax withholding requirements classification within statement cash flows company adopted new requirements beginning first quarter fiscal 2018 impact consolidated financial statements including cumulativeeffect adjustments retained earnings date adoption prospective basis beginning date adoption company records tax effects related sharebased payments income statement subject normal valuation allowance considerations taxrelated cash flows resulting sharebased payments reported operating activities statement cash flows cash payments taxing authorities made behalf company employees withheld shares reported financing activities statement cash flows consistent company’s practice prior adopting new requirements company elected continue practice estimating forfeiture rate purpose recognizing estimated compensation cost requisite service period february 2018 accounting standards update issued allows reclassification accumulated comprehensive income “aoci” retained earnings stranded tax effects resulting tax cuts jobs act “tax act” enacted december 22 2017 stranded tax effects result adjusting deferred tax liabilities assets effect change tax laws rates income continuing operations required existing accounting guidance even 61 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements situations adjustments relate income tax effects reported within aoci entity elects reclassify stranded tax effects tax act amount reclassification shall include effect change us federal corporate income tax rate gross deferred tax amounts related valuation allowances date enactment tax act related items remaining aoci income tax effects tax act items remaining aoci entity elects reclassify company earlyadopted foregoing accounting standards update second quarter fiscal 2018 elected reclassify retained earnings effect change us federal corporate income tax rate items remaining aoci date enactment tax act resulting aggregate reclassification aoci retained earnings recorded second quarter fiscal 2018 1 million presented separately consolidated statements equity also see note 10 accumulated comprehensive loss detail august 2018 accounting standards update issued aligns capitalization implementation costs incurred cloud computing arrangement service contract existing capitalization requirements implementation costs incurred develop obtain internaluse software update requires recognition implementation costs hosting services noncancellable term cloud computing arrangement plus optional renewal periods reasonably certain exercised customer exercise option controlled service provider company earlyadopted accounting standard update beginning fourth quarter fiscal 2018 impact consolidated financial statements company applying amendments prospectively arrangements entered adoption new requirement represent substantial change company’s accounting implementation costs incurred cloud computing arrangements prior adoption discontinued operations results discontinued operations presented separately net tax results ongoing operations periods presented disposed components reflected results discontinued operations periods presented consist six auto parts stores company ceased operations fiscal 2015 expenses included results discontinued operations direct operating expenses incurred disposed components may reasonably segregated costs ongoing operations company fiscal 2016 company recorded impairment charges accelerated depreciation 1 million longlived assets discontinued auto parts stores impaired assets fiscal 2016 consisted primarily capital lease assets associated buildings two leased properties cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 28 million 21 million august 31 2018 2017 respectively accounts receivable net accounts receivable represent amounts primarily due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 3 million 2 million august 31 2018 2017 respectively also included accounts receivable shortterm advances scrap metal suppliers used mechanism acquire unprocessed scrap metal advances generally repaid scrap metal opposed cash repayments advances scrap metal treated noncash operating activities consolidated statements cash flows totaled 15 million 12 million 8 million fiscal years ended august 31 2018 2017 2016 respectively inventories company’s inventories consist processed unprocessed scrap metal ferrous nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value company determines cost ferrous nonferrous scrap metal inventories using average cost method capitalizes substantially direct processing costs yard costs inventory company allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory auto 62 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements parts stores reported within finished goods based average price company pays vehicle capitalizes vehicle cost substantially production costs inventory css determines cost semifinished finished steel product inventories based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company determines cost supplies inventory using average cost method reduces carrying value losses due obsolescence company considers estimated future selling prices determining estimated net realizable value inventory company generally sells recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated market price quantities hand shipped contracts sales orders accounting process company uses record scrap metal quantities relies significant estimates respect unprocessed scrap metal inventory company relies weighed quantities reduced estimated amounts moved production process utilizes estimated metal recoveries yields based historical trends time estimates reasonably reliable indicators recycled scrap metal ultimately produced however actual recoveries yields vary depending product quality moisture content source unprocessed metal ultimate recoveries yields significantly different estimated value inventory could materially overstated understated assist validating reasonableness estimates company periodically reviews shrink factors performs monthly physical inventories due inherent nature company’s scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expense gains losses sales assets related exit activity reported within restructuring charges exitrelated activities consolidated statements operations depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2018 useful lives used depreciation amortization follows prepaid expenses company’s prepaid expenses totaled 22 million 9 million august 31 2018 2017 respectively consisted primarily prepaid insurance prepaid services deposits capital purchases assets company’s assets exclusive prepaid expenses consist primarily receivables insurers cost method investment debt issuance costs notes contractual receivables assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible receivables insurers totaled 36 million 8 million august 31 2018 2017 respectively increase fiscal 2018 relating primarily 63 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements contingent loss recorded year connection lawsuits arising motor vehicle collision company insurance coverage see “contingencies other” note 8 commitments contingencies discussion contingent loss fiscal 2017 company invested 6 million privatelyheld waste recycling entity company’s influence operating financial policies entity significant thus investment accounted cost method cost method investment carried cost adjusted otherthantemporary impairments certain distributions additional investments investment presented part amr reported within assets consolidated balance sheets company hold costmethod investments carrying value investment 6 million august 31 2018 2017 august 31 2018 company identified events changes circumstances may significant adverse effect fair value investment indicators otherthantemporary impairment debt issuance costs consist primarily costs incurred company enter modify credit facilities company reports deferred debt issuance costs within assets consolidated balance sheets amortizes interest expense straightline basis contractual term arrangement notes contractual receivables consist primarily advances entities business extracting scrap metal demolition activities well receivables counterparties sales equipment assets legal settlements repayment advances suppliers either cash scrap metal company performs periodic reviews notes contractual receivables identify credit risks assess overall collectibility receivables typically involves consideration value collateral case advances suppliers generally form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference assets held sale asset classified held sale upon meeting criteria specified accounting standards asset classified held sale measured lower carrying amount fair value less cost sell adjustments depreciation impairment loss recognized initial subsequent writedown asset fair value less cost sell company generally determines fair value using level 3 inputs fair value hierarchy consisting information provided brokers external sources along management’s assumptions see asset impairment charges recoveries net section note tabular presentation impairment charges recorded company assets held sale periods presented net gains recognized subsequent sale assets classified held sale prior fully impaired company assets held sale august 31 2018 2017 longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities company’s metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group company’s auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches fiscal 2016 company recorded impairment charges longlived asset groups associated certain regional metals recycling operations retail auto parts store locations respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based company’s plans dispose abandon asset end original useful life depreciation 64 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements accelerated beginning determination made years presented report company recognized accelerated depreciation primarily due shortening useful lives idled decommissioned machinery equipment assets fiscal 2018 company sold longlived assets consisting primarily machinery equipment previously recorded accelerated depreciation see asset impairment charges recoveries net section note tabular presentation longlived asset impairment charges recoveries accelerated depreciation longlived asset impairment charges recoveries accelerated depreciation reported consolidated statements operations within 1 asset impairment charges recoveries net 2 restructuring charges exitrelated activities related site closure qualifying discontinued operations reporting 3 loss discontinued operations related component company qualifying discontinued operations reporting investments joint ventures august 31 2018 company two 50owned joint venture interests accounted equity method accounting one joint venture interests presented part amr operations one interest presented part css operations joint ventures sell recycled scrap metal amr css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties august 31 2018 company’s investments equity method joint ventures generated 9 million cumulative undistributed earnings loss value investment joint venture recognized decline temporary management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal 2017 2016 company recorded impairment charges 1 million 2 million respectively related investments joint ventures reported within asset impairment charges recoveries net consolidated statements operations fiscal 2018 company declassified two 50 joint venture interests equity method classification result agreedupon dissolution joint venture entities joint venture interests previously presented part amr operations based company’s claims net assets two joint venture entities consideration transferred connection dissolutions company recognized gain less 1 million fiscal 2018 fiscal 2017 company sold one 50 joint venture interests presented part css operations resulting recognition 1 million gain sale gains represent recoveries impairments recorded investments prior years reported within asset impairment charges recoveries net fiscal 2017 one company’s joint venture interests sold real estate resulting recognition 6 million gain joint venture 3 million attributable company’s investment company’s share gain reported within income joint ventures consolidated statements operations see note 15 related party transactions detail transactions joint ventures asset impairment charges recoveries net following asset impairment charges subsequent recoveries excluding goodwill impairment charges discussed note recorded consolidated statements operations thousands 65 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination likely estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment likely company required perform quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly quantitative impairment test accounting guidance effect company prior third quarter fiscal 2017 first step twostep quantitative impairment test fair value reporting unit compared carrying value carrying value reporting unit exceeded fair value second step impairment test performed purposes measuring impairment second step fair value reporting unit allocated assets liabilities reporting unit determine 66 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements implied goodwill value carrying amount reporting unit’s goodwill exceeded implied fair value goodwill impairment loss recognized amount equal excess beginning third quarter fiscal 2017 company adopted accounting standard update eliminates second step twostep goodwill impairment test revised guidance company applies onestep quantitative test records amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit new guidance amend optional qualitative assessment goodwill impairment company required perform quantitative goodwill impairment test estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium see note 6 goodwill intangible assets net detail including recognition goodwill impairment charge 9 million fiscal 2016 goodwill impairment charges recognized fiscal 2018 2017 company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment likely fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record impairment charges indefinitelived intangible assets periods presented acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balance result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred fiscal 2018 company acquired certain assets metals recycling business columbus georgia acquisition material companys financial position results operations pro forma operating results acquisition presented since aggregate results would significantly different reported results see note 6 goodwill intangible assets net details company complete acquisitions fiscal 2017 2016 restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred see note 9 restructuring charges exitrelated activities detail accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included 67 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements accrual company accrued 8 million 10 million estimated cost unpaid workers’ compensation claims august 31 2018 2017 respectively included accrued liabilities consolidated balance sheets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense consolidated statements operations additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site matter situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically assessment remediation progresses individual sites particular matters adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 8 commitments contingencies detail loss contingencies company subject certain legal proceedings contingencies addition related environmental liabilities discussed note outcomes subject significant uncertainty company accrues estimated losses probable liability incurred amount loss reasonably estimated company uses judgment evaluates whether loss contingency arising litigation unasserted claim disclosed recorded outcome legal proceedings contingencies inherently uncertain often difficult estimate accrued legal contingencies reported within accrued liabilities consolidated balance sheets amounts accrued net corresponding receivables insurers reported within current assets consolidated balance sheets material august 31 2018 2017 see “contingencies other” note 8 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due shortterm nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included within level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available derivatives derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes 68 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income loss period recorded accumulated comprehensive income loss separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income loss period company reports gains losses within income net consolidated statements operations net realized unrealized foreign currency transaction gains losses material fiscal years 2018 2017 2016 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue contract purchase order customer fixed determinable price title risk loss transfer buyer collectibility reasonably assured title recycled scrap metal finished steel products transfers based contract terms historically almost company’s ferrous export sales made letters credit reducing credit risk however ferrous domestic sales nonferrous sales finished steel products generally made open account nonferrous export sales typically require deposit prior shipment sales made open account evaluated collectibility prior revenue recognition additionally company recognizes revenue partially loaded shipments ferrous recycled scrap metal contractual terms support revenue recognition based transfer title risk loss company reports revenue net payments made supplier scrap metal supplier company primarily responsible fulfillment including acceptability products purchased customer retail auto parts revenue recognized customer pays part historically sales returns adjustments impact ultimate collection revenues therefore material provisions returns made sales recognized company presents taxes assessed governmental authorities collected customers net basis therefore taxes excluded revenues shown liability consolidated balance sheets remitted freight costs company classifies shipping handling costs billed customers revenue related costs incurred component cost goods sold advertising costs company expenses advertising costs incurred advertising expense 6 million fiscal 2018 2017 5 million fiscal 2016 sharebased compensation company recognizes compensation cost relating sharebased payment transactions employees nonemployee directors vesting period cost measured based grantdate fair value equity instruments issued net estimated forfeiture rate see note 12 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits 69 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets likely tax benefit realized company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required tax benefits arising uncertain tax positions recognized likely position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 13 income taxes detail net income loss per share basic net income loss per share attributable ssi computed dividing net income loss attributable ssi weighted average number outstanding common shares period presented including vested deferred stock units “dsus” restricted stock units “rsus” meeting certain criteria diluted net income loss per share attributable ssi computed dividing net income loss attributable ssi weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed exercise stock options assumed vesting performance share rsu dsu awards using treasury stock method certain company’s stock options performance share rsu awards excluded calculation diluted net income loss per share attributable ssi antidilutive however certain rsu performance share awards could dilutive future net income attributable noncontrolling interests deducted income loss continuing operations arrive income loss continuing operations attributable ssi purpose calculating income loss per share continuing operations attributable ssi income loss per share discontinued operations attributable ssi presented separately consolidated statements operations see note 14 net income loss per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities legal liabilities goodwill longlived asset indefinitelived intangible asset valuation equity method cost method investments valuation certain sharebased awards asset valuation inventory measurement valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables majority cash equivalents maintained major financial institutions balances certain institutions exceeded federal deposit insurance corporation insured amount 250000 august 31 2018 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 58 million 48 million open letters credit august 31 2018 2017 respectively note 3 recent accounting pronouncements may 2014 accounting standards update issued clarifies principles recognizing revenue contracts customers update supersedes existing standard recognizing revenue additional updates issued since may 2014 amending aspects initial update providing implementation guidance applicable contracts customers regardless industryspecific transactionspecific fact patterns guidance requires improved disclosures help users financial statements better understand nature amount timing uncertainty revenue recognized company adopt standard effective september 1 2018 using modified retrospective approach company expect recognize cumulative effect adjustment opening balance retained earnings connection 70 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements initial application standard company expect adoption standard material impact financial position net income cash flows company identified certain scrap metal purchase sale arrangements currently recognizes revenue gross amount consideration expects entitled customer principal new revenue standard recognize revenue net amount consideration expects retain paying scrap metal supplier agent change classification cost scrap metal purchased arrangements effect reducing amount revenues reported financial statements impact net income january 2016 accounting standards update issued amends certain aspects reporting model financial instruments prominent among amendments requirement equity investments certain exceptions including accounted equity method accounting measured fair value changes fair value recognized net income entity may choose measure equity investments readily determinable fair values certain cost method investments cost minus impairment plus minus changes resulting observable price changes amendments also require qualitative assessment identify impairment equity investments without readily determinable fair values standard effective company beginning fiscal 2019 including interim periods within fiscal year company expect adoption material impact consolidated financial position results operations cash flows february 2016 accounting standard issued supersede existing lease standard require lessee recognize lease liability lease asset balance sheet leases including classified operating leases existing lease standard update also expands required quantitative qualitative disclosures surrounding leases additional updates issued since february 2016 amending aspects initial update including providing additional optional transition method adoption standard effective company beginning fiscal 2020 including interim periods within fiscal year company expects initially apply requirements recognizing cumulativeeffect adjustment opening balance retained earnings period adoption company process identifying population leases within scope new accounting standard documenting salient lease terms support initial subsequent measurement lease liabilities lease assets company also assessing implementing changes processes systems internal controls result new guidance company evaluating impact adopting standard financial position results operations cash flows disclosures expects recognize material amount lease assets liabilities consolidated balance sheet upon adoption note 4 inventories consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands 71 schnitzer steel industries inc form 10k 2018 depreciation expense property plant equipment includes amortization expense assets capital leases 49 million years ended august 31 2018 2017 53 million year ended august 31 2016 yearoveryear decrease accumulated depreciation primarily due retirement heavily aged equipment assets fiscal 2018 note 6 goodwill intangible assets net company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired second quarter fiscal 2016 management identified combination sustained weak market conditions time including adverse effects lower commodity selling prices constraining impact lower price environment supply raw materials negatively impacted volumes company’s financial performance decline company’s market capitalization time triggering event requiring interim impairment test goodwill allocated reporting units resulted impairment entire carrying amount goodwill allocated reporting unit within amr totaling 9 million second quarter fiscal 2018 company acquired certain assets metals recycling business columbus georgia 2 million acquisition qualified business combination accounting rules resulted recognition 1 million goodwill second quarter fiscal 2018 company allocated acquired goodwill reporting unit within amr operating segment reporting unit carry goodwill immediately prior acquisition fourth quarter fiscal 2018 company performed annual goodwill impairment test july 1 2018 testing date balance company’s goodwill 168 million carried two reporting units within amr company elected first assess qualitative factors determine whether existence events circumstances led determination likely estimated fair value reporting unit less carrying amount result qualitative assessment company concluded likely fair value reporting unit less carrying value testing date therefore impairment testing required gross change carrying amount goodwill years ended august 31 2018 2017 follows thousands accumulated goodwill impairment charges 471 million august 31 2018 2017 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include leasehold interests permits licenses 2 indefinitelived intangibles include trade names permits licenses real property options 72 schnitzer steel industries inc form 10k 2018 total intangible asset amortization expense 1 million years ended august 31 2018 2017 2016 impairments intangible assets immaterial periods presented estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 7 debt consisted following august 31 thousands august 24 2018 company certain subsidiaries entered first amendment third amended restated credit agreement “amended credit agreement” bank america na administrative agent lenders party thereto amends restates company’s existing credit agreement amended credit agreement provides 700 million c15 million senior secured revolving credit facilities maturing august 2023 prior amendment renewal credit agreement provided 335 million c15 million senior secured revolving credit facilities company incurred 3 million debt issuance costs connection amended credit agreement amortized interest expense fiveyear term arrangement august 31 2018 2017 borrowings outstanding credit facilities 100 million 140 million respectively weighted average interest rate amounts outstanding credit facilities 357 348 august 31 2018 2017 respectively interest rates outstanding indebtedness amended credit agreement based company’s option either london interbank offered rate “libor” canadian equivalent plus spread 125 275 amount spread based pricing grid tied company’s consolidated funded debt ebitda ratio greater prime rate federal funds rate plus 050 daily rate equal onemonth libor plus 175 case plus spread zero 150 based pricing grid tied company’s consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 015 045 based pricing grid tied company’s consolidated funded debt ebitda ratio amended credit agreement contains certain customary covenants including covenants limit ability company subsidiaries enter certain types transactions financial covenants include covenants requiring maintenance minimum fixed charge coverage ratio maximum leverage ratio company’s obligations amended credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain company’s subsidiaries’ assets including equipment inventory accounts receivable 73 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements august 31 2016 company 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 company exercised option redeem bonds prior maturity company repaid bonds full september 2016 8 million repayment reported cash outflow financing activities fiscal year ended august 31 2017 consolidated statement cash flows principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 10 million outstanding arrangements august 31 2018 2017 note 8 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 majority company’s facility lease agreements include renewal options rent escalation clauses rent expense 27 million 25 million 24 million fiscal 2018 2017 2016 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2018 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2018 2017 follows thousands 74 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements recycling operations august 31 2018 2017 company’s recycling operations environmental liabilities 54 million 48 million respectively potential remediation locations conducted business environmental liabilities historical recent activities liabilities relate investigation potential future remediation soil contamination groundwater contamination storm water runoff issues natural resource damages except portland harbor certain liabilities discussed legacy environmental loss contingencies liabilities individually material site portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup specific areas within site parties involved timing specific remedial action allocation costs cleanup among responsible parties yet determined process site investigation remedy selection identification additional prps allocation costs underway number years significant uncertainties remain unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs lwg indicated incurred 115 million investigationrelated costs approximately 10 year period working rifs following submittal draft ri fs documents epa largely rejected epa took rifs process company joined approximately 100 prps including lwg members voluntary process establish allocation costs site including costs incurred lwg rifs process lwg members also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 portland harbor natural resource trustee council “trustee council” invited company prps participate funding implementing natural resource injury assessment site following meetings among trustee council prps funding participation agreements negotiated participating prps including company agreed fund first phase threephase natural resource damage assessment phase 1 included development natural resource damage assessment plan “ap” implementation several early studies substantially completed 2010 december 2017 company joined participating prps agreeing fund phase 2 natural resource damage assessment includes implementation ap develop information sufficient facilitate early settlements trustee council phase 2 participants identification restoration projects funded settlements late may 2018 trustee council published notice intent proceed phase 3 involve full implementation ap final injury damage determination company proceeding process established trustee council regarding early settlements phase 2 uncertain whether company enter early settlement natural resource damages costs may incur early settlement january 30 2017 one trustees confederated tribes bands yakama nation withdrew council 2009 filed suit approximately 30 parties including company seeking reimbursement certain past future response costs connection remedial action site recovery assessment costs related natural resources damages releases site multnomah channel lower columbia river company intends defend claims sufficient information determine likelihood loss matter estimate amount damages sought amount damages could allocated company estimates cost remedial action cleanup inriver portion site varied widely various drafts fs epa’s final fs issued june 2016 ranging approximately 170 million 25 billion net present value depending remedial alternative number factors comments submitted epa company certain stakeholders identified number serious concerns regarding epa’s risk remedial alternatives assessments cost estimates scheduling assumptions conclusions regarding feasibility effectiveness remediation technologies 75 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements january 2017 epa issued record decision “rod” identified selected remedy site selected remedy modified version one alternative remedies evaluated epa’s fs expanded include additional work greater cost epa estimated total cost selected remedy 17 billion net present value cost 105 billion 7 discount rate estimated construction period 13 years following completion remedial designs rod epa stated cost estimate orderofmagnitude engineering estimate expected within 50 30 actual project cost changes cost elements likely occur result new information data collected engineering design company identified number concerns regarding remedy described rod based data decade old epa’s estimates costs time required implement selected remedy ongoing questions regarding cost effectiveness technical feasibility use stale data uncertain whether rod implemented issued addition rod determine allocate responsibility remediation costs among prps rod epa acknowledged much data used preparing rod decade old would need updated new round “baseline” sampling conducted prior remedial design phase accordingly rod provided additional preremedial design investigative work baseline sampling conducted order provide baseline current conditions delineate particular remedial actions specific areas within site additional sampling needs occur prior proceeding next phase process remedial design remedial design phase engineering phase additional technical information data collected identified incorporated technical drawings specifications developed subsequent remedial action moreover rod provided sitewide cost estimates provide sufficient detail estimate costs specific sediment management areas within site following issuance rod epa proposed prps subgroup prps perform additional investigative work identified rod new consent order december 2017 company three prps entered new administrative settlement agreement order consent epa perform preremedial design investigation baseline sampling twoyear period company estimates share costs performing work approximately 2 million recorded environmental liabilities selling general administrative expense consolidated financial statements fiscal 2018 company believes costs fully covered existing insurance coverage thus also recorded insurance receivable 2 million fiscal 2018 resulting net impact company’s consolidated results operations except certain early action projects company involved remediation activities expected commence number years addition discussed responsibility implementing funding remedy determined separate allocation process company expect next major stage allocation process proceed additional preremedial design data collected determination specific remediation actions required amount natural resource damages allocation costs investigations remedy natural resource damages among prps company believes possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense including preremedial design investigative activities remediation mitigation natural resource damages claims connection site although assurance policies cover costs company may incur august 31 2018 company’s total liability estimated share costs investigation 2 million oregon department environmental quality separately providing oversight voluntary investigations company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined legacy environmental loss contingencies company’s environmental loss contingencies august 31 2018 2017 portland harbor include actual possible investigation cleanup costs historical contamination sites currently formerly owned operated company sites company may responsibility costs due past disposal activities “legacy environmental loss contingencies” legacy environmental loss contingencies relate potential remediation waterways soil groundwater contamination may also involve natural resource damages governmental fines penalties claims third parties personal injury property damage company notified may 76 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements potentially responsible party certain sites investigation cleanup activities ongoing may required future company recognizes liability matters loss probable reasonably estimated investigation cleanup activities ongoing company yet identified responsibility contamination yet identified reasonably possible company may need recognize additional liabilities connection sites company cannot currently reasonably estimate possible loss range loss absent additional information developments additional liabilities individually aggregate may material adverse effect company’s results operations financial condition cash flows fiscal 2018 company accrued 4 million expense corporate division estimated costs related remediation shredder residue disposed around 1970s thirdparty sites located near investigation activities conducted oversight applicable state regulatory agency reasonably possible company may recognize additional liabilities connection matter time losses probable reasonably estimated company estimates range reasonably possible losses related matter excess current accruals zero 28 million based range remedial alternatives subject development approval regulators specific remedy implementation plan company investigating whether portion current future losses related matter incurred covered existing insurance coverage may offset contributions responsible parties addition company’s environmental loss contingencies august 31 2018 include 6 million estimated costs related remediation soil groundwater conditions including penalties connection closed facility owned previously operated indirectly whollyowned subsidiary investigation activities conducted oversight applicable state regulatory agency company also working local officials respect protection public water supplies reasonably possible company may recognize additional liabilities including penalties connection matter time losses probable reasonably estimated however company cannot reasonably estimate time possible loss range possible losses associated matter pending completion ongoing studies determination remediation plans pending negotiations settle related enforcement matter steel manufacturing operations company’s steel manufacturing operations known environmental liabilities august 31 2018 2017 steel mill’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firms apply treatments allow ultimate disposal eaf dust company’s steel mill operating permit issued title v clean air act amendments 1990 governs air quality standards permit based upon annual production capacity 950 thousand tons company’s permit first issued 1998 since renewed february 1 2018 permit renewal process occurs every five years renewal process underway however existing permit extended administrative rule current renewal process finalized summary environmental contingencies portland harbor superfund site legacy environmental loss contingencies discussed separately management currently believes adequate provision made potential impact issues ultimate outcomes material adverse effect company’s consolidated financial statements whole historically amounts company ultimately paid remediation activities material given period assurance amounts paid material future contingencies schnitzer southeast llc whollyowned subsidiary company “sse” sse employee company one company’s insurance carriers named defendants five separate wrongful death lawsuits filed state georgia arising accident 2016 alabama involving tractor trailer driven sse employee owned sse subsequent company’s fiscal 2018 year end settled two five lawsuits total 20 million amount paid substantially covered insurance addition amounts accrued two lawsuits settled paid company’s year end accrued 10 million reflecting estimate probable loss related three unresolved lawsuits recorded 10 million insurance receivable fiscal 2018 resulting net impact company’s consolidated results operations reasonably possible company may recognize additional losses connection unresolved lawsuits time additional losses probable reasonably estimated additional losses may material company’s consolidated financial statements extent circumstances change company determines additional loss 77 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements reasonably possible reasonably estimated material company would disclose estimate additional possible loss range loss company believes additional losses incurred would substantially covered existing insurance coverage company party various legal proceedings arising normal course business company recognizes liability matters loss probable reasonably estimated company anticipate resolution legal proceedings arising normal course business taking consideration expected insurance recoveries material adverse effect results operations financial condition cash flows note 9 restructuring charges exitrelated activities past several years company implemented number cost reduction productivity improvement restructuring initiatives closely align business market conditions initiatives focused decreasing company’s annual operating expenses reorganizing business reduce organizational layers streamline administrative supporting services functions optimizing operating capacity idling underutilized metals recycling assets closing facilities restructuring charges incurred company periods presented pertain primarily plan announced second quarter fiscal 2015 expanded subsequent periods “q2’15 plan” charges relating initiatives substantially complete end fiscal 2017 however company incurred fiscal 2018 may continue incur additional restructuring charges result remeasuring lease contract termination liabilities reflect changes contractual lease rentals sublease rentals currently estimable company’s consolidated operating results fiscal 2018 included net benefit restructuring charges exitrelated activities 1 million compared net benefit less 1 million fiscal 2017 charges 7 million fiscal 2016 exitrelated activities consisted asset impairments accelerated depreciation assets connection closure certain operations net gains exitrelated disposals benefits charges incurred periods presented primarily pertain q2’15 plan consolidated operating results periods presented also reflect benefits cost reduction productivity improvement measures initiated prior second quarter fiscal 2015 immaterial amount associated costs restructuring charges exitrelated activities incurred connection cost reduction productivity improvement plans fiscal year ended august 31 2016 comprise following thousands 78 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements restructuring charges exitrelated activities reportable segment fiscal year ended august 31 2016 follows thousands 1 csss steel manufacturing operations formerly smb reportable segment incur restructuring charges fiscal 2016 csss metals recycling operations formerly part amr reportable segment incurred immaterial amount restructuring charges fiscal 2016 therefore company presents restructuring charges related amr css combined basis company allocate restructuring charges exitrelated activities segments’ operating results management include information measurement performance operating segments august 31 2018 cumulative restructuring charges connection q2’15 plan totaled 15 million restructuring liabilities consisting entirely lease contract termination liabilities totaled less 1 million 79 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements note 10 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2018 2017 2016 thousands second quarter fiscal 2018 company adopted accounting standard update allowed reclassification aoci retained earnings stranded tax effects resulting tax act enacted december 22 2017 reclassifications aoci retained earnings stranded tax effects year ended august 31 2018 individually aggregate material reclassifications aoci earnings individually aggregate material impacted captions consolidated statements operations periods presented 80 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements note 11 employee benefits company certain subsidiaries contribute qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income loss company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material periods presented report fair value plan assets 17 million 16 million august 31 2018 2017 respectively projected benefit obligation 15 million 13 million august 31 2018 2017 respectively plan fully funded plan assets exceeding projected benefit obligation 2 million 3 million august 31 2018 2017 respectively plan assets comprised entirely level 1 investments august 31 2018 2017 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligation 401 368 august 31 2018 2017 respectively company estimates future annual benefit payments 1 million 3 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets current portion pension liability included accrued liabilities noncurrent portion pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 4 million august 31 2018 3 million august 31 2017 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 4 million august 31 2018 2017 net periodic pension cost serbp material years ended august 31 2018 2017 2016 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 14 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees company’s steel manufacturing operations covered collective bargaining agreement expire march 31 2019 october 1 2017 wispp certified plan’s actuaries green zone defined pension protection act 2006 company contributed 3 million wispp years ended august 31 2018 2017 2016 contributions represented 5 total contributions wispp year 81 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs requires wispp meet minimum funded percentage valuation date achieve funded percentage 100 october 1 2029 based recent actuarial valuation wispp funded percentage using valuation method prescribed irs satisfied minimum funded percentage requirement company contributions multiemployer plans 5 million year ended august 31 2018 4 million years ended august 31 2017 2016 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 4 million year ended august 31 2018 3 million years ended august 31 2017 2016 82 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements note 12 sharebased compensation company’s 1993 stock incentive plan amended “plan” established employees consultants directors 122 million shares class common stock reserved issuance plan 39 million available future grants august 31 2018 sharebased compensation expense 19 million 11 million 10 million years ended august 31 2018 2017 2016 respectively restricted stock units plan provides issuance rsus estimated fair value rsus based market closing price underlying class common stock date grant compensation expense associated rsus recognized respective requisite service period awards net estimated forfeitures years ended august 31 2018 2017 2016 compensation committee granted 252865 rsus 314862 rsus 361131 rsus respectively key employees officers employee directors plan rsus generally vest 20 per year five years commencing october 31 year grant addition first quarter fiscal 2016 compensation committee granted 48163 rsus twoyear vesting term retirementeligibility provisions plan estimated fair value rsus granted years ended august 31 2018 2017 2016 7 million summary company’s restricted stock unit activity follows 1 amounts represent weighted average value company’s class common stock date restricted stock units vested company recognized compensation expense associated rsus 7 million 6 million 6 million years ended august 31 2018 2017 2016 respectively august 31 2018 total unrecognized compensation costs related unvested rsus amounted 6 million expected recognized weighted average period 25 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions participant generally must employed company october 31 following end performance period receive award payout although adjusted awards paid employment terminates earlier account death disability retirement termination without cause first year performance period sale company reportable segments participant works awards paid class common stock soon practicable october 31 following end performance period 83 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements company accrues compensation cost performance share awards containing performance condition based probable outcome specified performance conditions net estimated forfeitures company accrues compensation cost probable performance conditions achieved company reassesses whether achievement performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance conditions achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed measurement recognition compensation cost performance share awards containing market condition discussed note fiscal 2015 2016 performance share awards compensation committee approved performancebased awards plan grant date november 25 2014 performance targets based company’s ebitda weighted 50 return equity weighted 50 two years performance period award payouts ranging threshold 50 maximum 200 portion awards fiscal 2016 2018 november performance share awards first quarter fiscal 2016 compensation committee approved performancebased awards plan grant date november 9 2015 201702 performance share awards granted compensation committee comprise two separate distinct awards different vesting conditions compensation committee granted 99860 performance share awards based relative total shareholder return “tsr” metric performance period spanning november 9 2015 august 31 2018 award share payouts range threshold 50 maximum 200 based relative ranking company’s tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level company’s tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 2 million company estimated fair value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 101842 performance share awards threeyear performance period consisting company’s fiscal 2016 2017 2018 performance targets based company’s cash flow return investment “cfroi” threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 2 million fiscal 2016 2018 april performance share awards third quarter fiscal 2016 compensation committee approved second half fiscal 2016 performancebased awards grant date april 27 2016 compensation committee granted 152221 performance share awards consisting 73546 tsr awards 78675 cfroi awards company’s key employees officers plan terms substantially similar awards granted first quarter fiscal 2016 described note except performance period tsr awards started april 27 2016 performance period cfroi awards started march 1 2016 estimated fair value tsr awards cfroi awards date grant 2 million fiscal 2017 2019 november performance share awards first quarter fiscal 2017 compensation committee approved performancebased awards plan grant date november 1 2016 134899 performance share awards granted compensation committee comprise two separate distinct awards different vesting conditions compensation committee granted 65506 performance share awards based relative tsr metric performance period spanning november 1 2016 august 31 2019 award share payouts range threshold 50 maximum 200 based relative ranking company’s tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level company’s tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 2 million company estimated fair 84 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 69393 performance share awards threeyear performance period consisting company’s fiscal 2017 2018 2019 performance targets based company’s cfroi threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 2 million fiscal 2017 2019 april performance share awards third quarter fiscal 2017 compensation committee approved second half fiscal 2017 performancebased awards grant date april 27 2017 compensation committee granted 167358 performance share awards consisting 81262 tsr awards 86096 cfroi awards company’s key employees officers plan terms substantially similar awards granted first quarter fiscal 2017 described note except performance period tsr awards started april 27 2017 performance period cfroi awards started march 1 2017 estimated fair value tsr awards cfroi awards date grant 2 million fiscal 2018 2020 performance share awards first quarter fiscal 2018 compensation committee approved performancebased awards plan grant date november 14 2017 246161 performance share awards granted compensation committee comprise two separate distinct awards different vesting conditions compensation committee granted 119763 performance share awards based relative tsr metric performance period spanning november 14 2017 august 31 2020 award share payouts range threshold 50 maximum 200 based relative ranking company’s tsr among designated peer group 16 companies tsr award stipulates certain limitations payout event payout reaches defined ceiling level company’s tsr negative tsr awards contain market condition therefore award recipients complete requisite service period related compensation expense based grantdate fair value changed regardless whether market condition satisfied estimated fair value tsr awards date grant 3 million company estimated fair value tsr awards using montecarlo simulation model utilizing several key assumptions including expected company peer company share price volatility correlation coefficients peers riskfree rate return expected dividend yield award design features remaining 126398 performance share awards threeyear performance period consisting company’s 2018 2019 2020 fiscal years performance targets based company’s return capital employed threeyear performance period award payouts ranging threshold 50 maximum 200 fair value awards granted based market closing price underlying class common stock grant date totaled 3 million 85 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements summary company’s performancebased awards activity follows 1 amounts represent weighted average value company’s class common stock date performance share awards vested compensation expense associated performance share awards containing market condition calculated using management’s current estimate expected level achievement performance targets award compensation expense awards based company’s financial performance 11 million 3 million 4 million years ended august 31 2018 2017 2016 respectively august 31 2018 total unrecognized compensation costs related unvested performance share awards amounted 10 million expected recognized weighted average period 11 years deferred stock units deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted plan dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized respective requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2018 2017 2016 totaled 21806 shares 42771 shares 57780 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2018 2017 2016 well unrecognized compensation expense august 31 2018 material stock options granted fiscal 2018 2017 2016 options outstanding periods presented expired august 31 2017 compensation expense associated stock options total proceeds received option exercises tax benefits realized options exercised zero years ended august 31 2018 2017 2016 86 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements summary company’s stock option activity related information fiscal years outstanding stock options follows 1 represents difference exercise price closing price company’s stock last trading day corresponding fiscal year multiplied number inthemoney options 87 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements note 13 income taxes income loss continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows december 22 2017 president united states signed enacted law comprehensive tax legislation commonly referred tax cuts jobs act “tax act” except certain provisions effective tax years beginning january 1 2018 tax act’s primary change reduction federal statutory corporate tax rate 35 21 resulting pro rata reduction company’s tax rate 35 257 fiscal 2018 pertinent changes tax act effective fiscal 2018 include limited acceleration deductions qualified property placed service september 27 2017 addition effective company’s fiscal 2019 year tax act also limits deductibility executive compensation eliminates deduction qualified domestic production activities changes tax act significantly impact company upon enactment include implementation modified territorial tax system modifications foreign earnings subject us tax 88 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements change tax law accounted period enactment company recognized discrete benefit 7 million second quarter fiscal 2018 due revaluation us net deferred tax liabilities reflect lower statutory rate company’s effective tax rate fiscal 2018 also reflects tax acts lower federal statutory corporate tax rate company’s effective tax rate continuing operations fiscal 2018 benefit 124 compared expense 27 prior year company reported tax benefit pretax income fiscal 2018 primarily due release valuation allowances certain deferred tax assets resulting recognition discrete tax benefits totaling 37 million fiscal 2018 impact tax act company’s effective tax rate continuing operations fiscal 2017 expense 27 lower us federal statutory rate time 35 primarily due company’s full valuation allowance positions federal income tax refund claims partially offset increases deferred tax liabilities indefinitelived assets jurisdictions company’s effective tax rate continuing operations fiscal 2016 expense 47 lower us federal statutory rate time 35 effective tax rate reduced valuation allowances deferred tax assets aggregate impact foreign income taxed different rates reductions partially offset realization deductible foreign investment basis tax purposes company’s income tax expense composed primarily increase deferred tax liabilities indefinitelived assets plus certain state cash tax expenses increase valuation allowance deferred tax assets recognized result negative evidence time including recent losses tax jurisdictions outweighing subjective positive evidence indicating likely associated tax benefit realized sec staff accounting bulletin 118 respect tax act december 22 2017 securities exchange commission issued staff accounting bulletin 118 “sab 118” provides guidance accounting impacts tax act sab 118 provides measurement period exceed one year tax act enactment date companies complete accounting standards codification topic 740 income taxes “asc 740” accordance sab 118 company must reflect income tax effects aspects tax act accounting asc 740 complete extent company’s accounting certain income tax effects tax act incomplete able determine reasonable estimate must record provisional estimate financial statements provisional estimates subject adjustment measurement period accounting complete company cannot determine provisional estimate included financial statements must continue apply asc 740 basis provisions tax laws effect immediately enactment tax act company’s accounting impacts tax act incomplete recorded amounts discussed note provisional estimates august 31 2018 company able reasonably estimate impact reduction us federal corporate rate us net deferred tax liabilities may affected analyses related tax act including limited changes underlying accounts respective deferred tax assets liabilities relate state tax effects adjustments made federal temporary differences provisional benefit resulting application tax act’s lower corporate tax rate fiscal 2018 taxable income reflects reasonable estimates effects tax act include limited amount capital expenditures qualified property placed service end fiscal 2018 company recorded material adjustments provisional amounts recorded second quarter fiscal 2018 related tax act addition august 31 2018 company made accounting policy election respect treatment global intangible lowtaxed income “gilti” election options 1 recognizing deferred taxes basis differences expected reverse gilti 2 accounting gilti period costs incurred company evaluating election option 89 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements deferred tax assets liabilities comprise following august 31 thousands august 31 2018 foreign operating loss carryforwards 22 million expire used 2024 2033 state credit carryforwards expire used 2019 2027 valuation allowances company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required fiscal 2018 company released valuation allowances certain us canadian state deferred tax assets resulting discrete tax benefits totaling 37 million release valuation allowances result sufficient positive evidence including cumulative income company’s us canadian tax jurisdictions recent years projections future taxable income based primarily companys improved financial performance morelikelythannot deferred tax assets realized company continues maintain valuation allowances certain us canadian state puerto rican deferred tax assets canadian deferred tax assets company continues maintain valuation allowance relate indefinitelived assets accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2014 2017 remain subject examination statute limitations 90 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements note 14 net income loss per share following table sets forth information used compute basic diluted net income loss per share attributable ssi years ended august 31 thousands common stock equivalent shares 62019 251899 1016745 considered antidilutive excluded calculation diluted net income loss per share attributable ssi years ended august 31 2018 2017 2016 respectively note 15 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 16 million 14 million 12 million years ended august 31 2018 2017 2016 respectively note 16 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance prior fourth quarter fiscal 2017 company’s internal organizational reporting structure included two operating reportable segments amr steel manufacturing business “smb” fourth quarter fiscal 2017 accordance plan announced june 2017 company modified internal organizational reporting structure combine steel manufacturing operations reported smb segment oregon metals recycling operations reported within amr segment forming css division resulted realignment chief executive officer considered company’s chief operating decision maker reviews performance makes decisions resource allocation company began reporting new segment structure fourth quarter fiscal 2017 reflected annual report form 10k year ended august 31 2017 segment data comparable periods presented prior segment change recast conform current period presentation activities reorganized segments recasting historical information impact company’s consolidated financial performance periods presented amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities autobodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets company holds noncontrolling ownership interests joint ventures either metals recycling business suppliers unprocessed metal company’s allocable portion results joint ventures reported within 91 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements segment results joint ventures sell recycled scrap metal amr css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties august 31 2018 company two 50owned joint venture interests one presented part amr operations one presented part css operations fiscal 2018 two company’s 50 joint venture interests presented part amr operations dissolved fiscal 2017 company sold one 50 joint venture interests presented part css operations intersegment sales amr css made prices approximate local market rates intercompany sales tend produce intercompany profit recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income reportable segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition company allocate certain items segment operating income management include information measurement performance operating segments unallocated items include restructuring charges exitrelated activities charges related legacy environmental liabilities provisions certain legal matters unallocated income expense operating income reportable segment reflect operating income reportable segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented fourth quarter fiscal 2018 company modified measurement segment operating income classify legacy environmental charges within corporate order align measures chief executive officer considered company’s chief operating decision maker reviews performance makes decisions resource allocation change applied prospectively beginning fourth quarter fiscal 2018 legacy environmental charges incurred quarter reported within corporate division fourth quarter fiscal 2018 company recorded 1 million legacy environmental charges corporate division prior change would classified within amr legacy environmental charges reflected amr’s operating results prior change material consolidated financial statements either individually aggregate environmental charges reported within selling general administrative expense consolidated statements operations following summary company’s total assets august 31 thousands 1 amr total assets include 4 million 5 million august 31 2018 2017 respectively investments joint ventures css total assets include 8 million 7 million august 31 2018 2017 respectively investment joint ventures 2 substantial majority corporate eliminations total assets consist corporate intercompany payables company’s operating segments intercompany eliminations 3 property plant equipment net includes 15 million 17 million august 31 2018 2017 respectively company’s canadian locations 92 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 1 amr operating income includes less 1 million 2 million less 1 million income loss joint ventures accounted equity method fiscal 2018 2017 2016 respectively amr operating income includes goodwill impairment charge 9 million fiscal 2016 asset impairment charges recoveries net 1 million less 1 million 16 million fiscal 2018 2017 2016 respectively 2 css operating income includes 2 million 1 million less 1 million income joint ventures accounted equity method fiscal 2018 2017 2016 respectively css operating income includes asset impairment charges recoveries net less 1 million 1 million 4 million fiscal 2018 2017 2016 respectively 93 schnitzer steel industries inc form 10k 2018 table contents schnitzer steel industries inc notes consolidated financial statements following revenues external customers presented based sales destination major product years ended august 31 thousands fiscal 2018 2017 2016 external customers accounted 10 company’s consolidated revenues sales customers foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold 94 schnitzer steel industries inc form 10k 2018 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary fair statement results periods represented thousands except per share amounts sum quarterly amounts may agree fullyear equivalent due rounding second quarter fiscal 2018 results included income tax benefit 7 million related impacts us federal tax legislation enacted quarter discrete income tax benefit 7 million related release valuation allowances certain us state deferred tax assets fourth quarter fiscal 2018 results included discrete income tax benefit 30 million related release valuation allowances certain deferred tax assets 95 schnitzer steel industries inc form 10k 2018 schedule ii valuation qualifying accounts years ended august 31 2018 2017 2016 thousands 96 schnitzer steel industries inc form 10k 2018 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission “coso” based assessment management determined company’s internal control financial reporting effective august 31 2019 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2019 stated report included herein 48 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets schnitzer steel industries inc subsidiaries “company” august 31 2019 2018 related consolidated statements income comprehensive income equity cash flows three years period ended august 31 2019 including related notes financial statement schedule listed index appearing item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting august 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company august 31 2019 2018 results operations cash flows three years period ended august 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting august 31 2019 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts revenue contracts customers september 1 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements 49 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates volume ferrous metal inventory described notes 2 4 consolidated financial statements company’s processed unprocessed scrap metal inventory 813 million august 31 2019 includes processed unprocessed ferrous metal inventory among types inventory accounting process company uses record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production management relies weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates management periodically reviews shrink factors performs monthly physical inventories due inherent nature company’s scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume principal considerations determination performing procedures relating volume ferrous metal inventory critical audit matter significant judgment management estimation metal recoveries yields specific ferrous metal inventory volumes turn resulted significant audit effort high degree subjectivity performing audit procedures evaluating audit evidence related estimates made management addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating estimation metal recoveries yields specific ferrous metal inventory volumes procedures also included among others testing inventory quantities received assessing reasonableness management’s estimated yields comparing actual yields ultimate inventory recoveries testing ferrous metal inventory shipments including volume ultimately recovered observing management’s physical inventory counts assessing rollforward activity time inventory counts yearend also considered whether evidence obtained areas audit consistent management’s estimates related ferrous metal inventory volumes pricewaterhousecoopers llp portland oregon october 24 2019 served company’s auditor since 1976 includes periods company became subject sec reporting requirements 50 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts currency us dollar see notes consolidated financial statements 51 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc consolidated statements income thousands except per share amounts currency us dollar 1 may foot due rounding see notes consolidated financial statements 52 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc consolidated statements comprehensive income thousands currency us dollar see notes consolidated financial statements 53 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc consolidated statements equity thousands except per share amounts currency us dollar see notes consolidated financial statements 54 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc consolidated statements cash flows thousands currency us dollar see notes consolidated financial statements 55 schnitzer steel industries inc form 10k 2019 see notes consolidated financial statements 56 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products schnitzer steel industries inc consolidated subsidiaries together referred company’s internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities auto bodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets august 31 2019 company’s facilities located united states “us” territories canada note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts schnitzer steel industries inc majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships potential variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation accounting changes beginning first quarter fiscal 2019 company adopted accounting standards update initially issued may 2014 clarifies principles recognizing revenue contracts customers core principle new guidance entity recognizes revenue depict transfer promised goods services customers amount reflects consideration entity expects entitled exchange goods services company adopted new revenue accounting standard using modified retrospective approach requires recognition cumulative effect initially applying new requirements adjustment opening balance retained earnings period initial application adoption new requirements change timing revenue recognition company compared previous guidance company recorded cumulativeeffect adjustment opening balance retained earnings september 1 2018 company identified certain scrap purchase sale arrangements recognized revenue gross amount consideration expected entitled customer principal previous revenue guidance new revenue standard recognizes revenue net amount consideration expects retain paying scrap metal supplier agent foregoing change classification cost scrap metal purchased arrangements effect reducing amount revenue cost goods sold reported financial statements impact net income company continued using accounting guidance effect adoption new revenue accounting standard consolidated revenues fiscal 2019 would higher approximately 28 million 1 consolidated cost goods sold would higher amount line items consolidated financial statements materially impacted adoption new requirements comparative prior period amounts disclosures continue reported accordance guidance effect prior date adoption see note 10 revenue disclosures required new standard 57 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements beginning first quarter fiscal 2019 company adopted accounting standards update amends certain aspects reporting model financial instruments pertinent amendment company entity may choose measure certain equity investments readily determinable fair values cost minus impairment plus minus changes resulting observable price changes amendments also require qualitative assessment identify impairment equity investments without readily determinable fair values adoption requirements impact company’s consolidated financial position results operations cash flows discontinued operations results discontinued operations presented separately net tax results ongoing operations periods presented disposed components reflected results discontinued operations periods presented consist six auto parts stores company ceased operations fiscal 2015 expenses included results discontinued operations direct operating expenses incurred disposed components may reasonably segregated costs ongoing operations company cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 27 million 28 million august 31 2019 2018 respectively accounts receivable net accounts receivable represent amounts primarily due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company extends credit customers contracts containing customary explicit payment terms payment generally required within 30 60 days shipment nonferrous export sales typically require deposit prior shipment historically almost company’s ferrous export sales made letters credit domestic ferrous metal sales nonferrous metal sales finished steel sales generally made open account majority sales covered credit insurance company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 2 million 3 million august 31 2019 2018 respectively also included accounts receivable shortterm advances scrap metal suppliers used mechanism acquire unprocessed scrap metal advances generally repaid scrap metal opposed cash repayments advances scrap metal treated noncash operating activities consolidated statements cash flows totaled 15 million 15 million 12 million fiscal years ended august 31 2019 2018 2017 respectively 58 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements inventories company’s inventories consist processed unprocessed scrap metal ferrous nonferrous mixed nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value company determines cost ferrous nonferrous scrap metal inventories using average cost method capitalizes substantially direct processing costs yard costs inventory company allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory auto parts stores reported within finished goods based average price company pays vehicle capitalizes vehicle cost substantially production costs inventory css determines cost semifinished finished steel product inventories based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company determines cost substantial majority supplies inventory using average cost method reduces carrying value losses due obsolescence company considers estimated future selling prices determining estimated net realizable value inventory company generally sells recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated net realizable value quantities hand shipped contracts sales orders accounting process company uses record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production management relies weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates management periodically reviews shrink factors performs monthly physical inventories due inherent nature company’s scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expense gains losses sales assets related exit activity reported within restructuring charges exitrelated activities consolidated statements income depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2019 useful lives used depreciation amortization follows prepaid expenses company’s prepaid expenses reported within prepaid expenses current assets consolidated balance sheets totaled 23 million 22 million august 31 2019 2018 respectively consisted primarily deposits capital purchases prepaid insurance prepaid rent prepaid services 59 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements assets company’s assets exclusive prepaid expenses consist primarily receivables insurers spare parts equity investment debt issuance costs notes contractual receivables assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date receivables insurers represent portion insured losses expected recovered company’s insurance carriers receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible receivables insurers totaled 89 million 36 million august 31 2019 2018 respectively increase fiscal 2019 relating primarily adjustment contingent loss originally recorded fiscal 2018 connection lawsuits arising 2016 motor vehicle collision company insurance coverage foregoing lawsuits settled full payment settlements made within company’s insurance policy limits first quarter fiscal 2020 see “contingencies other” note 8 commitments contingencies discussion contingent loss company invested 6 million equity privatelyheld waste recycling entity fiscal 2017 equity investment readily determinable fair value therefore carried cost adjusted impairments observable price changes investment presented part amr reported within assets consolidated balance sheets carrying value investment 6 million august 31 2019 2018 company recorded impairments upward downward adjustments carrying value investment since acquisition debt issuance costs consist primarily costs incurred company enter modify credit facilities company reports deferred debt issuance costs within assets consolidated balance sheets amortizes interest expense straightline basis contractual term arrangement notes contractual receivables consist primarily advances entities business extracting scrap metal demolition activities well receivables counterparties sales equipment assets legal settlements repayment advances suppliers either cash scrap metal company performs periodic reviews notes contractual receivables identify credit risks assess overall collectibility receivables typically involves consideration value collateral case advances suppliers generally form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities company’s metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group company’s auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined primarily using cost market approaches respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based company’s plans dispose abandon asset end original useful life depreciation accelerated beginning determination made 60 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements investments joint ventures august 31 2019 company two 50owned joint venture interests accounted equity method accounting one joint venture interests presented part amr operations one interest presented part css operations joint venture within css sells recycled scrap metal operations within css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties august 31 2019 company’s investments equity method joint ventures generated 8 million cumulative undistributed earnings loss value investment joint venture recognized decline temporary management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal 2018 company declassified two 50 joint venture interests equity method classification result agreedupon dissolution joint venture entities joint venture interests previously presented part amr operations fiscal 2017 company sold one 50 joint venture interests previously presented part css operations company recorded immaterial gains result transactions fiscal 2017 one company’s joint venture interests sold real estate resulting recognition 6 million gain joint venture 3 million attributable company’s investment company’s share gain reported within income joint ventures consolidated statements income see note 15 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination morelikelythannot estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment morelikelythannot company required perform quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly quantitative impairment test performing quantitative impairment test company applies onestep quantitative test records amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit company required perform quantitative goodwill impairment test estimates fair value reporting units using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital determined separately reporting unit determination fair value involves use significant estimates assumptions including revenue growth rates driven future commodity prices volume expectations operating margins capital expenditures working capital requirements tax rates terminal growth rates discount rates benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium company record goodwill impairment charges periods presented company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record impairment charges indefinitelived intangible assets periods presented 61 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balance result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred company acquired certain assets auto recycling business northern california fiscal 2019 certain assets metals recycling business columbus georgia fiscal 2018 acquisitions material company’s financial position results operations pro forma operating results acquisitions presented since aggregate results would significantly different reported results see note 6 goodwill intangible assets net details restructuring charges restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date contract termination costs consist primarily costs continue incurred operating leases remaining terms without economic benefit company liability contract termination costs recognized date company ceases using rights conveyed lease contract measured fair value determined based remaining contractual lease rentals reduced estimated sublease rentals liability restructuringrelated costs measured fair value period liability incurred accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 8 million estimated cost unpaid workers’ compensation claims august 31 2019 2018 included accrued liabilities consolidated balance sheets corresponding workers’ compensation insurance receivables 4 million august 31 2019 2018 included current assets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense consolidated statements income additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance potentially responsible parties site matter situations recoveries environmental remediation costs parties recognized claim recovery either realized realizable amounts recorded environmental liabilities reviewed periodically assessment remediation progresses individual sites particular matters adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 8 commitments contingencies detail 62 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements loss contingencies company subject certain legal proceedings contingencies addition related environmental liabilities discussed note outcomes subject significant uncertainty company accrues estimated losses probable liability incurred amount loss reasonably estimated legal costs incurred connection loss contingencies expensed incurred company uses judgment evaluates whether loss contingency arising litigation unasserted claim disclosed recorded outcome legal proceedings contingencies inherently uncertain often difficult estimate accrued legal contingencies reported within accrued liabilities consolidated balance sheets see “contingencies other” note 8 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due shortterm nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included within level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available derivatives derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income period recorded accumulated comprehensive income separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income period company reports gains losses within income net consolidated statements income net realized unrealized foreign currency transaction gains losses material fiscal 2019 2018 2017 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares 63 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue upon satisfying promises transfer goods services customers terms contracts nearly promises referred performance obligations consist transfer physical goods including ferrous nonferrous recycled scrap metal auto bodies auto parts finished steel products customers performance obligations satisfied point time company transfers control goods customer nearly cases title risk loss goods transfer customer timing transfer title risk loss dictated customary explicitly stated contract terms example company recognizes revenue partially loaded bulk shipments ferrous recycled scrap metal contractual terms support revenue recognition based transfer title risk loss significant majority company’s sales involve transfer control customer thus revenue recognition delivery customer’s destination example upon release goods shipper company’s billandhold arrangements involve transfer control customer goods segregated inventory company’s facility ready physical transfer customer shipping handling activities occur customer obtained control good accounted fulfillment costs rather additional promise contract shipping handling consideration freight revenue recognized control goods transfers customer freight expense accrued cost goods sold related revenue recognized certain regional markets company enters contracts whereby arranges brokers transfer scrap material scrap suppliers end customers transactions company obtains substantive control scrap material goods transferred end customer example arranging processing warehousing material company recognizes revenue equal gross amount consideration expects receive customer principal alternatively transactions company obtain substantive control scrap material product transferred end customer company recognizes revenue equal net amount consideration expects retain paying supplier purchase scrap metal agent company agent transaction substantial majority brokerage arrangements nearly company’s sales contracts reflect market pricing time contract executed one year less generally provide shipment within 30 60 days price agreed upon customer company’s retail auto parts sales listed prices recognized point sale company recognizes revenue based contractually stated selling prices quantities shipped net sales tax adjusted estimated claims discounts claims customary recycled scrap metal industry arise variances quantity quality delivered products revenue adjustments may required settlement claims exceeds original estimates discounts offered certain finished steel customers qualify variable consideration discounts contingent upon future events variable consideration arising discounts recognized upon transfer finished steel products customers based upon either expected value likely amount material fiscal year ended august 31 2019 company experiences sales returns therefore material provisions returns made sales recognized fiscal year ended august 31 2019 revenue adjustments related performance obligations satisfied previous periods material advertising costs company expenses advertising costs incurred advertising expense 6 million fiscal 2019 2018 2017 respectively sharebased compensation company estimates grantdate fair value stockbased compensation awards based market closing price underlying class common stock date grant except performance share awards total shareholder return “tsr” market performance metric company estimates fair value using montecarlo simulation model company recognizes compensation expense awards net estimated forfeitures requisite service period compensation expense based grantdate fair value described except performance share awards nonmarket return capital employed “roce cash flow return investment “cfroi” performance metrics awards compensation expense based 64 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements probable outcome achieving specified performance conditions company reassesses whether achievement roce cfroi performance metrics probable reporting date see note 12 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets morelikelythannot tax benefit realized company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required tax benefits arising uncertain tax positions recognized morelikelythannot position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense see note 13 income taxes detail net income per share basic net income per share attributable ssi shareholders computed dividing net income attributable ssi shareholders weighted average number outstanding common shares period presented including vested deferred stock units “dsus” restricted stock units “rsus” meeting certain criteria diluted net income per share attributable ssi shareholders computed dividing net income attributable ssi shareholders weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed vesting performance share rsu dsu awards using treasury stock method certain company’s performance share rsu awards excluded calculation diluted net income per share attributable ssi shareholders antidilutive however certain performance share rsu awards could dilutive future net income attributable noncontrolling interests deducted income continuing operations arrive income continuing operations attributable ssi shareholders purpose calculating income per share continuing operations attributable ssi shareholders income loss per share discontinued operations attributable ssi shareholders presented separately consolidated statements income see note 14 net income per share detail use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities legal liabilities goodwill longlived asset indefinitelived intangible asset valuation equity investments valuation certain sharebased awards asset valuation inventory measurement valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables majority cash equivalents maintained major financial institutions balances certain institutions exceeded federal deposit insurance corporation insured amount 250 thousand august 31 2019 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 49 million 58 million open letters credit august 31 2019 2018 respectively 65 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements note 3 recent accounting pronouncements february 2016 accounting standard issued supersedes lease standard existing time requires lessee recognize lease liability lease asset balance sheet leases greater 12 months including classified operating leases standard also expands required quantitative qualitative disclosures surrounding leases updates issued since february 2016 amending aspects initial standard including providing additional optional transition method adoption new lease accounting standard becomes effective company september 1 2019 company expects adopt new guidance using modified retrospective method whereby applies new requirements recognizing cumulativeeffect adjustment opening balance retained earnings september 1 2019 company expect cumulativeeffect adjustment material adoption using modified retrospective method impact prior period earnings company comparative prior periods adjusted new guidance company expects elect package practical expedients permitted transition guidance within new lease accounting standard among things permit carrying forward historical lease classification company also expects elect practical expedients exempting shortterm leases balance sheet recognition permitting entities separate lease nonlease components adoption new standard expected result recognition approximately 126 million 128 million operating lease rightofuse assets liabilities respectively september 1 2019 payments shortterm leases continue recognized income statement straightline basis lease term new lease standard expected materially impact company’s consolidated net income impact cash flows company assessed implement changes processes systems including implementing software solution internal controls result new guidance note 4 inventories consisted following august 31 thousands note 5 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense assets capital leases 53 million 49 million 49 million years ended august 31 2019 2018 2017 respectively note 6 goodwill intangible assets net company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired 66 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements second quarter fiscal 2018 company acquired certain assets metals recycling business columbus georgia 2 million acquisition qualified business combination accounting rules resulted recognition 1 million goodwill second quarter fiscal 2018 company allocated acquired goodwill reporting unit within amr operating segment reporting unit carry goodwill immediately prior acquisition second quarter fiscal 2019 company acquired certain assets auto recycling business northern california 2 million acquisition qualified business combination accounting guidance resulted recognition 2 million goodwill second quarter fiscal 2019 company allocated acquired goodwill reporting unit within amr operating segment carries nearly company’s goodwill fourth quarter fiscal 2019 company performed annual goodwill impairment test july 1 2019 testing date balance company’s goodwill 170 million 1 million balance carried single reporting unit within amr company elected first assess qualitative factors determine whether existence events circumstances led determination morelikelythannot estimated fair value reporting unit carrying goodwill less carrying amount result qualitative assessment company concluded morelikelythannot fair value reporting unit carrying goodwill less carrying value testing date therefore impairment testing required gross change carrying amount goodwill years ended august 31 2019 2018 follows thousands accumulated goodwill impairment charges 471 million august 31 2019 2018 following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization include leasehold interests permits licenses 2 indefinitelived intangibles include trade names permits licenses real property options total intangible asset amortization expense 1 million years ended august 31 2019 2018 2017 impairments intangible assets immaterial periods presented 67 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 7 debt consisted following august 31 thousands august 24 2018 company certain subsidiaries entered first amendment third amended restated credit agreement “amended credit agreement” bank america na administrative agent lenders party thereto amended restated company’s existing credit agreement amended credit agreement provides 700 million c15 million senior secured revolving credit facilities maturing august 2023 prior amendment renewal credit agreement provided 335 million c15 million senior secured revolving credit facilities company incurred 3 million debt issuance costs connection amended credit agreement amortized interest expense fiveyear term arrangement august 31 2019 2018 borrowings outstanding credit facilities 97 million 100 million respectively weighted average interest rate amounts outstanding credit facilities 378 357 august 31 2019 2018 respectively interest rates outstanding indebtedness amended credit agreement based company’s option either london interbank offered rate “libor” canadian equivalent plus spread 125 275 amount spread based pricing grid tied company’s consolidated funded debt ebitda ratio greater prime rate federal funds rate plus 050 daily rate equal onemonth libor plus 175 case plus spread zero 150 based pricing grid tied company’s consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 015 045 based pricing grid tied company’s consolidated funded debt ebitda ratio amended credit agreement contains certain customary covenants including covenants limit ability company subsidiaries enter certain types transactions financial covenants include covenants requiring maintenance minimum fixed charge coverage ratio maximum leverage ratio company’s obligations amended credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain company’s subsidiaries’ assets including equipment inventory accounts receivable august 31 2016 company 8 million taxexempt economic development revenue bonds outstanding state oregon scheduled mature january 2021 august 2016 company exercised option redeem bonds prior maturity company repaid bonds full september 2016 8 million repayment reported cash outflow financing activities fiscal year ended august 31 2017 consolidated statement cash flows 68 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements principal payments longterm debt capital lease obligations next five fiscal years thereafter follows thousands company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 10 million outstanding arrangements august 31 2019 2018 note 8 commitments contingencies commitments company leases portion capital equipment certain facilities leases expire various dates fiscal 2047 majority company’s facility lease agreements include renewal options rent escalation clauses rent expense 27 million 27 million 25 million fiscal 2019 2018 2017 respectively table sets forth company’s future minimum obligations noncancelable operating leases august 31 2019 thousands contingencies environmental changes company’s environmental liabilities years ended august 31 2019 2018 follows thousands 69 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements recycling operations august 31 2019 2018 company’s recycling operations environmental liabilities 52 million 54 million respectively potential remediation locations conducted business environmental liabilities historical recent activities liabilities relate investigation potential future remediation contaminated sediments riverbanks soil contamination groundwater contamination storm water runoff issues natural resource damages except portland harbor certain liabilities discussed legacy environmental loss contingencies immediately liabilities individually material site portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup specific areas within site parties involved timing specific remedial action allocation costs cleanup among responsible parties yet determined process site investigation remedy selection identification additional prps allocation costs underway number years significant uncertainties remain unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs lwg indicated incurred 155 million investigationrelated costs approximately 18 year period working rifs following submittal draft ri fs documents epa largely rejected epa took rifs process company joined approximately 100 prps including lwg members voluntary process establish allocation costs site including costs incurred lwg rifs process lwg members also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 portland harbor natural resource trustee council “trustee council” invited company prps participate funding implementing natural resource injury assessment site following meetings among trustee council prps funding participation agreements negotiated participating prps including company agreed fund first phase threephase natural resource damage assessment phase 1 included development natural resource damage assessment plan “ap” implementation several early studies substantially completed 2010 december 2017 company joined participating prps agreeing fund phase 2 natural resource damage assessment includes implementation ap develop information sufficient facilitate early settlements trustee council phase 2 participants identification restoration projects funded settlements late may 2018 trustee council published notice intent proceed phase 3 involve full implementation ap final injury damage determination company proceeding process established trustee council regarding early settlements phase 2 uncertain whether company enter early settlement natural resource damages costs may incur early settlement january 30 2017 one trustees confederated tribes bands yakama nation withdrew council 2009 filed suit approximately 30 parties including company seeking reimbursement certain past future response costs connection remedial action site recovery assessment costs related natural resources damages releases site multnomah channel lower columbia river parties filed various motions dismiss stay suit august 2019 court issued order denying motions dismiss staying action number parties filed appeal court’s denial motions dismiss filing company joined part company intends defend claims suit sufficient information determine likelihood loss matter estimate amount damages sought amount damages could allocated company estimates cost remedial action cleanup inriver portion site varied widely various drafts fs epa’s final fs issued june 2016 ranging approximately 170 million 25 billion net present value depending remedial alternative number factors comments submitted epa company certain stakeholders identified number serious concerns regarding epa’s risk remedial alternatives assessments cost estimates scheduling assumptions conclusions regarding feasibility effectiveness remediation technologies 70 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements january 2017 epa issued record decision “rod” identified selected remedy site selected remedy modified version one alternative remedies evaluated epa’s fs expanded include additional work greater cost epa estimated total cost selected remedy 17 billion net present value cost 105 billion 7 discount rate estimated construction period 13 years following completion remedial designs rod epa stated cost estimate orderofmagnitude engineering estimate expected within 50 30 actual project cost changes cost elements likely occur result new information data collected engineering design company identified number concerns regarding remedy described rod based data decade old epa’s estimates costs time required implement selected remedy ongoing questions regarding cost effectiveness technical feasibility use stale data uncertain whether rod implemented issued addition rod determine allocate responsibility remediation costs among prps rod epa acknowledged much data used preparing rod decade old would need updated new round “baseline” sampling conducted prior remedial design phase accordingly rod provided additional preremedial design investigative work baseline sampling conducted order provide baseline current conditions delineate particular remedial actions specific areas within site additional sampling needs occur prior proceeding next phase process remedial design remedial design phase engineering phase additional technical information data collected identified incorporated technical drawings specifications developed subsequent remedial action moreover rod provided sitewide cost estimates provide sufficient detail estimate costs specific sediment management areas within site following issuance rod epa proposed prps subgroup prps perform additional investigative work identified rod new consent order december 2017 company three prps entered new administrative settlement agreement order consent epa perform preremedial design investigation baseline sampling two year period company estimated share costs performing work would approximately 2 million recorded environmental liabilities selling general administrative expense consolidated financial statements fiscal 2018 company believes costs fully covered existing insurance coverage thus also recorded insurance receivable 2 million fiscal 2018 resulting net impact company’s consolidated results operations company’s loss contingencies august 31 2019 2018 included 1 million 2 million respectively estimated share costs investigation including preremedial design investigative activities preremedial design investigation baseline sampling work completed report evaluating data submitted epa june 17 2019 evaluation report concludes site conditions improved substantially since data forming basis rod collected decade ago analysis contained report significant implications remedial design remedial action site epa reviewed report finding limited corrections data suitable quality generally acceptable stating data used addition existing forthcoming designlevel data inform implementation rod however epa agree data analysis support conclusions presented report company prps disagree epa’s position use recent data reviewing epa’s comments company’s options epa stated wants prps step forward individually groups enter consent agreements perform remedial design covering entire site proposed dividing site eight ten subareas remedial design epa indicated may pursue enforcement actions prps entered consent agreements perform remedial design end 2019 company engaged goodfaith negotiations epa respect potentially performing remedial design unclear whether company reach agreement epa timing completion remedial design uncertain could take three four years except certain early action projects company involved remediation activities expected commence number years addition discussed responsibility implementing funding remedy determined separate allocation process ongoing company would expect next major stage allocation process proceed parallel remedial design process 71 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements determination specific remediation actions required amount natural resource damages allocation costs investigations remedy natural resource damages among prps company believes possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense including preremedial design investigative activities remedial design remedial action mitigation natural resource damages claims connection site although assurance policies cover costs company may incur oregon department environmental quality separately providing oversight voluntary investigations source control activities company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined legacy environmental loss contingencies company’s environmental loss contingencies august 31 2019 august 31 2018 portland harbor include actual possible investigation cleanup costs historical contamination sites currently formerly owned formerly operated company sites company may responsibility costs due past disposal activities “legacy environmental loss contingencies” legacy environmental loss contingencies relate potential remediation waterways soil groundwater contamination may also involve natural resource damages governmental fines penalties claims third parties personal injury property damage company notified may potentially responsible party certain sites investigation cleanup activities ongoing may required future company recognizes liability matters loss probable reasonably estimated investigation cleanup activities ongoing company yet identified responsibility contamination yet identified reasonably possible company may need recognize additional liabilities connection sites company cannot currently reasonably estimate possible loss range loss absent additional information developments additional liabilities individually aggregate may material adverse effect company’s results operations financial condition cash flows fiscal 2018 company accrued 4 million expense corporate division estimated costs related remediation shredder residue disposed around 1970s thirdparty sites located near investigation activities conducted oversight applicable state regulatory agency august 31 2019 august 31 2018 company 4 million accrued matter reasonably possible company may recognize additional liabilities connection matter time losses probable reasonably estimated company currently estimates range reasonably possible losses related matter excess current accruals zero 28 million based range remedial alternatives subject development approval regulators specific remedy implementation plan company investigating whether portion current future losses related matter incurred covered existing insurance coverage may offset contributions responsible parties addition company’s loss contingencies august 31 2019 august 31 2018 include 6 million estimated costs related remediation soil groundwater conditions including penalties connection closed facility owned previously operated indirect whollyowned subsidiary investigation activities conducted oversight applicable state regulatory agency company also working local officials respect protection public water supplies reasonably possible company may recognize additional liabilities including penalties connection matter time additional losses probable reasonably estimated however company cannot reasonably estimate time possible additional loss range possible additional losses associated matter pending completion ongoing studies determination remediation plans pending negotiations settle related enforcement matter 72 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements steel manufacturing operations company’s steel manufacturing operations known environmental liabilities august 31 2019 2018 steel mill’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firms apply treatments allow ultimate disposal eaf dust company’s steel mill operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based annual production capacity approximately 950 thousand tons company’s permit first issued 1998 since renewed february 1 2018 permit renewal process occurs every five years renewal process underway however existing permit extended administrative rule current renewal process finalized summary environmental contingencies respect environmental contingencies portland harbor superfund site legacy environmental loss contingencies discussed separately management currently believes adequate provision made potential impact environmental contingencies historically amounts company ultimately paid remediation activities material given period assurance amounts paid material future contingencies schnitzer southeast llc whollyowned subsidiary company “sse” sse employee company one company’s insurance carriers named defendants five separate wrongful death lawsuits filed state georgia arising accident 2016 alabama involving tractor trailer driven sse employee owned sse fiscal 2019 company settled three five lawsuits total 35 million subsequent company’s fiscal 2019 year end settled two remaining lawsuits total 68 million aggregate settlement amount 103 million substantially covered insurance resulting net impact company’s consolidated results operations august 31 2019 2018 company accrued loss contingencies offsetting insurance receivables related lawsuits totaling 83 million 30 million respectively full amount accrued august 31 2019 paid first quarter fiscal 2020 addition legal proceedings relating contingencies described company party various legal proceedings arising normal course business company recognizes liability matters loss probable reasonably estimated company anticipate resolution legal proceedings arising normal course business taking consideration expected insurance recoveries material adverse effect results operations financial condition cash flows 73 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements note 9 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2019 2018 2017 thousands second quarter fiscal 2018 company adopted accounting standard update allowed reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting tax cuts jobs act “tax act” enacted december 22 2017 reclassifications aoci retained earnings stranded tax effects year ended august 31 2018 individually aggregate material reclassifications aoci earnings individually aggregate material impacted captions consolidated statements income periods presented 74 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements note 10 revenue disaggregation revenues table illustrates company’s revenues disaggregated major product sales destination reportable segment thousands 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap receivables contracts customers revenue accounting standard defines receivable entity’s right consideration unconditional meaning passage time required payment due august 31 2019 august 31 2018 receivables contracts customers net allowance doubtful accounts totaled 142 million 164 million representing 97 total accounts receivable reported consolidated balance sheets contract liabilities contract consideration received customer prior revenue recognition recorded contract liability recognized revenue company satisfies related performance obligation terms contract company’s contract liabilities consist almost entirely customer deposits recycled scrap metal sales contracts reported within accounts payable consolidated balance sheets totaled 3 million 9 million august 31 2019 august 31 2018 respectively unsatisfied performance obligations reflected contract liabilities relate contracts original expected durations one year less therefore disclosed fiscal year ended august 31 2019 company reclassified 8 million customer deposits august 31 2018 revenues result satisfying performance obligations year note 11 employee benefits company certain subsidiaries contribute qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans 75 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material periods presented report fair value plan assets 20 million 17 million august 31 2019 2018 respectively projected benefit obligation 17 million 15 million august 31 2019 2018 respectively plan fully funded plan assets exceeding projected benefit obligation 3 million 2 million august 31 2019 2018 respectively plan assets comprised entirely level 1 investments august 31 2019 2018 level 1 investments valued based quoted market prices identical securities principal market contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligation 283 401 august 31 2019 2018 respectively company estimates future annual benefit payments 1 million 4 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets current portion pension liability included accrued liabilities noncurrent portion pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 4 million august 31 2019 2018 trust fund assets’ gains losses included income net company’s consolidated statements income benefit obligation unfunded amount 5 million august 31 2019 4 million august 31 2018 net periodic pension cost serbp material years ended august 31 2019 2018 2017 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 14 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees company’s steel manufacturing operations covered collective bargaining agreement expire march 31 2022 october 1 2018 wispp certified plan’s actuaries green zone defined pension protection act 2006 company contributed 3 million wispp years ended august 31 2019 2018 2017 contributions represented 5 total contributions wispp year 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs requires wispp meet minimum funded percentage valuation date achieve funded percentage 100 october 1 2029 based recent actuarial valuation wispp funded percentage using valuation method prescribed irs satisfied minimum funded percentage requirement company contributions multiemployer plans 6 million 5 million 4 million years ended august 31 2019 2018 2017 respectively 76 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 4 million 4 million 3 million years ended august 31 2019 2018 2017 respectively note 12 sharebased compensation company’s 1993 stock incentive plan amended “plan” established provide grant stockbased compensation awards employees consultants directors plan authorizes grant restricted shares restricted stock units performancebased awards including performance share awards stock options stock appreciation rights stockbased awards plan administered compensation committee company’s board directors “compensation committee” 122 million shares class common stock reserved issuance plan 34 million available future grants august 31 2019 sharebased compensation expense recognized cost goods sold selling general administrative expense applicable 17 million 19 million 11 million years ended august 31 2019 2018 2017 respectively restricted stock units “rsus” years ended august 31 2019 2018 2017 compensation committee granted 261642 252865 314862 rsus respectively company’s key employees employee directors plan rsus generally vest 20 per year five years commencing october 31 year grant rsu entitles recipient receive one share class common stock upon vesting estimated fair value rsu based market closing price underlying class common stock date grant weighted average grant date fair value rsus granted 2761 2660 2095 per unit years ended august 31 2019 2018 2017 respectively total estimated fair value rsus granted years ended august 31 2019 2018 2017 7 million rsu compensation expense recognized requisite service period award net estimated forfeitures date retirement eligibility achieved end service period rsu compensation expense 6 million 7 million 6 million years ended august 31 2019 2018 2017 respectively summary company’s rsu activity year ended august 31 2019 follows total fair value rsus vested based market closing price underlying class common stock vesting date 7 million 8 million 5 million years ended august 31 2019 2018 2017 respectively august 31 2019 total unrecognized compensation costs related unvested rsus amounted 6 million expected recognized weighted average period 2 years performance share awards plan authorizes performancebased awards certain employees subject certain conditions restrictions vesting subject continued employment participant company achievement certain performance goals established compensation committee participant generally must employed company october 31 following end performance period receive award payout however adjusted awards paid employment terminates earlier account qualifying employment termination event death disability retirement termination without cause first year performance period sale company reportable segments participant works 77 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements compensation committee determined performance share awards granted fiscal years 2019 2018 2017 comprise two separate distinct awards different vesting conditions awards vest threshold level specified metric met end approximately threeyear performance period awards granted fiscal 2019 fiscal 2018 performance metrics company’s total shareholder return “tsr” relative designated peer group 16 companies company’s return capital employed “roce awards granted fiscal 2017 metrics tsr company’s cash flow return investment “cfroi” fiscal 2017 performance share awards granted two stages first granted november 2016 second granted april 2017 threeyear 25year performance period respectively awards share payouts depend extent performance goals achieved number shares participant receives equal award granted multiplied payout factor ranges threshold 50 maximum 200 tsr award stipulates certain limitations payout event payout reaches defined ceiling level company’s tsr negative company estimates fair value tsr awards using montecarlo simulation model utilizing several key assumptions including following tsr awards granted fiscal years ended august 31 compensation expense tsr awards based grantdate fair value net estimated forfeitures recognized requisite service period date qualifying employment termination event entitles recipient prorated award end service period regardless whether market condition satisfied compensation expense tsr awards 4 million 3 million 2 million years ended august 31 2019 2018 2017 respectively fair value roce cfroi awards granted based market closing price underlying class common stock grant date company accrues compensation cost roce cfroi awards based probable outcome achieving specified performance conditions net estimated forfeitures requisite service period date qualifying employment termination event entitles recipient prorated award end service period company reassesses whether achievement roce cfroi performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance conditions achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed compensation expense roce cfroi awards 6 million 8 million 2 million years ended august 31 2019 2018 2017 respectively years ended august 31 2019 2018 2017 compensation committee granted total 254620 123812 tsr 130808 roce 246161 119763 tsr 126398 roce 302257 146768 tsr 155489 cfroi performance share awards respectively weighted average grant date fair value performance share awards granted 2837 2732 2152 years ended august 31 2019 2018 2017 respectively summary company’s performancebased awards activity year ended august 31 2019 follows 1 reflects net number awards achieved target levels based actual performance measured end performance period 78 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements total fair value performance share awards vested based market closing price company’s class common stock vesting date 13 million 4 million years ended august 31 2019 2017 respectively performance shares vested fiscal year 2018 august 31 2019 total unrecognized compensation costs related unvested performance share awards amounted 8 million expected recognized weighted average period 2 years deferred stock units “dsus” deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted dsu plan dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2019 2018 2017 totaled 31218 shares 21806 shares 42771 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2019 2018 2017 well unrecognized compensation expense august 31 2019 material note 13 income taxes income continuing operations income taxes follows years ended august 31 thousands income tax expense benefit continuing operations consisted following years ended august 31 thousands 79 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows december 22 2017 president united states signed enacted law comprehensive tax legislation commonly referred tax cuts jobs act “tax act” except certain provisions effective tax years beginning january 1 2018 tax act’s primary change reduction federal statutory corporate tax rate 35 21 resulting pro rata reduction company 35 257 fiscal 2018 full reduction 21 fiscal 2019 change tax law accounted period enactment company recognized discrete benefit 7 million second quarter fiscal 2018 due revaluation us net deferred tax liabilities reflect lower statutory rate company’s effective tax rate fiscal 2018 also reflected application tax act’s lower federal statutory corporate tax rate fiscal 2018 taxable income pertinent changes tax act include limited acceleration deductions qualified property placed service september 27 2017 limitations deductibility executive compensation elimination deduction qualified domestic production activities changes tax act significantly impact company upon enactment include implementation modified territorial tax system modifications foreign earnings subject us tax including tax global intangible lowtaxed income company elected treat period costs incurred company’s accounting impacts tax act complete november 30 2018 company record material adjustments provisional amounts recorded second quarter fiscal 2018 related tax act effective tax rate company’s effective tax rate continuing operations fiscal 2019 expense 232 compared benefit 124 prior year company reported tax benefit pretax income fiscal 2018 primarily due release valuation allowances certain deferred tax assets resulting recognition discrete tax benefits totaling 37 million fiscal 2018 impact tax act company’s effective tax rate continuing operations fiscal 2017 expense 27 lower us federal statutory corporate rate time 35 primarily due company’s full valuation allowance positions federal income tax refund claims partially offset increases deferred tax liabilities indefinitelived assets jurisdictions 80 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements deferred tax assets liabilities comprised following august 31 thousands august 31 2019 foreign operating loss carryforwards 16 million expire used 2024 2039 state credit carryforwards expire used 2019 2032 valuation allowances company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required fiscal 2018 company released valuation allowances certain us federal state canadian deferred tax assets resulting discrete tax benefits totaling 37 million release valuation allowances result sufficient positive evidence time including cumulative income company’s us canadian tax jurisdictions recent years projections future taxable income based primarily companys improved financial performance morelikelythannot deferred tax assets realized company continues maintain valuation allowances certain us federal state canadian puerto rican deferred tax assets canadian deferred tax assets company continues maintain valuation allowance relate indefinitelived assets accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2013 2018 remain subject examination statute limitations 81 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements note 14 net income per share following table sets forth information used compute basic diluted net income per share attributable ssi shareholders years ended august 31 thousands common stock equivalent shares 92873 62019 251899 considered antidilutive excluded calculation diluted net income per share attributable ssi shareholders years ended august 31 2019 2018 2017 respectively note 15 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 15 million 16 million 14 million years ended august 31 2019 2018 2017 respectively note 16 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities auto bodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets company holds noncontrolling ownership interests joint ventures either metals recycling business suppliers unprocessed metal company’s allocable portion results joint ventures reported within segment results august 31 2019 company two 50owned joint venture interests one presented part amr operations one presented part css operations joint venture within css sells recycled scrap metal operations within css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties fiscal 2018 two company’s 50 joint venture interests presented part amr operations dissolved fiscal 2017 company sold one 50 joint venture interests presented part css operations intersegment sales amr css made prices approximate local market rates intercompany sales tend produce intercompany profit recognized finished products ultimately sold third parties 82 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income reportable segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit reportable segments addition company allocate certain items segment operating income management include information measurement performance operating segments unallocated items include restructuring charges exitrelated activities charges net recoveries related legacy environmental matters provisions certain legal matters unallocated income expense operating income reportable segment reflect operating income reportable segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented fourth quarter fiscal 2018 company modified measurement segment operating income classify legacy environmental charges within corporate order align measures chief executive officer considered company’s chief operating decision maker reviews performance makes decisions resource allocation change applied prospectively beginning fourth quarter fiscal 2018 legacy environmental charges incurred quarter reported within corporate division fourth quarter fiscal 2018 company recorded 1 million legacy environmental charges corporate division prior change would classified within amr legacy environmental charges reflected amr’s operating results prior change material consolidated financial statements either individually aggregate environmental charges reported within selling general administrative expense consolidated statements income following summary company’s total assets august 31 thousands 1 amr total assets include 3 million 4 million august 31 2019 2018 respectively investments joint ventures css total assets include 7 million 8 million august 31 2019 2018 respectively investment joint ventures 2 substantial majority corporate eliminations total assets consist corporate intercompany payables company’s operating segments intercompany eliminations 3 property plant equipment net includes 14 million 15 million august 31 2019 2018 respectively company’s canadian locations 83 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 1 amr operating income includes less 1 million less 1 million 2 million income loss joint ventures accounted equity method fiscal 2019 2018 2017 respectively 2 css operating income includes 1 million 2 million 1 million income joint ventures accounted equity method fiscal 2019 2018 2017 respectively following revenues external customers presented major product based sales destination years ended august 31 thousands 84 schnitzer steel industries inc form 10k 2019 schnitzer steel industries inc notes consolidated financial statements 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap 2 fiscal 2019 company modified categories revenues external customers major product major product revenues fiscal 2018 2017 revised conform current presentation revisions immaterial year fiscal 2019 2018 2017 company external customer accounted 10 company’s consolidated revenues sales customers located foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands 1 na sales less 10 threshold 85 schnitzer steel industries inc form 10k 2019 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary fair statement results periods represented thousands except per share amounts second quarter fiscal 2018 results included income tax benefit 7 million related impacts us federal tax legislation enacted quarter discrete income tax benefit 7 million related release valuation allowances certain us state deferred tax assets fourth quarter fiscal 2018 results included discrete income tax benefit 30 million related release valuation allowances certain deferred tax assets 86 schnitzer steel industries inc form 10k 2019 schedule ii valuation qualifying accounts years ended august 31 2019 2018 2017 thousands 87 schnitzer steel industries inc form 10k 2019 item 9item 8 financial statements supplementary data management’s annual report internal control financial reporting management company responsible establishing maintaining adequate internal control financial reporting term defined rules 13a15f 15d15f securities exchange act 1934 company’s internal control financial reporting process designed supervision company’s principal executive principal financial officers effected company’s board directors management personnel provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures relate maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company provide reasonable assurance transactions recorded necessary permit preparation company’s consolidated financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorization company’s management directors provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect company’s consolidated financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projection evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate management company assessed effectiveness company’s internal control financial reporting using criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission “coso” based assessment management determined company’s internal control financial reporting effective august 31 2020 pricewaterhousecoopers llp independent registered public accounting firm audited company’s consolidated financial statements included annual report also audited effectiveness company’s internal control financial reporting august 31 2020 stated report included herein 54 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc report independent registered public accounting firm board directors shareholders schnitzer steel industries inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets schnitzer steel industries inc subsidiaries “company” august 31 2020 2019 related consolidated statements operations comprehensive loss income equity cash flows three years period ended august 31 2020 including related notes financial statement schedule listed index appearing item 15a2 collectively referred “consolidated financial statements” also audited companys internal control financial reporting august 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company august 31 2020 2019 results operations cash flows three years period ended august 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting august 31 2020 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 2 consolidated financial statements company changed manner accounts leases september 1 2019 manner accounts revenue contracts customers september 1 2018 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s annual report internal control financial reporting responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements 55 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee relate accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate volume ferrous metal inventory described notes 2 4 consolidated financial statements company’s processed unprocessed scrap metal inventory 63 million august 31 2020 includes processed unprocessed ferrous metal inventory among types inventory accounting process company uses record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production management relies weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates management periodically reviews shrink factors performs monthly physical inventories due inherent nature company’s scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume principal considerations determination performing procedures relating volume ferrous metal inventory critical audit matter significant judgment management estimation metal recoveries yields specific ferrous metal inventory volumes ii significant auditor judgment subjectivity effort performing audit procedures evaluating audit evidence related estimates made management addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating estimation metal recoveries yields specific ferrous metal inventory volumes procedures also included among others testing inventory quantities received assessing reasonableness management’s estimated yields comparing actual yields ultimate inventory recoveries testing ferrous metal inventory shipments including volume ultimately recovered observing management’s physical inventory counts assessing rollforward activity time inventory counts yearend considering whether evidence obtained areas audit consistent management’s estimates related ferrous metal inventory volumes goodwill impairment assessment reporting unit within auto metals recycling “amr” operating segment described notes 2 7 consolidated financial statements company’s goodwill balance 170 million august 31 2020 1 million balance carried single reporting unit within amr management evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level quantitative impairment test entails estimating fair value reporting unit comparing reporting unit’s carrying amount fourth quarter fiscal 2020 management performed annual goodwill impairment test july 1 2020 management estimated fair value reporting unit within amr using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” assessed specifically reporting unit determination fair value involves use estimates assumptions including revenue growth rates driven future ferrous nonferrous commodity price sales volume expectations gross margins selling general administrative expense relative total revenues capital expenditures working capital requirements discount rate wacc tax rate terminal growth rate benefits associated taxable transaction synergistic benefits available market participants 56 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc principal considerations determination performing procedures relating goodwill impairment assessment reporting unit within amr critical audit matter significant judgment management estimating fair value reporting unit ii significant auditor judgment subjectivity effort performing procedures evaluating management’s significant assumptions related wacc expected ferrous metal selling prices sales volumes gross margins selling general administrative costs relative total revenues iii audit effort involved use professionals specialized skill knowledge addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s goodwill impairment assessment including controls valuation reporting unit within amr procedures also included among others testing management’s process developing fair value estimate evaluating appropriateness discounted cash flow model testing completeness accuracy underlying data used model evaluating significant assumptions used management related wacc expected ferrous metal selling prices sales volumes gross margins selling general administrative costs relative total revenues evaluating management’s assumptions related expected ferrous metal selling prices sales volumes gross margins selling general administrative costs relative total revenues involved evaluating whether assumptions used management reasonable considering current past performance reporting unit consistency external market industry data whether assumptions consistent evidence obtained areas audit professionals specialized skill knowledge used assist evaluation company’s discounted cash flow model wacc assumption pricewaterhousecoopers llp portland oregon october 22 2020 served company’s auditor since 1976 includes periods company became subject sec reporting requirements 57 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated balance sheets thousands except per share amounts currency us dollar see notes consolidated financial statements 58 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated statements operations thousands except per share amounts currency us dollar see notes consolidated financial statements 59 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated statements comprehensive loss income thousands currency us dollar see notes consolidated financial statements 60 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated statements equity thousands except per share amounts currency us dollar 1 refers tax cuts jobs act signed enacted law december 22 2017 see notes consolidated financial statements 61 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated statements cash flows thousands currency us dollar see notes consolidated financial statements 62 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc consolidated statements cash flows continued thousands currency us dollar see notes consolidated financial statements 63 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 1 nature operations founded 1906 schnitzer steel industries inc oregon corporation one north america’s largest recyclers ferrous nonferrous scrap metal including endoflife vehicles manufacturer finished steel products schnitzer steel industries inc consolidated subsidiaries together referred company’s internal organizational reporting structure includes two operating reportable segments auto metals recycling “amr” business cascade steel scrap “css” business amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities auto bodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets refer note 18 segment information financial information company’s reportable segments august 31 2020 company’s facilities located united states “us” territories canada april 2020 company announced intention modify internal organizational reporting structure functionally based integrated model company consolidate operations sales services functional capabilities enterprise level company expects complete transition first quarter fiscal 2021 resulting single operating reportable segment note 2 summary significant accounting policies principles consolidation consolidated financial statements include accounts schnitzer steel industries inc majorityowned whollyowned subsidiaries equity method accounting used investments joint ventures company significant influence effective control significant intercompany account balances transactions profits losses eliminated transactions relationships variable interest entities evaluated determine whether company primary beneficiary entities therefore requiring consolidation company variable interest entities requiring consolidation accounting changes beginning first quarter fiscal 2020 company adopted accounting standards update initially issued february 2016 requires lessee recognize lease liability lease rightofuse asset balance sheet leases greater 12 months including classified operating leases update supersedes previous lease accounting standard company adopted new lease accounting standard using modified retrospective transition method whereby applied new requirements recognizing cumulativeeffect adjustment opening balance retained earnings september 1 2019 cumulativeeffect adjustment company material adoption using modified retrospective transition method impact prior period earnings company comparative prior periods adjusted new guidance company elected package practical expedients permitted transition guidance within new lease accounting standard among things permit carrying forward historical lease classification company also elected practical expedient exempting shortterm leases balance sheet recognition whereby payments leases recognized income statement straightline basis lease term addition company elected practical expedient separate lease nonlease components company elected apply classes underlying assets adoption new standard resulted recognition 126 million 128 million operating lease rightofuse assets liabilities respectively september 1 2019 presented separate line items balance sheet operating lease rightofuse assets considered longlived assets subject existing longlived asset impairment guidance adoption also resulted reclassification company’s capital lease assets obligations finance lease rightofuse assets liabilities september 1 2019 reclassification impact carrying amounts financial statement line items within leases reported see note 5 leases disclosures required new standard 64 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements beginning first quarter fiscal 2019 company adopted accounting standards update initially issued may 2014 clarifies principles recognizing revenue contracts customers company adopted accounting standard using modified retrospective approach recorded cumulativeeffect adjustment opening balance retained earnings september 1 2018 company identified certain scrap purchase sale arrangements recognized revenue gross amount consideration expected entitled customer principal previous revenue guidance new revenue standard recognizes revenue net amount consideration expects retain paying scrap metal supplier agent foregoing change classification cost scrap metal purchased arrangements effect reducing amount revenue cost goods sold reported financial statements impact net income company continued using accounting guidance effect adoption new revenue accounting standard consolidated revenues fiscal 2019 would higher approximately 28 million 1 consolidated cost goods sold would higher amount line items consolidated financial statements materially impacted adoption new requirements fiscal 2018 amounts disclosures continue reported accordance guidance effect prior date adoption see note 11 revenue disclosures required new standard cash equivalents cash equivalents include shortterm securities restricted third parties original maturity date 90 days less included accounts payable book overdrafts representing outstanding checks excess funds deposit 20 million 27 million august 31 2020 2019 respectively accounts receivable net accounts receivable represent amounts primarily due customers product sales accounts receivable reduced allowance doubtful accounts recorded invoiced amount bear interest company extends credit customers contracts containing customary explicit payment terms payment generally required within 30 60 days shipment nonferrous export sales typically require deposit prior shipment historically almost company’s ferrous export sales made letters credit ferrous metal sales nonferrous metal sales finished steel sales domestic customers generally made open account portion sales covered credit insurance company evaluates collectibility accounts receivable based combination factors including whether sales made pursuant letters credit insurance place cases management aware circumstances may impair customer’s ability meet financial obligations management records specific allowance amounts due reduces receivable amount company believes collected customers company maintains allowance considers total receivables outstanding historical collection rates economic trends accounts written efforts collect exhausted allowance doubtful accounts 2 million august 31 2020 2019 also included accounts receivable shortterm advances scrap metal suppliers used mechanism acquire unprocessed scrap metal advances generally repaid scrap metal opposed cash repayments advances scrap metal treated noncash operating activities consolidated statements cash flows totaled 9 million 15 million 15 million fiscal years ended august 31 2020 2019 2018 respectively 65 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements inventories company’s inventories consist processed unprocessed scrap metal ferrous nonferrous mixed nonferrous recovered joint products arising manufacturing process semifinished steel products billets finished steel products primarily rebar wire rod merchant bar used salvaged vehicles supplies inventories stated lower cost net realizable value company determines cost ferrous nonferrous scrap metal inventories using average cost method capitalizes substantially direct processing costs yard costs inventory company allocates material production costs joint products using gross margin method amr determines cost used salvaged vehicle inventory auto parts stores reported within finished goods based average price company pays vehicle capitalizes vehicle cost substantially production costs inventory css determines cost semifinished finished steel product inventories based average costs capitalizes direct indirect costs manufacturing inventory indirect costs manufacturing include general plant costs maintenance yard costs company determines cost substantial majority supplies inventory using average cost method reduces carrying value losses due obsolescence company considers estimated future selling prices determining estimated net realizable value inventory company generally sells recycled ferrous metal contracts provide shipment within 30 60 days price agreed utilizes selling prices committed contracts sales orders determining estimated net realizable value quantities hand shipped contracts sales orders accounting process company uses record ferrous scrap metal quantities relies significant estimates respect estimating quantities unprocessed ferrous scrap metal inventory moved production management relies weighed quantities processed ferrous material adjusted estimated metal recoveries yields based historical trends judgments management actual recoveries yields vary depending product quality moisture content source unprocessed metal company’s estimates intended reasonably reflect quantities unprocessed ferrous scrap metal used production processed ferrous metal assist validating reasonableness estimates management periodically reviews shrink factors performs monthly physical inventories due inherent nature company’s scrap metal inventories including variations product density holding period production processes utilized manufacture products physical inventories necessarily detect variances scrap metal inventory estimates quantities required mitigate risk company adjusts ferrous physical inventories volume commodity low physical inventory count deemed accurately estimate remaining volume leases company enters leases obtain access real property machinery equipment assets company’s lease obligations relate real property leases amr operating sites including substantial majority auto parts stores company’s administrative offices company determines whether arrangement contains lease inception assessing whether receives right direct use obtain substantially economic benefit use underlying asset lease classification measurement recognition determined lease commencement date underlying asset available use company accounting classification lease based whether arrangement effectively financed purchase underlying asset finance lease operating lease leases lease commencement noncancellable lease term 12 months less include option either purchase underlying asset renew lease beyond 12 months company reasonably certain exercise classified shortterm leases recognized balance sheet leases shortterm leases company recognizes rightofuse assets lease liabilities based primarily present value future minimum lease payments lease term lease commencement rightofuse assets represent company’s right use underlying asset lease term lease liabilities represent company’s obligation make future lease payments lease term noncancellable period lease together periods covered renewal termination options company reasonably certain exercise lease payments discounted present value using company’s incremental borrowing rate unless discount rate implicit lease readily determinable company’s incremental borrowing rate lease estimated rate interest company would pay borrow aggregate lease payments collateralized basis lease term estimation incremental borrowing rate requires judgment management reflects assessment company’s credit standing derive implied secured credit rating corresponding yield curve company used incremental borrowing rate recognize operating lease rightofuse assets liabilities new lease accounting standard application date rightofuse assets lease liabilities subject remeasurement lease commencement certain events changes circumstances arise change lease term due reassessment whether company reasonably certain exercise renewal termination option 66 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements operating leases lease expense recognized straightline basis lease term finance leases lease rightofuse asset amortized straightline basis interest expense recognized lease liability using effective interest rate method many company’s real property leases contain variable lease payments depend index rate included measurement rightofuse asset lease liability using index rate lease commencement respect company’s transition new lease accounting standard index rate application date subsequent changes variable lease payments recorded variable lease expenses period incurred company elected practical expedient separate lease related nonlease components accounting purposes thus costs related nonlease components disclosed lease expense payments shortterm leases recognized income statement straightline basis lease term see note 5 leases detail property plant equipment net property plant equipment recorded cost expenditures major additions improvements capitalized routine repair maintenance costs expensed incurred interest related construction qualifying assets capitalized part construction costs material periods presented assets retired sold related cost accumulated depreciation removed accounts resulting gains losses generally included operating expense gains losses sales assets related exit activity reported within restructuring charges exitrelated activities consolidated statements operations depreciation recorded straightline basis estimated useful lives assets upon idling asset depreciation continues recorded leasehold improvements amortized shorter estimated useful lives remaining lease term august 31 2020 useful lives used depreciation amortization follows prepaid expenses company’s prepaid expenses reported within prepaid expenses current assets consolidated balance sheets totaled 23 million august 31 2020 2019 consisted primarily deposits capital projects prepaid insurance prepaid services prepaid property taxes assets company’s assets exclusive prepaid expenses assets relating certain retirement plans consist primarily spare parts equity investment receivables insurers debt issuance costs capitalized implementation costs cloud computing arrangements notes contractual receivables assets reported within either prepaid expenses current assets consolidated balance sheets based expected use either beyond current operating cycle one year reporting date see note 12 employee benefits detail company’s assets relating retirement plans company invested 6 million equity privatelyheld waste recycling entity fiscal 2017 equity investment readily determinable fair value therefore carried cost adjusted impairments observable price changes investment presented part amr reportable segment reported within assets consolidated balance sheets carrying value investment 6 million august 31 2020 2019 company recorded impairments upward downward adjustments carrying value investment since acquisition receivables insurers represent portion insured losses expected recovered company’s insurance carriers receivable recorded amount exceed recorded loss terms legally enforceable insurance contracts support insurance recovery disputed deemed collectible receivables insurers totaled 5 million 89 million august 31 2020 2019 respectively decrease fiscal 2020 resulting primarily full payment company’s insurers settlements lawsuits arising 2016 motor vehicle collision see “contingencies other” note 9 commitments contingencies discussion matter 67 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements debt issuance costs consist primarily costs incurred company enter modify credit facilities company reports deferred debt issuance costs within assets consolidated balance sheets amortizes interest expense straightline basis contractual term arrangement company’s cloud computing arrangements primarily comprise hosting arrangements service contracts whereby company gains remote access use enterprise software hosted vendor another third party asneeded basis period time exchange subscription fee subscription fees usually prepaid recorded expense period company access use software implementation costs cloud computing arrangements capitalized certain criteria met consist internal external costs directly attributable developing configuring cloud computing software intended use amortization capitalized implementation costs recorded straightline basis term cloud computing arrangement noncancellable period agreement together periods covered renewal options company reasonably certain exercise notes contractual receivables consist primarily advances entities business extracting scrap metal demolition activities well receivables counterparties sales equipment assets legal settlements repayment advances suppliers either cash scrap metal company performs periodic reviews notes contractual receivables identify credit risks assess overall collectibility receivables typically involves consideration value collateral case advances suppliers generally form scrap metal extracted demolition construction projects note contractual receivable considered impaired based current information events probable company unable collect amounts due accordance contractual terms agreement note contractual receivable identified impaired measured based present value payments expected received discounted receivable’s contractual interest rate arrangements solely dependent collateral repayment estimated fair value collateral less estimated costs sell carrying value receivable exceeds recoverable amount impairment recorded difference longlived assets company tests longlived tangible intangible assets impairment asset group level determined based lowest level identifiable cash flows largely independent cash flows groups assets liabilities operating lease rightofuse assets considered longlived assets subject impairment testing company’s metals recycling operations reported within amr asset group generally consists regional shredding export operation along surrounding feeder yards regions shredding export operations metals recycling yard asset group company’s auto parts operations generally auto parts store asset group combined steel manufacturing metals recycling operations within css single asset group company tests asset groups impairment certain triggering events changes circumstances indicate carrying value asset group may impaired carrying value asset group recoverable exceeds company’s estimate future undiscounted cash flows use eventual disposition asset group impairment loss recognized amount carrying value exceeds fair value impairment loss allocated longlived assets group pro rata basis using relative carrying amounts assets except loss allocated individual longlived asset group shall reduce carrying amount asset fair value fair value determined using one income market cost approaches depending nature asset group respect individual longlived assets changes circumstances may merit change estimated useful lives salvage values assets accounted prospectively period change assets useful life shortened based company’s plans dispose abandon asset end original useful life depreciation accelerated beginning determination made 68 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements longlived asset impairment charges recoveries accelerated depreciation reported consolidated statements operations within 1 asset impairment charges recoveries net 2 restructuring charges exitrelated activities related site closure fiscal 2020 company reported 6 million items within asset impairment charges recoveries net comprising primarily 2 million related abandonment obsolete machinery equipment assets 2 million related impairment two auto parts stores 2 million related accelerated depreciation due shortening useful lives certain metals recovery assets amr reportable segment investments joint ventures august 31 2020 company two 50owned joint venture interests accounted equity method accounting one joint venture interests presented part amr operations one interest presented part css operations joint venture within css sells recycled scrap metal operations within css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties august 31 2020 company’s investments equity method joint ventures generated 8 million cumulative undistributed earnings loss value investment joint venture recognized decline temporary management considers available evidence evaluate realizable value investments including length time extent fair value less cost financial condition nearterm prospects joint venture business company’s intent ability retain investment period time sufficient allow anticipated recovery fair value management determines otherthantemporary impairment exists investment written fair value establishes new cost basis company determines fair value using level 3 inputs fair value hierarchy using income approach based discounted cash flow analysis fiscal 2018 company declassified two 50 joint venture interests equity method classification result agreedupon dissolution joint venture entities joint venture interests previously presented part amr operations see note 17 related party transactions detail transactions joint ventures goodwill intangible assets net goodwill represents excess purchase price net amount identifiable assets acquired liabilities assumed business combination measured fair value company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired impairment goodwill tested reporting unit level reporting unit operating segment one level operating segment referred ‘component’ component operating segment required identified reporting unit component business discrete financial information available segment management regularly reviews operating results testing goodwill impairment company option first assess qualitative factors determine whether existence events circumstances leads determination morelikelythannot estimated fair value reporting unit less carrying amount company elects perform qualitative assessment determines impairment morelikelythannot company required perform quantitative impairment test otherwise analysis required company also may elect perform qualitative assessment instead proceed directly quantitative impairment test performing quantitative impairment test company applies onestep quantitative test records amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit company performs quantitative goodwill impairment test estimates fair value reporting unit using income approach based present value expected future cash flows including terminal value utilizing marketbased weighted average cost capital “wacc” determined separately reporting unit determination fair value involves use estimates assumptions including revenue growth rates driven future ferrous nonferrous commodity price sales volume expectations gross margins selling general administrative expense relative total revenues capital expenditures working capital requirements discount rate wacc tax rate terminal growth rate benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting units’ valuation company uses market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium company record goodwill impairment charges periods presented 69 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements company tests indefinitelived intangible assets impairment first assessing qualitative factors determine whether necessary perform quantitative impairment test company believes result qualitative assessment morelikelythannot fair value indefinitelived intangible asset less carrying amount quantitative impairment test required otherwise testing required company record impairment charges indefinitelived intangible assets periods presented see note 7 goodwill intangible assets net detail business acquisitions company recognizes assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured fair values date contingent purchase consideration recorded fair value date acquisition excess purchase price fair value net assets acquired recorded goodwill within one year date acquisition company may update value allocated assets acquired liabilities assumed resulting goodwill balance result information received regarding valuation assets liabilities available time purchase measuring assets liabilities fair value requires company determine price would paid third party market participant based highest best use assets interests acquired acquisition costs expensed incurred company acquired certain assets auto recycling business northern california fiscal 2019 certain assets metals recycling business columbus georgia fiscal 2018 acquisitions material company’s financial position results operations pro forma operating results acquisitions presented since aggregate results would significantly different reported results business acquisitions fiscal 2020 see note 7 goodwill intangible assets net detail restructuring charges exitrelated activities restructuring charges consist severance contract termination restructuringrelated costs liability severance costs typically recognized plan termination communicated affected employees measured fair value communication date liability contract termination restructuringrelated costs measured fair value period liability incurred exitrelated activities consist asset impairments connection closure certain operations sites net gains exitrelated disposals accrued workers’ compensation costs company selfinsured significant majority workers’ compensation claims exposure limited various stoploss insurance policies company estimates costs workers’ compensation claims based nature injury incurred guidelines established applicable state accrual recorded based upon amount unpaid claims balance sheet date accrued amounts recorded individual claims reviewed periodically treatment progresses adjusted reflect additional information becomes available estimated cost claims incurred reported included accrual company accrued 8 million estimated cost unpaid workers’ compensation claims august 31 2020 2019 included accrued liabilities consolidated balance sheets corresponding workers’ compensation insurance receivables 4 million august 31 2020 2019 included current assets environmental liabilities company estimates future costs known environmental remediation requirements accrues undiscounted basis probable company incurred liability related costs reasonably estimated timing incurring estimated costs unknown company considers various factors estimating environmental liabilities adjustments liabilities recorded selling general administrative expense consolidated statements operations additional information becomes available affects estimated costs study remediate environmental issues expenditures made liabilities established legal costs incurred connection environmental contingencies expensed incurred 70 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements wide range estimated amounts reasonably established amount within range better estimate another low end range recorded financial statements number cases possible company may receive reimbursement insurance third parties site matter situations recoveries environmental remediation costs parties recognized realization claim recovery deemed probable amounts recorded environmental liabilities reviewed periodically assessment remediation progresses individual sites particular matters adjusted reflect additional information becomes available due evolving remediation technology changing regulations possible third party contributions subjective nature assumptions used factors amounts accrued could vary significantly amounts paid see “contingencies environmental” note 9 commitments contingencies detail loss contingencies company subject certain legal proceedings contingencies addition related environmental liabilities discussed note outcomes subject significant uncertainty company accrues estimated losses probable liability incurred amount loss reasonably estimated legal costs incurred connection loss contingencies expensed incurred company uses judgment evaluates whether loss contingency arising litigation unasserted claim disclosed recorded outcome legal proceedings contingencies inherently uncertain often difficult estimate accrued legal contingencies reported within accrued liabilities consolidated balance sheets see “contingencies other” note 9 commitments contingencies detail financial instruments company’s financial instruments include cash equivalents accounts receivable accounts payable debt company uses market approach value financial assets liabilities determined using available market information net carrying amounts cash equivalents accounts receivable accounts payable approximate fair value due shortterm nature instruments longterm debt primarily variable interest rates fair value estimated using observable inputs level 2 approximates carrying value fair value measurements fair value measured using inputs three levels fair value hierarchy classification within hierarchy determined based lowest level input significant fair value measurement three levels described follows • level 1 unadjusted quoted prices active markets identical assets liabilities • level 2 inputs quoted prices included within level 1 observable determination fair value asset liability either directly indirectly • level 3 unobservable inputs significant determination fair value asset liability developing fair value measurements company uses quoted market prices whenever available seeks maximize use observable inputs minimize use unobservable inputs quoted market prices available derivatives derivative contracts commodities used normal business operations settled physical delivery among criteria eligible may designated normal purchases normal sales contracts qualify normal purchases normal sales markedtomarket company use derivative instruments trading speculative purposes 71 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements foreign currency translation transactions assets liabilities company’s operations canada translated us dollars periodend exchange rate revenues expenses operations translated us dollars average exchange rate period cash flows operations translated us dollars using exchange rates effect time cash flows translation adjustments included determining net income period recorded accumulated comprehensive income separate component shareholders’ equity foreign currency transaction gains losses generated effects exchange rate changes transactions denominated currency functional currency gains losses foreign currency transactions generally included determining net income period company reports gains losses within expense income net consolidated statements operations net realized unrealized foreign currency transaction gains losses material fiscal 2020 2019 2018 common stock share class b common stock entitled one vote additionally share class b common stock may converted one share class common stock company reserves one share class common stock share class b common stock outstanding currently meaningful distinctions rights holders class shares class b shares share repurchases company accounts repurchase stock par value shares repurchased deemed retired upon retirement shares company records difference weighted average cost shares par value stock adjustment additional paidin capital excess recorded retained earnings additional paidin capital sufficient revenue recognition company recognizes revenue upon satisfying promises transfer goods services customers terms contracts nearly promises referred performance obligations consist transfer physical goods including ferrous nonferrous recycled scrap metal auto bodies auto parts finished steel products customers performance obligations satisfied point time company transfers control goods customer nearly cases title risk loss goods transfer customer timing transfer title risk loss dictated customary explicitly stated contract terms example company recognizes revenue partially loaded bulk shipments ferrous recycled scrap metal contractual terms support revenue recognition based transfer title risk loss significant majority company’s sales involve transfer control customer thus revenue recognition delivery customer’s destination example upon release goods shipper company’s billandhold arrangements involve transfer control customer goods segregated inventory company’s facility ready physical transfer customer shipping handling activities occur customer obtained control good accounted fulfillment costs rather additional promise contract shipping handling consideration freight revenue recognized control goods transfers customer freight expense accrued cost goods sold related revenue recognized certain regional markets company enters contracts whereby arranges brokers transfer scrap material scrap suppliers end customers transactions company obtains substantive control scrap material goods transferred end customer example arranging processing warehousing material company recognizes revenue equal gross amount consideration expects receive customer principal alternatively transactions company obtain substantive control scrap material product transferred end customer company recognizes revenue equal net amount consideration expects retain paying supplier purchase scrap material agent company agent transaction substantial majority brokerage arrangements nearly company’s sales contracts reflect market pricing time contract executed one year less generally provide shipment within 30 60 days price agreed upon customer company’s retail auto parts sales listed prices recognized point sale 72 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements company recognizes revenue based contractually stated selling prices quantities shipped net sales tax adjusted estimated claims discounts claims customary recycled scrap metal industry arise variances quantity quality delivered products revenue adjustments may required settlement claims exceeds original estimates discounts offered certain finished steel customers qualify variable consideration discounts contingent upon future events variable consideration arising discounts recognized upon transfer finished steel products customers based upon either expected value likely amount material years ended august 31 2020 2019 company experiences sales returns therefore material provisions returns made sales recognized years ended august 31 2020 2019 revenue adjustments related performance obligations satisfied previous periods material advertising costs company expenses advertising costs incurred advertising expense 5 million fiscal 2020 6 million fiscal 2019 2018 sharebased compensation company estimates grantdate fair value stockbased compensation awards based market closing price underlying class common stock date grant except performance share awards total shareholder return “tsr” market performance metric company estimates fair value using montecarlo simulation model company recognizes compensation expense awards net estimated forfeitures requisite service period compensation expense based grantdate fair value described except performance share awards nonmarket return capital employed “roce performance metric awards compensation expense based probable outcome achieving specified performance conditions company reassesses whether achievement roce performance metric probable reporting date see note 13 sharebased compensation detail income taxes income taxes accounted using asset liability method requires recognition taxes currently payable refundable recognition deferred tax assets liabilities future tax consequences events recognized one reporting period consolidated financial statements different reporting period tax returns tax credits recognized reduction income tax expense year credit arises valuation allowances recorded reduce deferred tax assets morelikelythannot tax benefit realized company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required tax benefits arising uncertain tax positions recognized morelikelythannot position sustained upon examination relevant tax authorities amount recognized financial statements largest amount tax benefit greater 50 percent likely realized upon ultimate settlement taxing authority full knowledge relevant information company recognizes interest penalties related uncertain tax positions income tax expense note 14 income taxes detail net loss income per share basic net loss income per share attributable ssi shareholders computed dividing net loss income attributable ssi shareholders weighted average number outstanding common shares period presented including vested deferred stock units “dsus” restricted stock units “rsus” meeting certain criteria diluted net loss income per share attributable ssi shareholders computed dividing net loss income attributable ssi shareholders weighted average number common shares outstanding assuming dilution potentially dilutive common shares include assumed vesting performance share rsu dsu awards using treasury stock method certain company’s performance share rsu awards excluded calculation diluted net loss income per share attributable ssi shareholders antidilutive however certain performance share rsu awards could dilutive future net income attributable noncontrolling interests deducted loss income continuing operations arrive loss income continuing operations attributable ssi shareholders purpose calculating loss income per share continuing operations attributable ssi shareholders see note 16 net loss income per share detail 73 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements use estimates preparation company’s consolidated financial statements accordance generally accepted accounting principles united states america “us gaap” requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date consolidated financial statements reported amounts revenue expenses reporting period examples include revenue recognition allowance doubtful accounts estimates contingencies including environmental liabilities legal liabilities goodwill longlived asset indefinitelived intangible asset valuation equity investments valuation certain sharebased awards asset valuation inventory measurement valuation pension plan assumptions assessment valuation deferred income taxes income tax contingencies actual results may differ estimated amounts concentration credit risk financial instruments potentially subject company significant concentration credit risk consist primarily cash equivalents accounts receivable notes contractual receivables majority cash equivalents maintained major financial institutions balances certain institutions exceeded federal deposit insurance corporation insured amount 250 thousand august 31 2020 concentration credit risk respect accounts receivable limited large number geographically diverse customers make company’s customer base company controls credit risk credit approvals credit limits credit insurance letters credit collateral cash deposits monitoring procedures company exposed residual credit risk respect open letters credit virtue possibility failure bank providing letter credit company 58 million 49 million open letters credit august 31 2020 2019 respectively note 3 recent accounting pronouncements company expect adoption future recently issued accounting pronouncements material impact consolidated financial statements note 4 inventories consisted following august 31 thousands 74 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 5 leases company’s operating leases real property underlying auto parts stores metals recycling facilities administrative offices generally noncancellable lease terms 5 10 years significant majority contain multiple renewal options 5 20 years renewal options company reasonably certain exercise included measurement lease term company’s finance leases operating leases involve primarily transportation equipment assets noncancellable lease terms less 10 years usually include renewal options company’s fiscal 2020 total lease cost 28 million consisting primarily operating lease expense 23 million shortterm lease expense 4 million components company’s total lease cost fiscal 2020 including finance lease amortization interest expense variable lease expense sublease income material individually aggregate substantial majority company’s total lease cost fiscal 2020 presented within cost goods sold consolidated statements operations rent expense 27 million fiscal 2019 2018 finance leaserelated assets liabilities consisted following thousands 1 presented net accumulated amortization 1 million august 31 2020 weighted average remaining lease terms weighted average discount rates company’s leases follows maturities lease liabilities fiscal year august 31 2020 follows thousands supplemental cash flow information noncash activity related leases follows thousands 75 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements 1 amounts include new leases adjustments lease balances result remeasurement result adopting new lease accounting guidance september 1 2019 using modified retrospective transition method company required present future minimum lease commitments capital leases operating leases previously disclosed company’s 2019 annual report form 10k accounted previous lease guidance principal payments capital lease obligations next five fiscal years thereafter august 31 2019 follows thousands table sets forth company’s future minimum obligations noncancellable operating leases august 31 2019 thousands 76 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 6 property plant equipment net property plant equipment net consisted following august 31 thousands depreciation expense property plant equipment includes amortization expense finance lease rightofuse assets 57 million 53 million 49 million years ended august 31 2020 2019 2018 respectively see note 5 leases additional disclosures finance leases note 7 goodwill intangible assets net acquisition goodwill second quarter fiscal 2019 company acquired certain assets auto recycling business northern california 2 million acquisition qualified business combination accounting guidance resulted recognition 2 million goodwill second quarter fiscal 2019 company allocated acquired goodwill reporting unit within amr operating segment carries nearly company’s goodwill impairment test company evaluates goodwill impairment annually july 1 upon occurrence certain triggering events substantive changes circumstances indicate fair value goodwill may impaired fourth quarter fiscal 2020 company performed annual goodwill impairment test july 1 2020 testing date balance company’s goodwill 169 million 1 million balance carried single reporting unit within amr company last performed quantitative impairment test goodwill carried reporting unit second quarter fiscal 2016 using measurement date february 1 2016 based changes market conditions related general economy metals recycling industry increase carrying amount reporting unit since last quantitative impairment test company elected perform qualitative assessment reporting unit instead proceeded directly quantitative impairment test quantitative impairment test entails estimating fair value reporting unit comparing reporting unit’s carrying amount company records amount goodwill impairment excess reporting unit’s carrying amount fair value exceed total amount goodwill allocated reporting unit company estimated fair value reporting unit within amr carrying 168 million goodwill july 1 2020 using income approach based present value expected future cash flows including terminal value utilizing marketbased wacc assessed specifically reporting unit determination fair value involves use estimates assumptions including revenue growth rates driven future ferrous nonferrous commodity price sales volume expectations gross margins selling general administrative expense relative total revenues capital expenditures working capital requirements discount rate wacc tax rate terminal growth rate benefits associated taxable transaction synergistic benefits available market participants addition corroborate reporting unit’s valuation company used market approach based earnings multiple data reconciliation company’s estimate aggregate fair value reporting units company’s market capitalization including consideration control premium reporting unit within amr subject quantitative impairment test estimated fair value reporting unit exceeded carrying amount approximately 29 july 1 2020 projections used income approach reporting unit took consideration impact current market conditions ferrous nonferrous recycled metals cost obtaining adequate supply flows scrap metal including endoflife vehicles recent trends retail auto parts sales projections assumed limited 77 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements recovery operating margins current levels multiyear period wacc used income approach valuation reporting unit 111 terminal growth rate used 20 assuming components fair value estimate held constant increase wacc 228 basis points weaker anticipated improvements operating margins could resulted failure quantitative impairment test reporting unit company reconciled market capitalization aggregated estimated fair value reporting units including consideration control premium representing estimated amount market participant would pay obtain controlling interest company implied control premium resulting difference companys market capitalization based average trading price companys class common stock twoweek period ended july 1 2020 increased estimated fair value noncontrolling interests ii higher aggregated estimated fair value reporting units within historical range average mean premiums observed historical transactions within steelmaking scrap processing metals industries company identified specific reconciling items including market participant synergies tax amortization benefits inprocess technology investments supported implied control premium july 1 2020 gross change carrying amount goodwill years ended august 31 2020 2019 follows thousands accumulated goodwill impairment charges 471 million august 31 2020 2019 2018 intangible assets net following table presents company’s intangible assets august 31 thousands 1 intangible assets subject amortization august 31 2019 related leasehold interests reclassified operating lease rightofuse assets adoption new lease accounting guidance september 1 2019 2 indefinitelived intangibles include trade names permits licenses 78 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements total intangible asset amortization expense 1 million years ended august 31 2020 2019 2018 impairments intangible assets recognized periods presented estimated amortization expense based current intangible asset balances next five fiscal years thereafter follows thousands note 8 debt consisted following august 31 thousands 1 prior adoption new lease accounting guidance september 1 2019 company’s finance lease liabilities classified capital lease obligations company’s capital lease obligations august 31 2019 presented line item company’s senior secured revolving credit facilities provide revolving loans 700 million c15 million mature august 2023 pursuant credit agreement bank america na administrative agent lenders party thereto 700 million credit facility includes 50 million sublimit letters credit 25 million sublimit swingline loans 50 million sublimit multicurrency borrowings august 31 2020 interest rates outstanding indebtedness credit agreement based company’s option either london interbank offered rate “libor” canadian equivalent c loans plus spread 125 350 amount spread based pricing grid tied company’s ratio consolidated funded debt ebitda defined credit agreement greater prime rate b federal funds rate plus 050 c daily rate equal onemonth libor plus 175 case plus spread 000 250 based pricing grid tied company’s consolidated funded debt ebitda ratio addition commitment fees payable unused portion credit facilities rates 020 050 based pricing grid tied company’s ratio consolidated funded debt ebitda june 30 2020 large part due uncertainties resulting effects coronavirus disease “covid19” company entered amendment existing credit agreement bank america na administrative agent lenders party thereto principal changes existing credit agreement effected amendment reduction consolidated fixed charge coverage minimum ratio 150 100 minimum ratio 120 100 fiscal quarter ending august 31 2020 minimum ratio 110 100 fiscal quarters ending november 30 2020 february 28 2021 may 31 2021 ii introduction minimum consolidated asset coverage ratio 100 fiscal quarters ending august 31 2020 may 31 2021 amendment provides revisions definition libor include 050 floor mechanics parties may replace benchmark interest rate used agreement libor one rates based secured overnight financing rate administered federal reserve bank new york 79 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements august 31 2020 2019 borrowings outstanding credit facilities 90 million 97 million respectively weighted average interest rate amounts outstanding credit facilities 459 378 august 31 2020 2019 respectively company’s credit agreement contains certain customary covenants including covenants limit ability company subsidiaries enter certain types transactions financial covenants credit agreement include consolidated fixed charge coverage ratio defined fourquarter rolling sum consolidated ebitda less defined maintenance capital expenditures certain environmental expenditures divided consolidated fixed charges b consolidated leverage ratio defined consolidated funded indebtedness divided sum consolidated net worth consolidated funded indebtedness c consolidated asset coverage ratio defined consolidated asset values divided consolidated funded indebtedness company’s obligations credit agreement guaranteed substantially subsidiaries credit facilities related guarantees secured senior first priority liens certain company’s subsidiaries’ assets including equipment inventory accounts receivable debt obligations primarily relate equipment purchase contract consideration includes obligation make future monthly payments vendor form licensing fees accounting purposes obligation treated partial financing purchase price equipment vendor monthly payments commence equipment placed service continue period four years thereafter company imputes interest obligation rate 425 reflecting estimated rate would recorded market transaction similar terms principal payments company’s bank revolving credit facilities debt obligations next five fiscal years thereafter follows thousands see note 5 leases additional disclosures finance lease obligations including payments next five fiscal years thereafter company maintains standby letters credit provide certain obligations including workers’ compensation performance bonds company 10 million outstanding arrangements august 31 2020 2019 note 9 commitments contingencies environmental changes company’s environmental liabilities years ended august 31 2020 2019 follows thousands 80 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements recycling operations august 31 2020 2019 company’s recycling operations environmental liabilities 53 million 52 million respectively potential remediation locations conducted business environmental liabilities historical recent activities liabilities relate investigation potential future remediation contaminated sediments riverbanks soil contamination groundwater contamination storm water runoff issues natural resource damages except portland harbor certain liabilities discussed legacy environmental loss contingencies immediately liabilities individually material site portland harbor december 2000 company notified united states environmental protection agency “epa” comprehensive environmental response compensation liability act “cercla” one potentially responsible parties “prps” operate formerly owned operated sites part adjacent portland harbor superfund site “site” precise nature extent cleanup specific areas within site parties involved timing specific remedial action allocation costs cleanup among responsible parties yet determined process site investigation remedy selection identification additional prps allocation costs underway number years significant uncertainties remain unclear extent company liable environmental costs natural resource damage claims third party contribution damage claims respect site company participated certain preliminary site study efforts party consent order entered epa certain prps referred “lower willamette group” “lwg” remedial investigationfeasibility study “rifs” fiscal 2007 company certain parties agreed interim settlement lwg company made cash contribution lwg rifs lwg indicated incurred 155 million investigationrelated costs approximately 18 year period working rifs following submittal draft ri fs documents epa largely rejected epa took rifs process company joined approximately 100 prps including lwg members voluntary process establish allocation costs site including costs incurred lwg rifs process lwg members also commenced federal court litigation stayed seeking bring additional parties allocation process january 2008 portland harbor natural resource trustee council “trustee council” invited company prps participate funding implementing natural resource injury assessment site following meetings among trustee council prps funding participation agreements negotiated participating prps including company agreed fund first phase threephase natural resource damage assessment phase 1 included development natural resource damage assessment plan “ap” implementation several early studies substantially completed 2010 december 2017 company joined participating prps agreeing fund phase 2 natural resource damage assessment includes implementation ap develop information sufficient facilitate early settlements trustee council phase 2 participants identification restoration projects funded settlements late may 2018 trustee council published notice intent proceed phase 3 involve full implementation ap final injury damage determination company proceeding process established trustee council regarding early settlements phase 2 uncertain whether company enter early settlement natural resource damages costs may incur early settlement january 30 2017 one trustees confederated tribes bands yakama nation withdrew council 2009 filed suit approximately 30 parties including company seeking reimbursement certain past future response costs connection remedial action site recovery assessment costs related natural resources damages releases site multnomah channel lower columbia river parties filed various motions dismiss stay suit august 2019 court issued order denying motions dismiss staying action company intends defend claims suit sufficient information determine likelihood loss matter estimate amount damages sought amount damages could allocated company estimates cost remedial action cleanup inriver portion site varied widely various drafts fs epa’s final fs issued june 2016 ranging approximately 170 million 25 billion net present value depending remedial alternative number factors comments submitted epa company certain stakeholders identified number serious concerns regarding epa’s risk remedial alternatives assessments cost estimates scheduling assumptions conclusions regarding feasibility effectiveness remediation technologies 81 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements january 2017 epa issued record decision “rod” identified selected remedy site selected remedy modified version one alternative remedies evaluated epa’s fs expanded include additional work greater cost epa estimated total cost selected remedy 17 billion net present value cost 105 billion 7 discount rate estimated construction period 13 years following completion remedial designs rod epa stated cost estimate orderofmagnitude engineering estimate expected within 50 30 actual project cost changes cost elements likely occur result new information data collected engineering design company identified number concerns regarding remedy described rod based data decade old epa’s estimates costs time required implement selected remedy ongoing questions regarding cost effectiveness technical feasibility use stale data uncertain whether rod implemented issued addition rod determine allocate responsibility remediation costs among prps rod epa acknowledged much data used preparing rod decade old would need updated new round “baseline” sampling conducted prior remedial design phase accordingly rod provided additional preremedial design investigative work baseline sampling conducted order provide baseline current conditions delineate particular remedial actions specific areas within site additional sampling required prior proceeding next phase process remedial design remedial design phase engineering phase additional technical information data collected identified incorporated technical drawings specifications developed subsequent remedial action moreover rod provided sitewide cost estimates provide sufficient detail estimate costs specific sediment management areas within site following issuance rod epa proposed prps subgroup prps perform additional investigative work identified rod new consent order december 2017 company three prps entered new administrative settlement agreement order consent epa perform preremedial design investigation baseline sampling twoyear period company estimated share costs performing work would approximately 2 million accrued fiscal 2018 costs fully covered existing insurance coverage thus company also recorded insurance receivable 2 million fiscal 2018 resulting net impact company’s consolidated results operations preremedial design investigation baseline sampling work completed report evaluating data submitted epa june 17 2019 evaluation report concludes site conditions improved substantially since data forming basis rod collected decade ago analysis contained report significant implications remedial design remedial action site epa reviewed report finding limited corrections data suitable quality generally acceptable stating data used addition existing forthcoming designlevel data inform implementation rod however epa agree data analysis warrants change remedy time reaffirmed commitment proceed remedial design company prps disagree epa’s position use recent data continue pursue limited critical changes selected remedy site remedial design phase epa encouraged prps step forward individually groups enter consent agreements perform remedial design covering entire site proposed dividing site eight ten subareas remedial design certain prps since executed consent agreements remedial design work covering little half remedial action areas site epa’s refusal date modify remedy reflect current data site conditions concerns terms consent agreement company elected enter consent agreement remedial design respect subareas site march 26 2020 epa issued unilateral administrative order uao company mmgl llc “mmgl” unaffiliated company remedial design work portion one epa identified subareas within site designated river mile 35 east project area following conference company discuss uao written comments submitted company epa made limited modifications uao issued amendment uao april 27 2020 effective date may 4 2020 required uao company notified epa intent comply uao effective date reserving sufficient cause defenses failure comply uao without sufficient cause could subject company significant penalties treble damages pursuant optimized remedial design timeline set forth uao epa’s expected schedule completion remedial design work four years epa estimated cost work approximately 4 million company agreed respondent uao mmgl company lead performance responsible portion costs work remedial design uao also entered agreement another prp pursuant prp agreed fund portion costs work agreements allocation liability claims associated site respondents respect third party company estimated share costs performing work uao would approximately 3 million recorded environmental liabilities selling general administrative expense consolidated financial statements third quarter fiscal 2020 company insurance policies believes provide reimbursement costs incurs remedial design penalties 82 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements company also expects pursue future allocation contribution prps portion remedial design costs asset relating recovery costs recognized upon meeting certain accounting requirements yet met end fiscal 2020 company’s environmental liabilities august 31 2020 2019 include 4 million 1 million respectively relating portland harbor except certain early action projects company involved remediation activities expected commence number years moreover remediation activities site expected sequenced order timing sequencing determined addition discussed responsibility implementing funding remedy determined separate allocation process ongoing company expects next major stage allocation process proceed parallel remedial design process final remedial actions yet designed determination amount natural resource damages allocation among prps costs investigations remedial action costs natural resource damages company believes possible reasonably estimate amount range costs likely reasonably possible incur connection site although costs could material company’s financial position results operations cash flows liquidity among facts currently developed detailed information history ownership nature uses activities operations performed property within site factors play substantial role determining allocation investigation remedy costs among prps company insurance policies believes provide reimbursement costs incurs defense remedial design remedial action mitigation natural resource damages claims connection site policies jointly insure company mmgl successor former subsidiary company mmgl negotiated settlement certain insurers claims related site continue seek settlements insurers formed qualified settlement fund “qsf” became operative fourth quarter fiscal 2020 hold settlement amounts funds needed pay reimburse costs incurred company mmgl connection site insurance policies funds qsf may cover costs company may incur qsf unconsolidated variable interest entity “vie” primary beneficiary two parties unrelated one appointed company one appointed mmgl share equally power direct activities vie significantly impact economic performance company’s appointee comanage vie executive officer company neither mmgl appointee comanage vie related party company purpose primary beneficiary assessment otherwise oregon department environmental quality separately providing oversight voluntary investigations source control activities company involving company’s sites adjacent portland harbor focused controlling current “uplands” releases contaminants willamette river liabilities established connection investigations extent contamination company’s responsibility contamination yet determined legacy environmental loss contingencies company’s environmental loss contingencies august 31 2020 2019 portland harbor include actual possible investigation cleanup costs historical contamination sites currently formerly owned formerly operated company sites company may responsibility costs due past disposal activities “legacy environmental loss contingencies” legacy environmental loss contingencies relate potential remediation waterways soil groundwater contamination may also involve natural resource damages governmental fines penalties claims third parties personal injury property damage company notified may potentially responsible party certain sites investigation cleanup activities ongoing may required future company recognizes liability matters loss probable reasonably estimated investigation cleanup activities ongoing company yet identified responsibility contamination yet identified reasonably possible company may need recognize additional liabilities connection sites company cannot currently reasonably estimate possible loss range loss absent additional information developments additional liabilities individually aggregate may material adverse effect company’s results operations financial condition cash flows fiscal 2018 company accrued 4 million expense corporate division estimated costs related remediation shredder residue disposed around 1970s third party sites located near investigation activities conducted oversight applicable state regulatory agency august 31 2020 2019 company 4 million 83 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements accrued matter reasonably possible company may recognize additional liabilities connection matter time losses probable reasonably estimated company currently estimates range reasonably possible losses related matter excess current accruals zero 28 million based range remedial alternatives subject development approval regulators specific remedy implementation plan however subsequent development remedial alternatives company performed additional investigative activities new state requirements potential impact required remedial actions associated cost estimates pending analysis discussion company regulators company investigating whether portion current future losses related matter incurred covered existing insurance coverage may offset contributions responsible parties addition company’s loss contingencies august 31 2020 2019 include 8 million estimated costs related remediation soil groundwater conditions including penalties amount 27 million connection closed facility owned previously operated indirect whollyowned subsidiary investigation activities conducted oversight applicable state regulatory agency company also working local officials respect protection public water supplies reasonably possible company may recognize additional liabilities connection matter time additional losses probable reasonably estimated however company cannot reasonably estimate time possible additional loss range possible additional losses associated matter pending completion ongoing studies determination remediation plans part activities relating protection public water supplies company agreed reimburse municipality certain studies plans reasonably possible may incur additional liabilities costs future including wellhead treatment case costs installation wellhead treatment incurred could range 10 million 13 million steel manufacturing operations company’s steel manufacturing operations known environmental liabilities august 31 2020 2019 steel mill’s electric arc furnace generates dust “eaf dust” classified hazardous waste epa zinc lead content result company captures eaf dust ships specialized rail cars firms apply treatments allow ultimate disposal eaf dust company’s steel mill operating permit issued title v clean air act amendments 1990 governs certain air quality standards permit based annual production capacity approximately 950 thousand tons company’s permit first issued 1998 since renewed multiple times recently april 2020 extending permit april 1 2025 summary environmental contingencies respect environmental contingencies portland harbor superfund site legacy environmental loss contingencies discussed separately management currently believes adequate provision made potential impact environmental contingencies historically amounts company ultimately paid remediation activities material given period assurance amounts paid material future contingencies schnitzer southeast llc whollyowned subsidiary company “sse” sse employee company one company’s insurance carriers named defendants five separate wrongful death lawsuits filed state georgia arising accident 2016 alabama involving tractor trailer driven sse employee owned sse fiscal 2019 company settled three five lawsuits total 35 million first quarter fiscal 2020 company settled two remaining lawsuits total 68 million aggregate settlement amount 103 million substantially covered insurance resulting net impact company’s consolidated results operations august 31 2019 company accrued loss contingencies offsetting insurance receivables related lawsuits totaling 83 million full amount accrued august 31 2019 paid company’s insurers first quarter fiscal 2020 contingencies relation matter addition legal proceedings relating contingencies described company party various legal proceedings arising normal course business company recognizes liability matters loss probable reasonably estimated company anticipate resolution legal proceedings arising normal course business taking consideration expected insurance recoveries material adverse effect results operations financial condition cash flows 84 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 10 accumulated comprehensive loss components accumulated comprehensive loss net tax follows august 31 2020 2019 2018 thousands second quarter fiscal 2018 company adopted accounting standard update allowed reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting tax cuts jobs act “tax act” enacted december 22 2017 reclassifications aoci retained earnings stranded tax effects year ended august 31 2018 individually aggregate material reclassifications accumulated comprehensive loss earnings individually aggregate material impacted captions consolidated statements operations periods presented 85 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 11 revenue disaggregation revenues table illustrates company’s revenues disaggregated major product sales destination reportable segment thousands 1 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap receivables contracts customers revenue accounting standard defines receivable entity’s right consideration unconditional meaning passage time required payment due august 31 2020 2019 receivables contracts customers net allowance doubtful accounts totaled 135 million 142 million respectively representing 97 total accounts receivable reported consolidated balance sheets reporting date contract liabilities contract consideration received customer prior revenue recognition recorded contract liability recognized revenue company satisfies related performance obligation terms contract company’s contract liabilities consist almost entirely customer deposits recycled scrap metal sales contracts reported within accounts payable consolidated balance sheets totaled 8 million 3 million august 31 2020 2019 respectively unsatisfied performance obligations reflected contract liabilities relate contracts original expected durations one year less therefore disclosed fiscal year ended august 31 2020 company reclassified 3 million customer deposits august 31 2019 revenues result satisfying performance obligations year fiscal year ended 86 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements august 31 2019 company reclassified 8 million customer deposits august 31 2018 revenues result satisfying performance obligations year note 12 employee benefits company certain subsidiaries contribute qualified nonqualified retirement plans covering substantially employees plans include defined benefit pension plan supplemental executive retirement benefit plan “serbp” multiemployer pension plans defined contribution plans defined benefit pension plan supplemental executive retirement benefit plan company maintains qualified defined benefit pension plan certain nonunion employees effective june 30 2006 company froze plan ceased accruing benefits employee service company reflects funded status defined benefit pension plan net asset liability consolidated balance sheets changes funded status recognized comprehensive income company amortizes component net periodic pension benefit cost portion net gain loss reported within accumulated comprehensive loss beginningofyear net gain loss exceeds 5 greater benefit obligation market value plan assets net periodic pension benefit cost material years presented report fair value plan assets 21 million 20 million august 31 2020 2019 respectively projected benefit obligation 18 million 17 million august 31 2020 2019 respectively plan fully funded plan assets exceeding projected benefit obligation 4 million 3 million august 31 2020 2019 respectively fair value hierarchy plan assets comprised level 1 level 2 investments august 31 2020 2019 level 1 investments valued based quoted market prices identical securities principal market level 2 investments corporate bonds valued yields currently available comparable securities issuers similar credit ratings significant contributions expected made defined benefit pension plan future however changes discount rate actual investment returns lower longterm expected return plan assets could result need company make additional contributions assumed discount rate used calculate projected benefit obligation 238 283 august 31 2020 2019 respectively company estimates future annual benefit payments 1 million 4 million per year company also nonqualified serbp certain executives restricted trust fund established assets invested life insurance policies used plan benefits although fund subject claims company’s general creditors trust fund included assets current portion pension liability included accrued liabilities noncurrent portion pension liability included longterm liabilities company’s consolidated balance sheets trust fund valued 3 million august 31 2020 4 million august 31 2019 trust fund assets’ gains losses included income net company’s consolidated statements operations benefit obligation unfunded amount 5 million august 31 2020 2019 net periodic pension cost serbp material years ended august 31 2020 2019 2018 defined benefit pension plan serbp material consolidated financial statements disclosures required us gaap omitted multiemployer pension plans company contributes 14 multiemployer pension plans accordance collective bargaining agreements multiemployer pension plans defined benefit plans sponsored multiple employers accordance one collective bargaining agreements plans jointly managed trustees include representatives management labor unions contributions plans made based upon fixed rate per hour worked agreed contributing employers unions collective bargaining benefit levels set joint board trustees based advice independent actuary regarding level benefits agreedupon contributions expected support extent pension obligation participating employers unfunded company may required make additional contributions future fund obligations one multiemployer plans company contributes steelworkers western independent shops pension plan “wispp” ein 900169564 plan 001 benefiting union employees company’s steel manufacturing operations covered collective bargaining agreement expire march 31 2022 october 1 2019 wispp certified plan’s actuaries green zone defined pension protection act 2006 company contributed 3 million wispp years ended august 31 2020 2019 2018 contributions represented 5 total contributions wispp year 87 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements 2004 internal revenue service “irs” approved sevenyear extension period wispp may amortize unfunded liabilities conditioned upon maintenance certain minimum funding levels 2014 wispp obtained relief specified funding requirements irs requires wispp meet minimum funded percentage valuation date achieve funded percentage 100 october 1 2029 based recent actuarial valuation wispp funded percentage using valuation method prescribed irs satisfied minimum funded percentage requirement company contributions multiemployer plans 6 million years ended august 31 2020 2019 5 million year ended august 31 2018 defined contribution plans company several defined contribution plans covering certain employees company contributions defined contribution plans totaled 4 million years ended august 31 2020 2019 2018 note 13 sharebased compensation company’s 1993 stock incentive plan amended “sip” established provide grant stockbased compensation awards employees consultants directors sip authorizes grant restricted shares restricted stock units performancebased awards including performance share awards stock options stock appreciation rights stockbased awards sip administered compensation committee company’s board directors “compensation committee” 122 million shares class common stock reserved issuance sip 27 million available future grants august 31 2020 sharebased compensation expense recognized cost goods sold selling general administrative expense applicable 10 million 17 million 19 million years ended august 31 2020 2019 2018 respectively restricted stock units “rsus” years ended august 31 2020 2019 2018 compensation committee granted 470917 261642 252865 rsus respectively company’s key employees sip rsus generally vest 20 per year five years commencing october 31 year grant rsu entitles recipient receive one share class common stock upon vesting estimated fair value rsu based market closing price underlying class common stock date grant weighted average grant date fair value rsus granted 1488 2761 2660 per unit years ended august 31 2020 2019 2018 respectively total estimated fair value rsus granted years ended august 31 2020 2019 2018 7 million rsus granted year ended august 31 2020 compensation expense associated rsus recognized requisite service period awards net forfeitures participants retirement eligible grant date become retirement eligible fiveyear term award longer two years period ending date retirement eligibility achieved awards granted years ended august 31 2019 2018 rsu compensation expense recognized requisite service period award net estimated forfeitures date retirement eligibility achieved end service period rsu compensation expense 4 million 6 million 7 million years ended august 31 2020 2019 2018 respectively summary company’s rsu activity year ended august 31 2020 follows total fair value rsus vested based market closing price underlying class common stock vesting date 6 million 7 million 8 million years ended august 31 2020 2019 2018 respectively august 31 2020 total unrecognized compensation costs related unvested rsus amounted 10 million expected recognized weighted average period three years 88 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements performance share awards sip authorizes performancebased awards certain employees subject certain conditions restrictions vesting subject continued employment participant company achievement certain performance goals established compensation committee participant generally must employed company october 31 following end performance period receive award payout however adjusted awards paid employment terminates earlier account qualifying employment termination event death disability retirement termination without cause first year performance period sale company reportable segments participant works compensation committee determined performance share awards granted fiscal years 2020 2019 2018 comprise two separate distinct awards different vesting conditions awards vest threshold level specified metric met end approximately threeyear performance period award performance metrics company’s total shareholder return “tsr” relative designated peer group company’s return capital employed “roce” awards share payouts depend extent performance goals achieved number shares participant receives equal award granted multiplied payout factor ranges threshold 50 maximum 200 tsr award stipulates certain limitations payout event payout reaches defined ceiling level company’s tsr negative company estimates fair value tsr awards using montecarlo simulation model utilizing several key assumptions including following tsr awards granted fiscal years ended august 31 compensation expense tsr awards based grantdate fair value net estimated forfeitures recognized requisite service period date qualifying employment termination event entitles recipient prorated award end service period regardless whether market condition satisfied compensation expense tsr awards 3 million 4 million 3 million years ended august 31 2020 2019 2018 respectively fair value roce awards granted based market closing price underlying class common stock grant date company accrues compensation cost roce awards based probable outcome achieving specified performance conditions net estimated forfeitures requisite service period date qualifying employment termination event entitles recipient prorated award end service period company reassesses whether achievement roce performance conditions probable reporting date probable actual performance results exceed stated target performance conditions company accrues additional compensation cost additional performance shares awarded upon reassessment longer probable actual performance results exceed stated target performance conditions longer probable target performance conditions achieved company reverses recognized compensation cost shares longer probable issued performance conditions achieved end service period related compensation cost previously recognized reversed compensation expense roce awards performance share awards nonmarket performance metric granted prior fiscal 2018 2 million 6 million 8 million years ended august 31 2020 2019 2018 respectively years ended august 31 2020 2019 2018 compensation committee granted total 337770 165834 tsr 171936 roce 254620 123812 tsr 130808 roce 246161 119763 tsr 126398 roce performance share awards respectively weighted average grant date fair value per share performance share awards granted 2132 2837 2732 years ended august 31 2020 2019 2018 respectively 89 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements summary company’s performancebased awards activity year ended august 31 2020 follows 1 reflects net number awards achieved target levels based actual performance measured end performance period total fair value performance share awards vested based market closing price company’s class common stock vesting date 10 million 13 million years ended august 31 2020 2019 respectively performance shares vested fiscal year 2018 august 31 2020 total unrecognized compensation costs related unvested performance share awards amounted 6 million expected recognized weighted average period two years deferred stock units “dsus” deferred compensation plan nonemployee directors “dsu plan” provides issuance dsus nonemployee directors granted dsu plan dsu gives director right receive one share class common stock future date immediately following annual meeting shareholders nonemployee director receive dsus become fully vested day next annual meeting subject continued service board compensation expense associated dsus granted recognized requisite service period awards company issue class common stock director pursuant vested dsus lump sum january first year director ceases director company subject right director elect installment payment program dsu plan dsus granted years ended august 31 2020 2019 2018 totaled 41592 shares 31218 shares 21806 shares respectively compensation expense associated dsus total value shares vested years ended august 31 2020 2019 2018 well unrecognized compensation expense august 31 2020 material note 14 income taxes loss income continuing operations income taxes follows years ended august 31 thousands 90 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements income tax expense benefit continuing operations consisted following years ended august 31 thousands reconciliation difference federal statutory rate company’s effective tax rate years ended august 31 follows effective tax rate company’s effective tax rate continuing operations fiscal 2020 expense 86 compared 232 fiscal 2019 reconciling differences company’s effective tax rate continuing operations fiscal 2020 us federal statutory rate 21 exaggerated due company’s nearbreakeven pretax loss continuing operations 2 million fiscal 2020 despite none reconciling differences individually material company’s effective tax rate continuing operations fiscal 2020 lower us federal statutory rate reflective income tax expense pretax loss continuing operations primarily due partially offsetting impacts individually immaterial permanent differences nondeductible expenses research development credits effects unrecognized tax benefits aggregate impact state taxes company reported tax benefit pretax income fiscal 2018 primarily due release valuation allowances certain deferred tax assets resulting recognition discrete tax benefits totaling 37 million fiscal 2018 impact tax act enacted law december 22 2017 91 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements march 27 2020 president united states signed enacted law coronavirus aid relief economic security “cares” act contains several income tax provisions well measures aimed assisting businesses impacted economic effects covid19 pandemic among provisions cares act removes certain limitations utilization net operating losses “nols” allows carrybacks certain past future nols company applied nol carryback provisions cares act nol fiscal 2020 resulted reclassification 11 million nol deferred income tax asset refundable income taxes recognition 1 million income tax benefit third quarter fiscal 2020 company anticipate income tax provisions cares act material impact financial statements deferred tax assets liabilities deferred tax assets liabilities comprised following august 31 thousands august 31 2020 foreign operating loss carryforwards 19 million expire used 2023 2039 federal state credit carryforwards expire used 2020 2041 valuation allowances company assesses realizability deferred tax assets quarterly basis analysis potential sources future taxable income including prior year taxable income available absorb carryback tax losses reversals existing taxable temporary differences tax planning strategies forecasts taxable income company considers negative positive evidence including weight evidence determine valuation allowances deferred tax assets required fiscal 2018 company released valuation allowances certain us federal state canadian deferred tax assets resulting discrete tax benefits totaling 37 million release valuation allowances result sufficient positive evidence time including cumulative income company’s us canadian tax jurisdictions recent years projections future taxable income based primarily companys improved financial performance morelikelythannot deferred tax assets realized company continues maintain valuation allowances certain state canadian puerto rican deferred tax assets canadian deferred tax assets company continues maintain valuation allowance relate indefinitelived assets 92 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements accounting uncertainty income taxes following table summarizes activity related company’s reserve unrecognized tax benefits excluding interest penalties years ended august 31 thousands company anticipate material changes reserve next 12 months recognized amounts taxrelated penalties interest material periods presented company files federal state income tax returns us foreign tax returns puerto rico canada us federal income tax returns fiscal years 2013 2019 remain subject examination statute limitations note 15 restructuring charges exitrelated activities january 8 2020 subsequent end first quarter fiscal 2020 company committed certain restructuring initiatives aimed reducing annual operating expenses primarily selling general administrative corporate amr css primarily reductions nontrade procurement spend including outside professional services lower employeerelated expenses nonheadcount measures additionally company incurred professional service costs related transition internal organizational reporting structure functionally based integrated model fiscal 2020 company incurred aggregate restructuring charges exitrelated costs approximately 9 million connection initiatives comprising severance costs 2 million costs associated lease contract termination 1 million professional services costs 6 million substantial majority restructuring charges related initiatives recognized fiscal 2020 required us make cash payments note 16 net loss income per share following table sets forth information used compute basic diluted net income per share attributable ssi shareholders years ended august 31 thousands common stock equivalent shares 629223 92873 62019 considered antidilutive excluded calculation diluted net loss income per share attributable ssi shareholders years ended august 31 2020 2019 2018 respectively note 17 related party transactions company purchases recycled metal joint venture operations prices approximate fair market value purchases totaled 11 million 15 million 16 million years ended august 31 2020 2019 2018 respectively 93 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements note 18 segment information accounting standards reporting information operating segments define operating segment component enterprise engages business activities may earn revenues incur expenses discrete financial information available evaluated regularly chief operating decision maker deciding allocate resources assessing performance amr acquires recycles ferrous nonferrous scrap metal sale foreign domestic metal producers processors brokers procures salvaged vehicles sells serviceable used auto parts vehicles network selfservice auto parts stores auto parts stores also supply company’s shredding facilities auto bodies processed saleable recycled scrap metal css operates steel minimill produces range finished steel long products using ferrous recycled scrap metal raw materials css’s steel mill obtains substantially scrap metal raw material requirements integrated metals recycling joint venture operations css’s metals recycling operations also sell recycled metal external customers primarily export markets company holds noncontrolling ownership interests joint ventures either metals recycling business suppliers unprocessed metal company’s allocable portion results joint ventures reported within segment results august 31 2020 company two 50owned joint venture interests one presented part amr operations one presented part css operations joint venture within css sells recycled scrap metal operations within css prices approximate local market rates produces intercompany profit intercompany profit eliminated products remain inventory recognized finished products sold third parties fiscal 2018 two company’s 50 joint venture interests presented part amr operations dissolved intersegment sales made prices approximate local market rates intercompany sales tend produce intercompany profit recognized finished products ultimately sold third parties information provided obtained internal information provided company’s chief operating decision maker purpose corporate management company uses segment operating income measure segment performance company allocate corporate interest income expense income taxes income expense segments certain expenses related shared services support operational activities transactions allocated corporate segments unallocated corporate expense consists primarily expense management certain administrative services benefit segments addition company allocate certain items segment operating income management include information measurement performance segments unallocated items include restructuring charges exitrelated activities charges net recoveries related legacy environmental matters provisions certain legal matters unallocated income expense operating income segment reflect operating income segment would report standalone business results discontinued operations excluded segment operating income presented separately net tax results ongoing operations periods presented fourth quarter fiscal 2018 company modified measurement segment operating income classify legacy environmental charges within corporate order align measures chief executive officer considered company’s chief operating decision maker reviews performance makes decisions resource allocation change applied prospectively beginning fourth quarter fiscal 2018 legacy environmental charges incurred quarter reported within corporate division fourth quarter fiscal 2018 company recorded 1 million legacy environmental charges corporate division prior change would classified within amr legacy environmental charges reflected amr’s operating results prior change material consolidated financial statements either individually aggregate environmental charges reported within selling general administrative expense consolidated statements operations 94 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements following summary company’s total assets august 31 thousands 1 amr total assets include 2 million 3 million august 31 2020 2019 respectively investment joint ventures css total assets include 8 million 7 million august 31 2020 2019 respectively investment joint ventures 2 substantial majority corporate eliminations total assets consist corporate intercompany payables company’s operating segments intercompany eliminations 3 property plant equipment net includes 16 million 14 million august 31 2020 2019 respectively company’s canadian locations table illustrates company’s results continuing operations reportable segment years ended august 31 thousands 1 amr operating income includes less 1 million less 1 million less 1 million income loss joint ventures accounted equity method fiscal 2020 2019 2018 respectively 95 schnitzer steel industries inc form 10k 2020 schnitzer steel industries inc notes consolidated financial statements 2 css operating income includes 1 million 1 million 2 million income joint ventures accounted equity method fiscal 2020 2019 2018 respectively following revenues external customers presented major product based sales destination years ended august 31 thousands 1 fiscal 2019 company modified categories revenues external customers major product major product revenues fiscal 2018 revised conform current presentation revisions immaterial year 2 steel revenues include primarily sales finished steel products semifinished goods billets manufacturing scrap fiscal 2020 2019 2018 company external customer accounted 10 company’s consolidated revenues sales customers located foreign countries significant part company’s business schedule identifies foreign countries company’s sales exceeded 10 consolidated revenues last three years ended august 31 thousands na sales less 10 threshold 96 schnitzer steel industries inc form 10k 2020 quarterly financial data unaudited opinion management unaudited quarterly financial summary includes adjustments necessary fair statement results periods represented thousands except per share amounts 97 schnitzer steel industries inc form 10k 2020 schedule ii valuation qualifying accounts years ended august 31 2020 2019 2018 thousands 98 schnitzer steel industries inc form 10k 2020 item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k a1 following financial statements filed part report see index consolidated financial statements schedule page 32 report 2the following schedule report independent accountants filed part report schedules omitted information either applicable required 3exhibits 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 1014 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 1015 letter dated march 22 1999 amending lease schnitzer investment corp registrant related portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 1016 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1017 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1018 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1019 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1020 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference 1021 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1022 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1023 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1024 schnitzer steel industries inc economic value added bonus plan filed exhibit 1027 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 991 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 management contract compensatory plan arrangement b reports form 8k reports form 8k required filed registrant fourth quarter fiscal year ended august 31 2002 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 22 2002 barry rosen barry rosen vice president finance treasurer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 22 2002 capacities indicated signature title principal executive officer robert w philip robert w philip president chief executive officer director principal financial officer barry rosen barry rosen vice president finance treasurer chief financial officer principal accounting officer kelly e lang kelly e lang vice president corporate controller directors robert ball robert ball director william furman william furman director carol lewis carol lewis director scott lewis scott lewis director kenneth novack kenneth novack director jean reynolds jean reynolds director dori schnitzer dori schnitzer director gary schnitzer gary schnitzer director leonard schnitzer leonard schnitzer director ralph r shaw ralph r shaw director barry rosen attorneyinfact barry rosen certification robert w philip certify 1i reviewed annual report form 10k schnitzer steel industries inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses november 22 robert w philip robert w philip president chief executive officer certification barry rosen certify 1i reviewed annual report form 10k schnitzer steel industries inc 2based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4the registrants certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant adesigned disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared bevaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date cpresented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5the registrants certifying officer disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent functions aall significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls bany fraud whether material involves management employees significant role registrants internal controls 6the registrants certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses november 22 barry rosen barry rosen vice president finance treasurer chief financial officer index exhibits 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k rascal year ended august 31 2001 incorporated herein reference 101 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 101 form s1 102 second amendment lease dated october 18 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 105 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 103 second extension lease dated may 28 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 104 lease agreement dated march 24 1980 schnitzer investment corp registrant amended relating corporate headquarters incorporated reference exhibit 102 form s1 105 third amendment lease dated may 29 1996 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 106 fourth amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 106 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 107 lease agreement dated march 1 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 103 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 108 amendment lease dated march 31 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 108 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 109 lease agreement dated april 20 1995 schnitzer investment corp registrant relating corporate headquarters filed exhibit 104 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1010 lease agreement dated february 18 1997 schnitzer investment corp registrant relating corporate headquarters filed exhibit 1010 registrants form 10k fiscal year ended august 31 1997 incorporated herein reference 1011 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 1012 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1013 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 1014 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 1015 letter dated march 22 1999 amending lease schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 1016 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating sacramento metals recycling operation incorporated reference exhibit 104 form s1 1017 amendment lease dated february 8 1995 schnitzer investment corp registrant relating sacramento metals recycling operation filed exhibit 102 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 1018 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1019 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1020 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference 1021 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1022 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1023 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1024 schnitzer steel industries inc economic value added bonus plan filed exhibit 1027 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 991 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 part item 1 business item 2 properties item 3 legal proceedings item 4 submission matters vote security holders item 4a executive officers registrant part ii item 5 market registrants common stock related stockholder matters item 6 selected financial data item 7 managements discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data report independent accountants schnitzer steel industries inc consolidated balance sheet thousands except per share amounts schnitzer steel industries inc consolidated statement operations thousands except per share amounts schnitzer steel industries inc consolidated statement shareholders equity thousands schnitzer steel industries inc consolidated statement cash flows thousands schnitzer steel industries inc notes consolidated financial statements schedule iivaluation qualifying accounts years ended august 31 2002 2001 2000 thousands report independent accountants financial statement schedule item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management related stockholder matters item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k signatures certification index exhibitsitem 15 exhibits financial statement schedules reports form 8k 1 following financial statements filed part report see index consolidated financial statements schedule page 42 report 2 following schedule report independent accountants filed part report page schedule ii valuation qualifying accounts 73 report independent accountants financial statement schedule 74 schedules omitted information either applicable required 3 exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrants form 10q quarter ended november 30 2002 incorporated herein reference 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 104 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference schnitzer steel industries inc form 10k 105 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 106 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 107 letter dated march 22 1999 amending lease schnitzer investment corp registrant related portland metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 108 fifth amendment lease dated july 9 2001 schnitzer investment corp registrant related portland metals recycling operation 109 sixth amendment lease dated august 7 2003 schnitzer investment corp registrant related portland metals recycling operation 1010 purchase sale agreement dated august 7 2003 schnitzer investment corp registrant relating sacramento metals recycling operations real estate 1011 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1012 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1013 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference 1014 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1015 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1016 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1017 schnitzer steel industries inc economic value added bonus plan filed exhibit 1027 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference schnitzer steel industries inc form 10k 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 management contract compensatory plan arrangement b reports form 8k following report filed form 8k fiscal quarter ended august 31 2003 july 1 2003 company filed current report form 8k report item 9 pursuant item 12 issuance press release announcing financial results companys quarter nine months ended may 31 2003 item 7 financial statements exhibits schnitzer steel industries inc form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 24 2003 sbarry rosen barry rosen vice president finance treasurer chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 24 2003 capacities indicated signature title principal executive officer robert w philip president chief executive officer director robert w philip principal financial officer barry rosen vice president finance treasurer chief financial officer barry rosen principal accounting officer kelly e lang vice president corporate controller kelly e lang directors robert ball director robert ball william furman director william furman carol lewis director carol lewis scott lewis director scott lewis kenneth novack director kenneth novack jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen index exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrants form 10q quarter ended november 30 2002 incorporated herein reference 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k rascal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 104 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 105 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 106 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 107 letter dated march 22 1999 amending lease schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 108 fifth amendment lease dated july 9 2001 schnitzer investment corp registrant related portland metals recycling operation 109 sixth amendment lease dated august 7 2003 schnitzer investment corp registrant related portland metals recycling operation 1010 purchase sale agreement dated august 7 2003 schnitzer investment corp registrant relating sacramento metals recycling operations real estate 1011 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1012 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1013 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference 1014 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1015 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1016 deferred bonus agreement company executive officer filed exhibit 103 registrants form 10q quarterly period ended may 31 1996 incorporated herein reference 1017 schnitzer steel industries inc economic value added bonus plan filed exhibit 1027 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules 1 following financial statements filed part report see index consolidated financial statements schedule page 40 report 2 following schedule report independent accountants filed part report page schedule ii valuation qualifying accounts 70 report independent accountants financial statement schedule 71 schedules omitted information either applicable required 3 exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrants form 10q quarter ended november 30 2002 incorporated herein reference 22 amendment 1 dated november 14 2003 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc company filed exhibit 21 registrants form 10q quarter ended november 30 2003 incorporated herein reference 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 41 credit agreement dated may 30 2003 registrant bank america na lenders party thereto filed exhibit 101 registrants form 10q quarter ended may 31 2003 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10k year ended august 31 2003 incorporated herein reference schnitzer steel industries inc form 10k 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10k year ended august 31 2003 incorporated herein reference 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 104 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 105 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 106 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 107 letter dated march 22 1999 amending lease schnitzer investment corp registrant related portland metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 108 fifth amendment lease dated july 9 2001 schnitzer investment corp registrant related portland metals recycling operation filed exhibit 108 registrants form 10k year ended august 31 2003 incorporated herein reference 109 sixth amendment lease dated august 7 2003 schnitzer investment corp registrant related portland metals recycling operation filed exhibit 109 registrants form 10k year ended august 31 2003 incorporated herein reference 1010 purchase sale agreement dated august 7 2003 schnitzer investment corp registrant relating sacramento metals recycling operations real estate filed exhibit 1010 registrants form 10k year ended august 31 2003 incorporated herein reference 1011 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1012 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference schnitzer steel industries inc form 10k 1013 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference 1014 form stock option agreement used option grants employees 1993 stock incentive plan 1015 form stock option agreement used option grants nonemployee directors 1993 stock incentive plan 1016 employment agreement dated august 20 2004 barry rosen registrant 1017 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1018 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1019 schnitzer steel industries inc amended restated economic value added eva bonus plan 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 management contract compensatory plan arrangement schnitzer steel industries inc form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated november 24 2004 sbarry rosen barry rosen vice president finance chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 24 2004 capacities indicated signature title principal executive officer robert w philip chairman president chief executive officer robert w philip principal financial officer barry rosen vice president finance chief financial officer barry rosen principal accounting officer kelly e lang vice president corporate controller kelly e lang schnitzer steel industries inc form 10k directors robert ball director robert ball william furman director william furman carol lewis director carol lewis scott lewis director scott lewis kenneth novack director kenneth novack jean reynolds director jean reynolds dori schnitzer director dori schnitzer gary schnitzer director gary schnitzer ralph r shaw director ralph r shaw barry rosen attorneyinfact barry rosen schnitzer steel industries inc form 10k index exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrants form 10q quarter ended november 30 2002 incorporated herein reference 22 amendment 1 dated november 14 2003 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc company filed exhibit 21 registrants form 10q quarter ended november 30 2003 incorporated herein reference 31 1993 restated articles incorporation registrant incorporated reference exhibit 31 registrants registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrants form 10q quarter ended may 31 1998 incorporated herein reference 41 credit agreement dated may 30 2003 registrant bank america na lenders party thereto filed exhibit 101 registrants form 10q quarter ended may 31 2003 incorporated herein reference 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k rascal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrants form 10k year ended august 31 2003 incorporated herein reference 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrants form 10k year ended august 31 2003 incorporated herein reference 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation incorporated reference exhibit 103 form s1 schnitzer steel industries inc form 10k 104 second amendment lease dated october 28 1994 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 101 registrants form 10q quarterly period ended november 30 1995 incorporated herein reference 105 third amendment lease dated february 1998 schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 1025 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 106 fourth amendment lease dated july 1 1998 schnitzer investment corp registrant relating portland metals recycling operation filed exhibit 1026 registrants form 10k fiscal year ended august 31 2000 incorporated herein reference 107 letter dated march 22 1999 amending lease schnitzer investment corp registrant relating portland recycled metals recycling operation filed exhibit 101 registrants form 10q quarter ended november 30 2001 incorporated herein reference 108 fifth amendment lease dated july 9 2001 schnitzer investment corp registrant related portland metals recycling operation filed exhibit 108 registrants form 10k year ended august 31 2003 incorporated herein reference 109 sixth amendment lease dated august 7 2003 schnitzer investment corp registrant related portland metals recycling operation filed exhibit 109 registrants form 10k year ended august 31 2003 incorporated herein reference 1010 purchase sale agreement dated august 7 2003 schnitzer investment corp registrant relating sacramento metals recycling operations real estate filed exhibit 1010 registrants form 10k year ended august 31 2003 incorporated herein reference 1011 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 1012 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrants form 10k fiscal year ended august 31 1995 incorporated herein reference 1013 1993 stock incentive plan registrant filed exhibit 101 registrants form 10q quarter ended february 28 2002 incorporated herein reference schnitzer steel industries inc form 10k 1014 form stock option agreement used option grants employees 1993 stock incentive plan 1015 form stock option agreement used option grants nonemployee directors 1993 stock incentive plan 1016 employment agreement dated august 20 2004 barry rosen registrant 1017 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1018 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrants form 10k fiscal year ended august 31 2001 incorporated herein reference 1019 schnitzer steel industries inc amended restated economic value added eva bonus plan 211 subsidiaries registrant 231 consent independent accountants 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules 1 following financial statements filed part report see index consolidated financial statements schedule page 47 report 2 following schedule report independent accountants filed part report page schedule ii valuation qualifying accounts report independent accountants financial statement schedule schedules omitted information either applicable required 3 exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrant’s form 10q quarter ended november 30 2002 incorporated herein reference 22 amendment 1 dated november 14 2003 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc registrant filed exhibit 21 registrant’s form 10q quarter ended november 30 2003 incorporated herein reference 23 agreement purchase sale dated december 30 2004 among vehicle recycling solutions llc delaware limited liability company several whollyowned subsidiaries vehicle recycling solutions llc picknpull auto dismantlers california general partnership whollyowned subsidiary registrant filed exhibit 21 registrant’s form 10q quarter ended november 30 2004 incorporated herein reference 24 master agreement dated june 8 2005 among hugo neu co llc hne recycling llc hnw recycling llc joint venture operations inc certain limited purposes hugo neu corporation registrant filed exhibit 101 registrant’s form 8k filed june 9 2005 incorporated herein reference 25 unit purchase agreement dated august 5 2005 picknpull auto dismantlers pnp commercial acquisition llc tree acquisition lp related acquisition greenleaf auto recyclers llc filed exhibit 21 registrant’s form 8k filed october 5 2005 incorporated herein reference 26 agreement purchase sale dated august 5 2005 pnp commercial acquisition llc ford motor company related acquisition greenleaf auto recyclers llc filed exhibit 22 registrant’s form 8k filed october 5 2005 incorporated herein reference schnitzer steel industries inc form 10k 27 first amendment dated september 30 2005 unit purchase agreement dated august 5 2005 picknpull auto dismantlers pnp commercial acquisition llc tree acquisition lp filed exhibit 23 registrant’s form 8k filed october 5 2005 incorporated herein reference 28 asset purchase agreement dated september 2 2005 rrc acquisition llc regional recycling llc metal asset acquisition llc 939 fortress investments llc fortress apartments llc integrity metals llc rcc recycling llc alan dreher george dreher paul dreher james j filler teja jouhal herbert miller filed exhibit 21 registrant’s form 8k filed september 8 2005 incorporated herein reference 31 restated articles incorporation registrant incorporated reference exhibit 31 registrant’s registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrant’s form 10q quarter ended may 31 2005 incorporated herein reference 41 amended restated credit agreement dated november 8 2005 registrant bank america na lenders party thereto 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k rascal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrant’s form 10k year ended august 31 2003 incorporated herein reference 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrant’s form 10k year ended august 31 2003 incorporated herein reference 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation terminated except surviving indemnity obligations incorporated reference exhibit 103 form s1 104 purchase sale agreement dated may 4 2005 schnitzer investment corp registrant relating purchase registrant portland metals recycling operations real estate filed exhibit 101 registrant’s form 8k filed may 10 2005 incorporated herein reference 105 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 schnitzer steel industries inc form 10k 106 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 107 letter agreement regarding initial compensation terms dated july 18 2005 john carter registrant filed exhibit 101 registrant’s form 8ka filed july 20 2005 incorporated herein reference 108 agreement dated august 31 2005 gregory j witherspoon registrant regarding mr witherspoon’s position interim chief financial officer filed exhibit 101 registrant’s form 8ka filed september 6 2005 incorporated herein reference 109 employment agreement dated september 13 2005 donald hamaker registrant filed exhibit 101 registrant’s form 8k filed september 19 2005 incorporated herein reference 1010 stock incentive plan registrant filed exhibit 101 registrant’s form 10q quarter ended february 28 2002 incorporated herein reference 1011 form stock option agreement used option grants employees 1993 stock incentive plan filed exhibit 1014 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1012 form stock option agreement used option grants nonemployee directors 1993 stock incentive plan filed exhibit 1015 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1013 employment agreement dated august 20 2004 barry rosen registrant filed exhibit 1016 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1014 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrant’s form 10k fiscal year ended august 31 2001 incorporated herein reference 1015 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrant’s form 10k fiscal year ended august 31 2001 incorporated herein reference 1016 schnitzer steel industries inc amended restated economic value added “eva” bonus plan filed exhibit 1019 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1017 executive annual bonus plan filed exhibit 101 registrant’s form 8k filed february 3 2005 incorporated herein reference 1018 nonemployee director compensation schedule filed exhibit 101 registrant’s form 8k filed july 20 2005 incorporated herein reference schnitzer steel industries inc form 10k 211 subsidiaries registrant 231 consent registered independent public accounting firm 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 management contract compensatory plan arrangement schnitzer steel industries inc form 10k signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 14 2005 capacities indicated signature title principal executive officer john carter john carter president chief executive officer principal financial officer gregory j witherspoon gregory j witherspoon interim chief financial officer principal accounting officer vicki piersall vicki piersall vice president corporate controller schnitzer steel industries inc form 10k directors robert ball robert ball director william furman william furman director scott lewis scott lewis director kenneth novack kenneth novack director jean reynolds jean reynolds director jill schnitzer edelson jill schnitzer edelson director ralph r shaw ralph r shaw director gregory j witherspoon attorneyinfact gregory j witherspoon schnitzer steel industries inc form 10k index exhibits 21 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc filed exhibit 21 registrant’s form 10q quarter ended november 30 2002 incorporated herein reference 22 amendment 1 dated november 14 2003 stock membership interest purchase agreement dated january 8 2003 among bob spence pick pull auto dismantling inc picknpull auto dismantlers picknpull auto dismantlers stockton llc norprop inc registrant filed exhibit 21 registrant’s form 10q quarter ended november 30 2003 incorporated herein reference 23 agreement purchase sale dated december 30 2004 among vehicle recycling solutions llc delaware limited liability company several whollyowned subsidiaries vehicle recycling solutions llc picknpull auto dismantlers california general partnership whollyowned subsidiary registrant filed exhibit 21 registrant’s form 10q quarter ended november 30 2004 incorporated herein reference 24 master agreement dated june 8 2005 among hugo neu co llc hne recycling llc hnw recycling llc joint venture operations inc certain limited purposes hugo neu corporation registrant filed exhibit 101 registrant’s form 8k filed june 9 2005 incorporated herein reference 25 unit purchase agreement dated august 5 2005 picknpull auto dismantlers pnp commercial acquisition llc tree acquisition lp related acquisition greenleaf auto recyclers llc filed exhibit 21 registrant’s form 8k filed october 5 2005 incorporated herein reference 26 agreement purchase sale dated august 5 2005 pnp commercial acquisition llc ford motor company related acquisition greenleaf auto recyclers llc filed exhibit 22 registrant’s form 8k filed october 5 2005 incorporated herein reference 27 first amendment dated september 30 2005 unit purchase agreement dated august 5 2005 picknpull auto dismantlers pnp commercial acquisition llc tree acquisition lp filed exhibit 23 registrant’s form 8k filed october 5 2005 incorporated herein reference schnitzer steel industries inc form 10k 28 asset purchase agreement dated september 2 2005 rrc acquisition llc regional recycling llc metal asset acquisition llc 939 fortress investments llc fortress apartments llc integrity metals llc rcc recycling llc alan dreher george dreher paul dreher james j filler teja jouhal herbert miller filed exhibit 21 registrant’s form 8k filed september 8 2005 incorporated herein reference 31 restated articles incorporation registrant incorporated reference exhibit 31 registrant’s registration statement form s1 registration 3369352 form s1 32 restated bylaws registrant filed exhibit 32 registrant’s form 10q quarter ended may 31 2005 incorporated herein reference 41 amended restated credit agreement dated november 8 2005 registrant bank america na lenders party thereto 91 schnitzer steel industries inc 2001 restated voting trust buysell agreement dated march 26 2001 filed exhibit 91 registrants form 10k rascal year ended august 31 2001 incorporated herein reference 101 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 101 registrant’s form 10k year ended august 31 2003 incorporated herein reference 102 lease agreement dated august 7 2003 schnitzer investment corp registrant relating corporate headquarters filed exhibit 102 registrant’s form 10k year ended august 31 2003 incorporated herein reference 103 lease agreement dated september 1 1988 schnitzer investment corp registrant amended relating portland metals recycling operation terminated except surviving indemnity obligations incorporated reference exhibit 103 form s1 104 purchase sale agreement dated may 4 2005 schnitzer investment corp registrant relating purchase registrant portland metals recycling operations real estate filed exhibit 101 registrant’s form 8k filed may 10 2005 incorporated herein reference schnitzer steel industries inc form 10k 105 second amended shared services agreement dated september 13 1993 registrant certain entities controlled shareholders registrant incorporated reference exhibit 105 form s1 106 amendment dated september 1 1994 second amended shared services agreement registrant certain entities controlled shareholders registrant filed exhibit 106 registrant’s form 10k fiscal year ended august 31 1995 incorporated herein reference 107 letter agreement regarding initial compensation terms dated july 18 2005 john carter registrant filed exhibit 101 registrant’s form 8ka filed july 20 2005 incorporated herein reference 108 agreement dated august 31 2005 gregory j witherspoon registrant regarding mr witherspoon’s position interim chief financial officer filed exhibit 101 registrant’s form 8ka filed september 6 2005 incorporated herein reference 109 employment agreement dated september 13 2005 donald hamaker registrant filed exhibit 101 registrant’s form 8k filed september 19 2005 incorporated herein reference 1010 stock incentive plan registrant filed exhibit 101 registrant’s form 10q quarter ended february 28 2002 incorporated herein reference 1011 form stock option agreement used option grants employees 1993 stock incentive plan filed exhibit 1014 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1012 form stock option agreement used option grants nonemployee directors 1993 stock incentive plan filed exhibit 1015 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1013 employment agreement dated august 20 2004 barry rosen registrant filed exhibit 1016 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1014 supplemental executive retirement bonus plan registrant filed exhibit 1024 registrant’s form 10k fiscal year ended august 31 2001 incorporated herein reference 1015 amendment supplemental executive retirement bonus plan registrant effective january 1 2002 filed exhibit 1025 registrant’s form 10k fiscal year ended august 31 2001 incorporated herein reference schnitzer steel industries inc form 10k 1016 schnitzer steel industries inc amended restated economic value added “eva” bonus plan filed exhibit 1019 registrant’s form 10k year ended august 31 2004 incorporated herein reference 1017 executive annual bonus plan filed exhibit 101 registrant’s form 8k filed february 3 2005 incorporated herein reference 1018 nonemployee director compensation schedule filed exhibit 101 registrant’s form 8k filed july 20 2005 incorporated herein reference 211 subsidiaries registrant 231 consent registered independent public accounting firm 241 powers attorney 311 certification chief executive officer pursuant section 302 sarbanesoxley act 2002 312 certification chief financial officer pursuant section 302 sarbanesoxley act 2002 321 certification chief executive officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 322 certification chief financial officer pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002item 15 exhibits financial statement schedules 1 following financial statements filed part report see index consolidated financial statements schedule page 47 report 2 following schedule report independent accountants filed part report schedules omitted information either applicable required 3 exhibits management contract compensatory plan arrangement signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc gregory j witherspoon gregory j witherspoon chief financial officer dated november 9 2006 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant november 9 2006 capacities indicateditem 15 exhibits financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 29 2007 capacities indicateditem 15 exhibits financial statement schedules 1 following financial statements filed part report see index consolidated financial statements schedule page 45 report 2 following schedule report independent accountants filed part report schnitzer steel industries inc form 10k 2008 89 90 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc form 10k 2008 91 92 schnitzer steel industries inc form 10k 2008 schnitzer steel industries inc form 10k 2008 93 management contract compensatory plan arrangement 94 schnitzer steel industries inc form 10k 2008 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 28 2008 capacities indicated schnitzer steel industries inc form 10k 2008 95 richard peach attorneyinfact richard peach 96 schnitzer steel industries inc form 10k 2008item 15 exhibits financial statement schedules 1 following financial statements filed part report see index consolidated financial statements schedule page 52 report 2 following schedule report independent accountants filed part report schnitzer steel industries inc form 10k 2009 97 98 schnitzer steel industries inc form 10k 2009 schnitzer steel industries inc form 10k 2009 99 management contract compensatory plan arrangement 100 schnitzer steel industries inc form 10k 2009 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 27 2009 capacities indicated signature title principal executive officer tamara l lundgren tamara l lundgren president chief executive officer principal financial officer richard peach richard peach sr vice president chief financial officer principal accounting officer jeff p poeschl jeff p poeschl vice president principal accounting officer directors david j anderson david j anderson director robert ball robert ball director john carter john carter director william furman william furman director judith johansen judith johansen director wayland r hicks wayland r hicks director william larsson william larsson director scott lewis scott lewis director kenneth novack kenneth novack director schnitzer steel industries inc form 10k 2009 101 signature title jean reynolds jean reynolds director jill schnitzer edelson jill schnitzer edelson director ralph r shaw ralph r shaw director richard peach attorneyinfact richard peach 102 schnitzer steel industries inc form 10k 2009item 15 exhibits financial statement schedules 1 following financial statements filed part report independent registered public accounting firm company’s consolidated financial statements notes thereto quarterly financial data unaudited pages 44 82 report 2 following financial statement schedule filed part report schnitzer steel industries inc form 10k 2010 87 88 schnitzer steel industries inc form 10k 2010 management contract compensatory plan arrangement schnitzer steel industries inc form 10k 2010 89 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 20 2010 richard peach richard peach sr vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 20 2010 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer tamara l lundgren principal financial officer richard peach sr vice president chief financial officer richard peach principal accounting officer jeff p poeschl vice president corporate controller principal accounting officer jeff p poeschl directors david j anderson director david j anderson robert ball director robert ball john carter director john carter william furman director william furman judith johansen director judith johansen wayland r hicks director wayland r hicks william larsson director william larsson scott lewis director scott lewis 90 schnitzer steel industries inc form 10k 2010 richard peach attorneyinfact richard peach schnitzer steel industries inc form 10k 2010 91item 15 exhibits financial statement schedules following financial statements filed part report independent registered public accounting firm company’s consolidated financial statements notes thereto quarterly financial data unaudited pages 40 72 report following financial statement schedule filed part report schedule ii valuation qualifying accounts page 73 report schedules omitted information either applicable required 77 schnitzer steel industries inc form 10k 2011 78 schnitzer steel industries inc form 10k 2011 management contract compensatory plan arrangement 1 accordance rule 406t regulation st information exhibits furnished deemed filed part registration statement 79 schnitzer steel industries inc form 10k 2011 prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 exchange act 1934 otherwise subject liability sections shall incorporated reference registration statement document filed securities act 1933 amended except expressly set forth specific reference filing agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 80 schnitzer steel industries inc form 10k 2011 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 20 2011 richard peach richard peach senior vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 20 2011 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer tamara l lundgren principal financial officer richard peach senior vice president chief financial officer richard peach principal accounting officer jeff p poeschl vice president corporate controller principal accounting officer jeff p poeschl directors david j anderson director david j anderson robert ball director robert ball john carter director john carter william furman director william furman judith johansen director judith johansen wayland r hicks director wayland r hicks 81 schnitzer steel industries inc form 10k 2011 signature title william larsson director william larsson scott lewis director scott lewis kenneth novack director kenneth novack jean reynolds director jean reynolds richard peach attorneyinfact richard peach 82 schnitzer steel industries inc form 10k 2011item 15 exhibits financial statement schedules 82 schnitzer steel industries inc form 10k 2012 83 schnitzer steel industries inc form 10k 2012 management contract compensatory plan arrangement 1 accordance rule 406t regulation st information exhibits furnished deemed filed part registration statement prospectus purposes sections 11 12 securities act 1933 deemed filed purposes section 18 exchange act 1934 otherwise subject liability sections shall incorporated reference registration statement document filed securities act 1933 amended except expressly set forth specific reference filing 84 schnitzer steel industries inc form 10k 2012 agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 85 schnitzer steel industries inc form 10k 2012 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 25 2012 richard peach richard peach senior vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 25 2012 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer tamara l lundgren principal financial officer richard peach senior vice president chief financial officer richard peach principal accounting officer david j mendez vice president corporate controller principal accounting officer david j mendez directors david j anderson director david j anderson john carter director john carter william furman director william furman judith johansen director judith johansen wayland r hicks director wayland r hicks 86 schnitzer steel industries inc form 10k 2012 signature title william larsson director william larsson scott lewis director scott lewis kenneth novack director kenneth novack richard peach attorneyinfact richard peach 87 schnitzer steel industries inc form 10k 2012item 15 exhibits financial statement schedules 87 schnitzer steel industries inc form 10k 2013 88 schnitzer steel industries inc form 10k 2013 89 schnitzer steel industries inc form 10k 2013 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 90 schnitzer steel industries inc form 10k 2013 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 29 2013 richard peach richard peach senior vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 29 2013 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer tamara l lundgren principal financial officer richard peach senior vice president chief financial officer richard peach principal accounting officer david j mendez vice president corporate controller principal accounting officer david j mendez directors david j anderson director david j anderson john carter director john carter william furman director william furman judith johansen director judith johansen wayland r hicks director wayland r hicks 91 schnitzer steel industries inc form 10k 2013 signature title william larsson director william larsson david jahnke director david jahnke kenneth novack director kenneth novack richard peach attorneyinfact richard peach 92 schnitzer steel industries inc form 10k 2013item 15 exhibits financial statement schedules 90 schnitzer steel industries inc form 10k 2014 91 schnitzer steel industries inc form 10k 2014 92 schnitzer steel industries inc form 10k 2014 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 93 schnitzer steel industries inc form 10k 2014 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 28 2014 richard peach richard peach senior vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 28 2014 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer tamara l lundgren principal financial officer richard peach senior vice president chief financial officer richard peach principal accounting officer stefano gaggini vice president corporate controller principal accounting officer stefano gaggini directors david j anderson director david j anderson john carter director john carter william furman director william furman wayland r hicks director wayland r hicks david l jahnke director david l jahnke 94 schnitzer steel industries inc form 10k 2014 signature title judith johansen director judith johansen william larsson director william larsson kenneth novack director kenneth novack richard peach attorneyinfact richard peach 95 schnitzer steel industries inc form 10k 2014item 15 exhibits financial statement schedules 94 schnitzer steel industries inc form 10k 2015 95 schnitzer steel industries inc form 10k 2015 96 schnitzer steel industries inc form 10k 2015 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 97 schnitzer steel industries inc form 10k 2015 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 27 2015 richard peach richard peach senior vice president chief financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 27 2015 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer director tamara l lundgren principal financial officer richard peach senior vice president chief financial officer richard peach principal accounting officer stefano gaggini vice president corporate controller principal accounting officer stefano gaggini directors david j anderson director david j anderson john carter director john carter william furman director william furman wayland r hicks director wayland r hicks david l jahnke director david l jahnke 98 schnitzer steel industries inc form 10k 2015 signature title judith johansen director judith johansen william larsson director william larsson michael sutherlin director michael sutherlin richard peach attorneyinfact richard peach 99 schnitzer steel industries inc form 10k 2015item 15 exhibits financial statement schedules 101 schnitzer steel industries inc form 10k 2016 102 schnitzer steel industries inc form 10k 2016 103 schnitzer steel industries inc form 10k 2016 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 104 schnitzer steel industries inc form 10k 2016 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 25 2016 richard peach richard peach senior vice president chief financial officer chief corporate operations pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 25 2016 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer director tamara l lundgren principal financial officer richard peach senior vice president chief financial officer chief corporate operations richard peach principal accounting officer stefano gaggini vice president corporate controller principal accounting officer stefano gaggini directors david j anderson director david j anderson john carter director john carter wayland r hicks director wayland r hicks david l jahnke director david l jahnke 105 schnitzer steel industries inc form 10k 2016 signature title judith johansen director judith johansen william larsson director william larsson michael sutherlin director michael sutherlin richard peach attorneyinfact richard peach 106 schnitzer steel industries inc form 10k 2016item 15 exhibits financial statement schedules 98 schnitzer steel industries inc form 10k 2017 99 schnitzer steel industries inc form 10k 2017 100 schnitzer steel industries inc form 10k 2017 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document may describe actual state affairs date made time 101 schnitzer steel industries inc form 10k 2017 item 16 form 10k summary none 102 schnitzer steel industries inc form 10k 2017 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 24 2017 richard peach richard peach senior vice president chief financial officer chief corporate operations pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 24 2017 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer director tamara l lundgren principal financial officer richard peach senior vice president chief financial officer chief corporate operations richard peach principal accounting officer stefano gaggini vice president corporate controller principal accounting officer stefano gaggini directors david j anderson director david j anderson john carter director john carter wayland r hicks director wayland r hicks david l jahnke director david l jahnke 103 schnitzer steel industries inc form 10k 2017 signature title judith johansen director judith johansen william larsson director william larsson michael sutherlin director michael sutherlin richard peach attorneyinfact richard peach 104 schnitzer steel industries inc form 10k 2017item 15 exhibits financial statement schedules 100 schnitzer steel industries inc form 10k 2018 101 schnitzer steel industries inc form 10k 2018 102 schnitzer steel industries inc form 10k 2018 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document date made may describe actual state affairs purpose time 103 schnitzer steel industries inc form 10k 2018 item 16 form 10k summary none 104 schnitzer steel industries inc form 10k 2018 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 24 2018 richard peach richard peach senior vice president chief financial officer chief corporate operations pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 24 2018 capacities indicated signature title principal executive officer tamara l lundgren president chief executive officer director tamara l lundgren principal financial officer richard peach senior vice president chief financial officer chief corporate operations richard peach principal accounting officer stefano gaggini deputy chief financial officer chief accounting officer stefano gaggini directors john carter director john carter wayland r hicks director wayland r hicks rhonda hunter director rhonda hunter david l jahnke director david l jahnke 105 schnitzer steel industries inc form 10k 2018 signature title judith johansen director judith johansen william larsson director william larsson michael sutherlin director michael sutherlin richard peach attorneyinfact richard peach 106 schnitzer steel industries inc form 10k 2018item 15 exhibits financial statement schedules 91 schnitzer steel industries inc form 10k 2019 92 schnitzer steel industries inc form 10k 2019 93 schnitzer steel industries inc form 10k 2019 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document date made may describe actual state affairs purpose time item 16 form 10k summary none 94 schnitzer steel industries inc form 10k 2019 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 24 2019 richard peach richard peach senior vice president chief financial officer chief corporate operations pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 24 2019 capacities indicated richard peach attorneyinfact richard peach 95 schnitzer steel industries inc form 10k 2019item 15 exhibits financial statement schedules 101 schnitzer steel industries inc form 10k 2020 102 schnitzer steel industries inc form 10k 2020 103 schnitzer steel industries inc form 10k 2020 management contract compensatory plan arrangement agreements documents filed exhibits report intended provide factual information disclosure respect terms agreements documents rely purpose particular representations warranties made us agreements documents made solely within specific context relevant agreement document date made may describe actual state affairs purpose time item 16 form 10k summary none 104 schnitzer steel industries inc form 10k 2020 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized schnitzer steel industries inc dated october 22 2020 richard peach richard peach executive vice president chief financial officer chief strategy officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant october 22 2020 capacities indicated richard peach attorneyinfact richard peach 105 schnitzer steel industries inc form 10k 2020