SCHN 2017 Annual Report

SCHNITZER STEEL INDUSTRIES, INC. 2 / Schnitzer Steel Industries, Inc. Form 10-K 2017 PART I ITEM 1. BUSINESS General Founded in 1906, Schnitzer Steel Industries, Inc. ("SSI"), an Oregon corporation, is one of North America’s largest recyclers of ferrous and nonferrous scrap metal, including end-of-life vehicles, and a manufacturer of finished steel products. Worldwide demand for recycled scrap metal is driven primarily by steel production levels. Steel mill production using electric arc furnace (“EAF”) technology relies on recycled scrap metal as its primary feedstock, and steel manufacturing using blast furnace technology also uses recycled scrap metal for a portion of its rawmaterials. Steel mills around the world, including those in the NorthAmerican domestic market in which our own steel mill operates, are the primary end markets for our recycled scrap metal. Our steel mill in Oregon produces finished steel products using internally sourced recycled scrap metal as the primary raw material and sells to industrial customers primarily in North America. Prior to the fourth quarter of fiscal 2017, our internal organizational and reporting structure supported two operating and reportable segments: the Auto and Metals Recycling ("AMR") business and the Steel Manufacturing Business ("SMB"). In the fourth quarter of fiscal 2017, in accordance with our plan announced in June 2017, we modified our internal organizational and reporting structure to combine our steel manufacturing operations, which had been reported as our SMB segment, with our Oregon metals recycling operations, which had been reported within our AMR segment, forming a new division named Cascade Steel and Scrap ("CSS"). The Oregon metals recycling operations include our collection, shredding, and export facilities in Portland, Oregon, and also include four metals recycling feeder yard operations located in Oregon and Southern Washington and one joint venture ownership interest. The Oregon metals recycling operations source substantially all of the scrap rawmaterial needs of our steel manufacturing operations. This change in organizational structure is intended to enhance our flexibility, generate internal synergies, and enable us to more effectively adjust to market changes across our recycling and steel manufacturing operations. We began reporting on this new segment structure in the fourth quarter of fiscal 2017 as reflected in this Annual Report on Form 10-K. The segment data for the comparable periods presented has been recast to conform to the current period presentation for all activities of the reorganized segments. Recasting this historical information did not have an impact on the consolidated financial performance of SSI for any of the periods presented. SSI collects and recycles autobodies, rail cars, home appliances, industrial machinery, manufacturing scrap and construction and demolition scrap through its 97 auto and metals recycling facilities. We source material through well-developed, regional supply chains that collect scrap from large and small businesses and individuals. Our largest source of autobodies is our own network of 53 retail self-service auto parts stores, which operate under the commercial brand-name Pick-n-Pull. All of our auto parts stores are reported within the AMR segment, and a majority of the stores are located in close geographic proximity to our regional metals recycling operations which have large-scale shredders and deep water port access. The level of vertical integration of our auto parts stores and metals recycling operations provides for efficient processing of salvaged automobiles into recycled metal products for new metal production in steel mills and smelters globally. We process recycledmetals ranging from iron and steel to aluminum, copper, lead, stainless steel and zinc for use in the manufacture of new products. With scrap recycling facilities located in 23 States, Puerto Rico and Western Canada, we are well-positioned to efficiently collect scrap metal throughout North America and deliver recycled metal products to customers around the world from our seven deep water ports, and also to our steel mill in Oregon. In fiscal 2017, we sold our products to customers located in 24 countries, including the United States ("U.S.") and Canada, and we sold to external customers or delivered to our steel mill an aggregate of 3.6 million tons of ferrous recycled scrap metal and sold 585 million pounds of nonferrous recycled scrap metal to external customers. AMR is our largest segment, representing 80%of our total revenues from sales to external customers in fiscal 2017. AMR generated 91% of its revenues in fiscal 2017 from sales of ferrous and nonferrous scrap metal, with the remainder generated from retail auto parts and other sales. AMR's revenues from sales of recycled scrap metal, disaggregated by major product category, were 68% ferrous scrap metal and 32% nonferrous scrap metal in fiscal 2017. The remainder of our revenues from external scrap metal sales are generated by our metals recycling operations reported within the CSS segment. The significant majority of ferrous scrap metal processed by the CSS metals recycling operations is used by our steel mill to produce finished steel products, and a minority portion is sold to the export market. CSS produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar and other specialty products using ferrous recycled scrap metal and other raw materials. CSS's finished steel products are primarily used in nonresidential and infrastructure construction in North America. In fiscal 2017, CSS sold 496 thousand short tons of finished steel products.