Russel Metals Annual Report 2006

← All annual reports

FY2006 Annual Report · Russel Metals

Loading PDF…

Russell Cover 3/23/07 11:27 AM Page 1

metals service centers

energy tubular products

steel distributors

Operating as:

• Comco Pipe and Supply Company

• Wirth Steel

• Fedmet Tubulars

• Sunbelt Group

• Triumph Tubular & Supply

• Arrow Steel

• Pioneer Pipe

• Spartan Steel Products

Operating as:

• Russel Metals

• Métaux Russel

• A.J. Forsyth

• Acier Leroux

• Acier Loubier

• Acier Richler

• B&T Steel

• Leroux Steel

• Mégantic Métal

• McCabe Steel

• York-Ennis

• Russel Metals Williams Bahcall

• Baldwin International

www.russelmetals.com

M
E

2 0 0 6
A n n u a l
R e p o r t

Five Consecutive
Years of Dividend
Increases

Record
Share Price
in 2006

Equity
Tripled Since
2003

Rewarding
Our
Shareholders

Industry-
Leading Return
on Capital

Increased
Market
Capitalization

TSX
Leading
Dividend Yield

Russell Cover 3/23/07 11:27 AM Page 2

corporate profile

Russel Metals is one of the largest metals distribution companies in North America.

> russel metals inc. directory

We conduct business primarily in three metals distribution segments: metals service centers; energy tubular

products; and steel distributors.

> businesses at a glance

metals service centers

energy tubular products

steel distributors

We provide processing and
distribution services to a broad base
of more than 19,000 end users
through a network of 52 Canadian
locations and 4 U.S. locations.
Our metals service centers carry
a broad line of products in a wide
range of sizes, shapes and
specifications, including carbon hot
rolled and cold finished steel, pipe
and tubular products, stainless steel
and aluminum. We purchase these
products primarily from steel
producers in North America and
process and package them in
accordance with end user
specifications. We service all
major geographic regions of
Canada and the Midwest region
in the United States.

These operations distribute oil
country tubular goods (OCTG), line
pipe, tubes, valves and fittings,
primarily to the energy industry in
Western Canada and the western
United States, from 5 Canadian and
2 U.S. locations. We purchase these
products either from the pipe
processing arms of North American
steel mills, independent
manufacturers of pipe and pipe
accessories or international
steel mills.

Our steel distributors act as master
distributors selling steel in large
volumes to other steel service
centers and equipment
manufacturers mainly on an “as is”
basis. Our U.S. operation processes
some coil for its customer base at
its cut to length facility in Houston,
Texas. Our steel distributors source
their steel both domestically and
offshore. The international sourcing
provides our other business
segments with valuable insight
regarding international pricing trends
and their potential impact on steel
markets in North America.

The main steel products sourced by
this segment are structural beam,
plate, coils, pipe and tubing.

Head Office

1900 Minnesota Court, Suite 210, Mississauga, Ontario, Canada, L5N 3C9
Main Tel: (905) 819-7777 Fax: (905) 819-7409 Investor Relations: (905) 816-5178
E-mail: info@russelmetals.com Internet: www.russelmetals.com

Shareholder Information

Transfer Agent and Registrar

Stock Symbol:
The Toronto Stock Exchange – RUS

CIBC Mellon Trust Company
P.O. Box 7010, Adelaide Street Postal Stn.,
Toronto, Ontario, Canada, M5G 2W9
Answer line: Toronto (416) 643-5500
Toll free: 1-800-387-0825
E-mail: inquiries@cibcmellon.ca

Internet: www.cibcmellon.ca

Board of Directors

Officers

Alain Benedetti
Corporate Director

James F. Dinning
Chairman of the Board,
Western Financial Group Inc.

Carl R. Fiora
Corporate Director,
steel industry executive

Anthony F. Griffiths
Corporate Director,
Chairman of the Board,
Russel Metals Inc.

Robbert Hartog
President,
Robhar Investments Ltd.

Lise Lachapelle
Corporate Director

John W. Robinson
Corporate Director,
steel industry executive

Edward M. Siegel, Jr.
President and Chief Executive Officer,
Russel Metals Inc.

Anthony F. Griffiths
Chairman of the Board
Toronto

Edward M. Siegel, Jr.
President and
Chief Executive Officer
Mississauga

Brian R. Hedges
Executive Vice President
and Chief Financial Officer
Mississauga

Marion E. Britton
Vice President, Chief Accounting
Officer and Assistant Secretary
Mississauga

Lesley M.S. Coleman
Vice President and Controller
Mississauga

William M. O’Reilly
Secretary
Davies Ward Phillips & Vineberg, LLP
Toronto

Elaine G. Toomey
Assistant Secretary
Mississauga

Management Team

Edward M. Siegel, Jr.
President and
Chief Executive Officer

Brian R. Hedges
Executive Vice President and
Chief Financial Officer

Marion E. Britton
Vice President,
Chief Accounting Officer and
Assistant Secretary

David J. Halcrow
Vice President, Purchasing and
Inventory Management

Maureen A. Kelly
Vice President, Information
Systems

Corporate Governance

Detailed disclosure concerning the Company’s governance practices may be found in the Management Proxy Circular.

focused on shareholders’ returns

60%

higher
dividends

27%

higher
net income

50%

larger market
capitalization

22%

higher share
price

dividend yield

Our share price increased for the fifth straight year,

and in 2006 the increase was 22%. Our industry-

leading dividend increased by 60% to $1.60 per share.

> five-year financial highlights

For the years ended December 31

2006

2005

2004

2003

2002

OPERATING RESULTS (millions)
Revenues
Net income
EBIT (Notes)
EBIT as a % of revenue
EBITDA (Notes)
EBITDA as a % of revenue
Basic earnings per common share ($) $

BALANCE SHEET INFORMATION (millions)
Metals

Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accruals
Net working capital – Metals
Fixed assets
Goodwill

Net assets employed in metals operations $
Other operating assets
Net income tax assets and liabilities
Deferred financing charges
Pension and benefit liabilities
Other corporate assets and liabilities
Total net assets employed

CAPITALIZATION (millions)
Bank indebtedness, net of (cash)
Long-term debt
Total interest bearing debt, net of (cash) $
Market capitalization (Notes)
Total firm value

OTHER INFORMATION (Notes)
Common shareholders’ equity (millions) $
$
Book value per share
$
Free cash flow (millions)
$
Capital expenditures (millions)
Depreciation and amortization (millions) $
Earnings multiple
Firm value as a multiple of EBIT
Firm value as a multiple of EBITDA
Interest bearing debt/EBITDA
Debt as a % of capitalization
Market capitalization as a % of book value
Return on capital employed

COMMON SHARE INFORMATION
Ending outstanding common shares
Average outstanding common shares
Dividend yield (Notes)
Dividend per share (Notes)
Share price – High
Share price – Low
Share price – Ending

$
$
$
$

$
$
$
$
$

2,692.1
158.7
250.2

9.3%

270.2

10.0%
2.65

324.7
664.0
3.8
(262.8)
729.7
170.9
9.2
909.8
21.5
(19.3)
6.8
(2.6)
(27.6)
888.6

(209.9)
203.9
(6.0)
1,665.2
1,659.2

894.6
14.34
158.8
27.6
20.0
10.1
6.6
6.1
0.8
19%
186%
28%

$
$
$
$
$

2,614.1
124.5
202.5

7.7%

221.7

8.5%

2.47

356.1
474.0
1.3
(291.2)
540.2
162.3
9.2
711.7
22.0
(9.6)
7.2
(8.9)
(24.6)
697.8

(44.9)
204.0
159.1
1,106.8
1,265.9

538.7
10.63
130.6
26.5
19.2
8.8
6.3
5.7
0.9
27%
205%
29%

$
$
$
$
$

2,411.4
177.8
305.7

12.7%

324.3

13.4%
3.64

356.8
553.9
1.7
(318.5)
593.9
161.6
9.2
764.7
22.4
(59.3)
8.4
(10.2)
(26.2)
699.8

32.6
210.6
243.2
773.3
1,016.5

456.6
9.15
189.4
25.4
18.6
4.3
3.3
3.1
0.6
32%
169%
44%

$
$
$
$
$

1,503.8
18.5
55.1

3.7%

71.4

4.7%

0.41

247.5
303.1
2.0
(207.9)
344.7
165.1
4.2
514.0
23.3
(1.5)
3.5
(11.5)
(5.5)
522.3

59.1
209.4
268.5
378.2
646.7

253.8
5.90
7.6
34.9
16.3
21.4
11.7
9.1
3.8
51%
149%
11%

1,403.3
29.2
67.9

4.8%

83.1

5.9%

0.71

197.6
329.4
2.8
(178.6)
351.2
88.9
2.7
442.8
24.7
0.8
5.0
(9.6)
(2.6)
461.1

(3.9)
242.6
238.7
194.1
432.8

222.4
5.84
45.2
12.8
15.2
7.2
6.4
5.2
2.9
52%
87%
15%

62,366,842
59,887,382

50,656,009
50,461,330

49,887,659
48,671,915

43,023,342
40,021,479

38,057,001
38,024,034

6.0%

1.60
29.38
21.61
26.70

$
$
$
$

4.6%

1.00
22.75
13.40
21.85

$
$
$
$

4.5%

0.70
15.75
11.61
15.50

$
$
$
$

3.6%

0.32
8.90
4.65
8.79

$
$
$
$

4.7%

0.24
5.49
3.46
5.10

NOTES:
(1) In this Annual Report we use certain financial measures that do not comply with Canadian generally accepted accounting principles (GAAP) or have
standardized meanings, and thus, may not be comparable to similar measures presented by other issuers, for example EBIT and EBITDA and Other
Information in the above table. Management believes that EBIT and EBITDA may be useful in assessing our operating performance and as an indicator of
our ability to service or incur indebtedness, make capital expenditures and finance working capital requirements. EBIT and EBITDA should not be considered
in isolation or as an alternative to cash from operating activities or other combined income or cash flow data prepared in accordance with Canadian GAAP.
EBIT, EBITDA and a number of the ratios provided under Other Information are used by debt and equity analysts to compare our performance against other
public companies.

This terminology is defined on page 48, under Definitions. See financial statements for GAAP earnings.

(2) Statements contained in this document that relate to Russel Metals’ beliefs or expectations as to certain future events are not statements of historical fact
and are forward-looking statements. Russel Metals cautions readers that there are important factors, risks and uncertainties, including but not limited to
economic, competitive and governmental factors affecting Russel Metals’ operations, markets, products, services and prices that could cause the
Company’s actual results, performance or achievements to be materially different from those forecasted or anticipated by Russel Metals in such forward-
looking statements. All dollar references in this report are in Canadian dollars unless otherwise stated.

2 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

> report to shareholders

For the year ended December 31, 2006

focused on profitability

With the 10-year anniversary of the appointment of the current management

team, we thought we would reflect on your Company, the industry, the corporate

environment and shareholder returns, and share our thoughts on the future.

Our team has enjoyed the support of our Board of Directors, shareholders,

customers, suppliers, and most importantly, our employees, who have played

such a major part in our successes. Before we begin, I would like to thank each

and every one of our stakeholders for their past and continued support.

The Company

In 1997, our shareholders sent a clear message for change as was indicated in our inaugural Annual

Report of that year. At that time, we reduced layers of management, modified compensation plans to

emphasize pay for per formance, centralized metals service centers purchasing and stressed a renewed

focus on bottom line performance. Over our tenure, these priorities have never wavered and once the

financial health of the Company warranted it, we were able to reward our shareholders through escalating

earnings distributions.

In 2006, we generated the second best earnings results in our history and we now enjoy a balance sheet

that evidences a financial strength that we could not have envisioned 10 years ago. 2006 was the third

straight year of outstanding per formance for the Company, mirroring the resurgence and stability of the

steel sector. Our industry-leading dividend increased by 60% to $1.60 per share in 2006, further

strengthening the financial return to our shareholders. The dividend has increased in each of the last

five years reflecting the Company’s philosophy of rewarding our shareholders.

All three of our operating segments had an excellent year in 2006. The operating profit in our metals

service centers segment improved over 2005 to $126 million. The metals service centers return on

ending net assets of 27% was very strong for the third straight year.

During the last half of 2006, the impact of the strong Canadian dollar was felt in our Canadian operations

as our manufacturing customers were negatively impacted on products they export to the United States.

The Canadian dollar has recently weakened, which could potentially help Canadian manufacturers if it

remains at current levels.

Despite one of the mildest winters in history, our energy tubular products segment produced record

earnings levels for the second straight year. This segment generated operating earnings of $62 million

and a return on ending net assets employed of 23%. Comco Pipe and Supply Company in Alberta enjoyed

its second straight year of record profits and Pioneer Pipe in Colorado produced record earnings from

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3

> report to shareholders cont’d

For the year ended December 31, 2006

operations in 2006. Oil prices remained high throughout most of 2006. Recent drops in the price of crude

oil and natural gas coupled with the perceived negative impact on oil and gas drilling activity in Canada due

to tax changes for income trusts could result in slower oil and gas exploration activities in 2007, which was

evidenced in the fourth quarter of 2006.

Our steel distributors segment had an extraordinary year and produced earnings from operations of

$77 million, up 65% from 2005, which was near the peak that was experienced in 2004. The steel

distributors’ 42% return on ending net assets employed led our three business segments for the third

straight year.

With our continued high level of profitability and our common share issue early in 2006, we have further

strengthened our balance sheet. We are now positioned to be a major participant in the accelerating

consolidation occurring in the steel sector. Our cash on hand is slightly greater than our total debt and our

shareholders’ equity increased 66% to $895 million, or $14.34 per share.

The balance sheet is currently under leveraged and we continue to evaluate internal and external growth

opportunities. We believe that an opportunity to significantly add value for our shareholders through an

acquisition, or acquisitions, will occur in due course, and we have the financial strength in our balance

sheet to execute any transaction that may occur in the sector.

During the first half of 2006, we experienced volume increases that led to working capital levels that proved

to be unsustainable due to the drop in our business activities during the second half. We successfully

addressed these issues in the metals service centers segment in the fourth quarter and we will continue to

be focused on reducing our working capital usage in the other two segments in the first half of 2007.

Steel prices began and closed 2006 at similar levels, but within the year we experienced price increases in the

third quarter and price declines in the fourth quarter. On the demand side, 2006 opened with very strong

demand in Canada, which softened later in the year.

The Industry

The trends in the industry continue to indicate support for the ongoing steel sector recovery that started in

early 2004. The price of steel remains volatile, but the high and low points in pricing are at higher and more

economically viable levels, for both producers and service centers. During 2006, the steel producers

managed the production of steel in such a fashion that supply and demand remained fairly balanced,

although, there was an inordinate inventory build in the second half. The consolidation trend within the steel

sector continued in 2006, both with steel producers and service centers. Strategic buyers have executed the

majority of acquisitions in the producer area, whereas in the service center area both strategic and financial

sponsors have been very active.

Growth through acquisition remains a priority for us. Our patience and discipline in evaluating acquisitions

was tested during 2006 as both strategic and financial buyers acquired some excellent service center

operations. Despite being interested, we felt that the operations that were sold did not meet our minimum

criteria at the amounts paid. Consequently, we elected to pass on the prospects that were presented as we

felt that eventually there would be better opportunities.

4 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

2006 was the third straight year

of outstanding performance

The environment ten years ago in 1997 was very similar to today. We were made aware of several

acquisition opportunities, but we were either uncomfortable with the high purchase prices ultimately

paid or declined to participate at all for strategic reasons. In our 1997 Annual Report, we stated “we

are of the view that the prices being offered and paid for those metals distribution operations were not

justifiable over the course of the steel cycle”. Our patience allowed us to wait and acquire some quality

operations including A.J. Forsyth, Williams Steel, Spartan Steel, Triumph Tubulars and Acier Leroux at

more reasonable pricing levels.

The Corporate Environment

Over the past ten years corporate governance practices have evolved significantly, and governance now

has a higher profile than at any other time in history. Our website includes the Company’s Values

Statement, the Code of Business Conduct and the Charter of the Board of Directors and its Committees.

Our corporate governance practices have been enhanced to reflect the emerging best practices in

Canada. Our efforts were recognized with both an improved and a high ranking in The Globe and

Mail ’s board games analysis of Canada’s top corporations.

There is currently a requirement for executive certifications on internal control over financial reporting.

We support the view expressed by the International Federation of Accountants – “it was felt that those

companies that viewed internal control as sound business practices were more likely to have embedded

it into their normal business processes, and more likely to feel that they had benefited as a result”. We

have stressed internal controls throughout the Company, and over the last ten years we have reinforced

this culture through an active internal audit department. This practice is part of our business

environment and is well accepted within our culture.

A second topic of discussion in the governance area that has gained media attention is the backdating of

share option grants. We have consistently employed very rigorous pricing rules for the granting of options

and we have never backdated options. Our share option plan requires options to be priced at or above

the close of the market on the day prior to our Board meeting. When financial information or other

material information is released, our Board imposes stricter requirements, namely, the common share

options be priced at the greater of the price on the close of the market on the day prior to the Board

meeting and the close of the market on the second day following the Board meeting.

Shareholder Returns

In 1997, when current management was appointed, our share price was $4.95 per share, we did not pay

dividends to common shareholders and our market capitalization was $252 million. Once the financial

health of our Company was stabilized, we emphasized shareholder returns as a primary management

priority. At the end of 2006, our share price was $26.70, we paid dividends of $0.40 per quarter and our

market capitalization was $1.7 billion. Our share price increased for the fifth straight year, and in 2006 the

increase was 22%. Since 2001, our share price has appreciated 742% in the six-year period.

In Canada, the attractiveness of dividend paying stocks strengthened further in 2006 following the 2005

announcement that dividends would attract lower individual income tax rates. In 2006, the Canadian

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 5

> report to shareholders cont’d

For the year ended December 31, 2006

government proposed the implementation of taxes on income trusts which further levelled the playing field

for dividend generating stocks. For the fifth consecutive year, our dividend was increased and it grew by 60%

in 2006 alone. Our annual dividend of $1.60 per share has made our common shares one of the top

yielding securities in the S&P/TSX Composite Index and our shares currently yield about 6%.

Outlook

As mentioned earlier, we noticed softness in demand in both the metals service centers and the energy

tubular products segments in the last quarter of 2006. The metals service centers were negatively impacted

by the strength of the Canadian dollar. We believe that this affected our customers who sell manufactured

products into the U.S.

When I compare the state of our Company and the current steel environment to the period prior to 2004,

I am very pleased. We have just finished three years of record earnings, pay one of the highest yielding

dividends on the TSX, have more cash than long-term debt, and are poised to grow the Company both

organically and through external acquisitions. Entering 2007, North American steel prices appear to be

stabilizing. The service center industry inventory overhang is shrinking, steel imports are declining as

steel prices outside of North America increase, and demand is improving over the fourth quarter of 2006.

Looking back on the last 10 years, management feels a sense of pride at what has been accomplished.

We are, however, far from complacent as we live in a competitive, highly cyclical industry. We are well

positioned to capitalize on any eventualities that may present themselves.

E.M. Siegel, Jr.

President and Chief Executive Officer

6 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

> management’s discussion and analysis

For the year ended December 31, 2006

The Management’s Discussion and Analysis of Financial Condition and Results of Operations of Russel Metals Inc. and its
subsidiaries provides information to assist the reader and should be read in conjunction with the audited Consolidated Financial
Statements for the year ended December 31, 2006, including the notes thereto. Statements contained in this document that relate
to our beliefs or expectations as to certain future events are not statements of historical fact and are forward-looking statements.
We caution readers that there are important factors, risks and uncertainties, including but not limited to economic, competitive and
governmental factors affecting our operations, markets, products, services and prices that could cause our actual results,
performance or achievements to be materially different from those forecasted or anticipated by us in such forward-looking
statements. All dollar references in this report are in Canadian dollars unless otherwise stated.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of measures that
are not prescribed by generally accepted accounting principles (GAAP) and as such may not be comparable to similar measures
presented by other companies. We believe these measures are commonly employed to measure performance in our industry and are
used by analysts, investors, lenders and other interested parties to evaluate financial performance and our ability to incur and
service debt to support our business activities. The measures we use are specifically defined where they are first used in this report.

While we believe that non-GAAP measures are helpful supplemental information, they should not be considered in isolation as an
alternative to net income; cash flows generated by operating, investing or financing activities; or other financial statement data
presented in accordance with GAAP.

> Additional information related to Russel Metals Inc., including our Annual Information Form, may be obtained from SEDAR at

www.sedar.com or on our website at www.russelmetals.com.

Overview
We are one of the largest metals distribution companies in North America. We conduct business primarily in three metals
distribution segments: metals service centers; energy tubular products; and steel distributors.

Continued high, stable steel prices and strong demand resulted in higher operating profits for 2006 in all three segments compared
to the same period in 2005.

Our basic earnings per share of $2.65 for 2006 are higher than the $2.47 reported for 2005. Our operating profits increased by
24% and our net earnings increased by 27% for the year ended December 31, 2006 compared to 2005. Our basic earnings per
share for 2006 increased by a smaller percentage than the net earnings increased, as our weighted average shares outstanding
increased 19% due to common shares issued during 2006.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 7

060504030206050403020605040302Return on Capital Employed%Earnings per Share$ per shareTotal Revenues$ billions1.42.62.41.52.70.710.413.642.472.651115442928> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Summarized Financial Information
The table discloses selected information related to revenues, earnings and common share information over the last eight quarters.

2006

(millions, except per share data and volumes)

Mar. 31

June 30

Sept. 30

Dec. 31

Three Months Ended

Year
Ended

Dec. 31

Revenues

Earnings from operations

Net earnings

– continuing operations

Net earnings

Basic earnings per common share

– continuing operations

Basic earnings per common share

Diluted earnings per common share

– continuing operations

Diluted earnings per common share

Market price of common shares

High

Low

740.7

685.9

672.3

593.2

2,692.1

61.2

37.3

0.71

0.70

27.50

21.61

70.0

46.2

0.74

27.47

22.15

69.2

44.6

0.72

0.71

29.05

24.30

48.6

30.6

0.49

29.38

25.95

249.0

158.7

2.65

2.63

29.38

21.61

Number of common shares traded

17,295,366

18,556,903

16,513,705

15,387,461

67,753,435

2005

(millions, except per share data and volumes)

Mar. 31

June 30

Sept. 30

Dec. 31

Three Months Ended

Year
Ended

Dec. 31

Revenues

Earnings from operations

Net earnings

– continuing operations

Net earnings

Basic earnings per common share

– continuing operations

Basic earnings per common share

Diluted earnings per common share

– continuing operations

Diluted earnings per common share

Market price of common shares

High

Low

693.6

644.5

629.3

646.7

2,614.1

58.8

33.5

33.4

0.67

0.66

18.78

14.60

39.2

23.5

0.46

16.84

13.40

42.6

25.8

0.51

18.84

13.85

60.8

41.8

0.82

0.81

22.75

17.25

201.4

124.6

124.5

2.47

2.44

22.75

13.40

Number of common shares traded

12,304,628

17,461,794

13,890,518

13,100,827

56,757,767

8 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Results of Operations
The following table provides operating profits from continuing operations before interest, taxes and restructuring costs. The
corporate expenses included are not allocated to specific operating segments. Gross margins (revenue minus cost of sales) as a
percentage of revenues for the operating segments are also shown below. The table shows the segments as they are reported to
management and they are consistent with the segmented reporting in the consolidated financial statements.

(millions, except percentages)

Segment Revenues

Metals service centers

Energy tubular products

Steel distributors

Other

Segment Operating Profits

Metals service centers

Energy tubular products

Steel distributors

Corporate expenses

Other

2006

2005

2004

1,507.9

1,538.5

1,530.9

614.3

559.4

10.5

595.2

468.7

11.7

395.3

471.2

14.0

2,692.1

2,614.1

2,411.4

126.4

115.2

209.4

62.2

76.7

(18.2)

1.9

54.0

46.6

(16.8)

2.4

47.2

78.2

(16.3)

4.6

2006

Change
as a %
of 2005

2005

Change
as a %
of 2004

(2%)

19%

10%

15%

65%

(8%)

51%

(1%)

(45%)

14%

(40%)

(2%)

Operating profits from continuing operations

249.0

201.4

323.1

24%

(38%)

Segment Gross Margin as a % of Revenues

Metals service centers

Energy tubular products

Steel distributors

Total operations

Segment Operating Profits as a % of Revenues

Metals service centers

Energy tubular products

Steel distributors

Total operations

Return on Averaged Capital Employed

25.1%

16.5%

18.3%

21.9%

8.4%

10.1%

13.7%

9.3%

23.1%

14.6%

14.3%

19.8%

7.5%

9.1%

9.9%

7.7%

30.9%

19.6%

23.5%

27.8%

13.7%

11.9%

16.6%

13.4%

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 9

060504030206050403020605040302Steel Distributors%Energy Tubular Products%Metals Service Centers%152650131514412913287031292949> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Metals Service Centers

a) Description of operations
We provide processing and distribution services to a broad base of more than 19,000 end users through a network of 52 Canadian
locations and 4 U.S. locations. Our metals service centers carry a broad line of products in a wide range of sizes, shapes and
specifications, including carbon hot rolled and cold finished steel, pipe and tubular products, stainless steel and aluminum. We
purchase these products primarily from steel producers in North America and process and package them in accordance with end
user specifications. We service all major geographic regions of Canada and the Midwest region in the United States. Within Canada,
our service centers operate under the names Russel Metals, Métaux Russel, A.J. Forsyth, Acier Leroux, Acier Loubier, Acier Richler,
B&T Steel, Leroux Steel, Mégantic Métal, McCabe Steel and York-Ennis. Our U.S. service center operations are conducted under the
names Russel Metals Williams Bahcall and Baldwin International. Our Williams Bahcall operations focus primarily on the distribution
of general line carbon products through three facilities located in Wisconsin. Baldwin International distributes specialty alloy
products from its facility in Ohio.

Our metals service centers revenues and cost of sales for 2005 and 2004 have been restated to report customer rebates as a
reduction in the corresponding revenue as required by a new Canadian accounting standard adopted January 1, 2006. This restatement
decreased our annual revenues and cost of sales by $1.2 million for 2005 and $1.1 million for 2004. There was no impact on
2005 or 2004 net earnings.

Factors affecting results

b)
The following is a general discussion of the significant factors affecting our metals service centers results. More specific
information on how these factors impacted 2006, 2005 and 2004 is found in the sections that follow.

Steel pricing fluctuates significantly throughout the business cycle. Steel prices are influenced by overall demand, trade sanctions,
scrap steel pricing and product availability. Supply side management, practiced by steel producers in North America, and
international supply and demand, which impacts steel imports, affect product availability. Trade sanctions are initiated either by
steel mills or government agencies in North America and, less directly, worldwide. Steel prices continue to be volatile; however,
they are currently at levels above historical norms.

Demand is significantly affected by economic cycles with revenues and operating profit fluctuating with the level of general business
activity in the markets serviced. We are most impacted by the manufacturing (excluding automotive), resource and construction
segments of the Canadian economy. Demand has been relatively stable over the last several years.

Canadian service centers, which represent the majority of our metals service center operations, are particularly affected by regional
general economic conditions. We have operations in all regions of Canada and believe that we have a national market share above
25%. This large market share and our diverse customer base of approximately 19,000 customers suggest that our results should
mirror the performance of the regional economies of Canada excluding the automotive sector in which we are not a significant
participant.

Metals Service Centers

1 0 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

060504030206050403020605040302Operating Profits as a % of RevenuesOperating Profits$ millionsRevenues$ millions7511,5391,53191032382091154.14.213.77.51,5081268.4c) Metals service centers segment results -- 2006 compared to 2005
Revenues for 2006 were 2% lower than revenues for 2005. The average selling price of steel for 2006 declined approximately 3%
from the average selling price for 2005. Our average selling price declined each quarter for the first three quarters in 2005.
Average selling price remained relatively constant after that, with the average selling price for the 2006 year being equivalent to the
average selling price for the fourth quarter of 2005.

Overall tons shipped for 2006 were approximately 1% higher than those shipped in 2005. Tons shipped in Alberta and British
Columbia were both up 10% due to oil and gas related activity in Alberta and infrastructure building in both provinces. Volumes were
strong at our Williams Bahcall operations with an increase of approximately 12% in tons shipped due to improved customer demand
in the Wisconsin region. Tons shipped declined approximately 9% in our Atlantic region due to lack of project work in this area. All
other regions had tons shipped that approximated those shipped in 2005.

Gross margin as a percentage of revenues improved from 23.1% for 2005 to 25.1% for 2006 related to stable inventory costs
during 2006. We estimated that our 2005 operating profit included a before tax inventory holding loss of approximately $38 million.
The average cost per ton of our inventory at December 31, 2006 approximated that of December 31, 2005.

The average revenue per invoice for 2006 was approximately $1,906 compared to the average for 2005 of approximately $1,888.

We believe that the strength of the Canadian dollar adversely impacted our customers in Ontario and Quebec who sell finished
product to the U.S. and consequently we had reduced volumes in these regions. The change in the Canadian dollar versus the U.S.
dollar has not been a significant factor in the metals service centers in relation to inventory costs as inventory is purchased for our
Canadian operations from Canadian or U.S. suppliers based on the landed cost at the specific location in Canada.

Operating expenses in our metals service centers segment increased by $11.8 million, or 5%, compared to 2005. This was
primarily due to higher compensation expense, delivery costs and bad debt expense. The increase in compensation expense relates
to higher wages in regions where the volumes are up, as well as higher costs to maintain staff in Western Canada and higher
amounts within our pay for performance plans. The increase in bad debt expense occurred in the first quarter of 2006 from a
specific customer and does not relate to a general deterioration.

Metals service centers operating profits for 2006 of $126.4 million were $11.2 million higher than 2005, related to the lower cost
of goods sold and the elimination in 2006 of inventory holding losses experienced in 2005.

d) Metals service centers segment results -- 2005 compared to 2004
Revenue for 2005 approximated that of 2004. The average selling price of steel for the year ended December 31, 2005 was
approximately the same as the year ended December 31, 2004. The average selling price increased during the first nine months of
2004 to a price peak in September 2004. The price declined since that date to July 2005 and has been relatively stable since then.

Overall tons shipped in 2005 approximated those in 2004. Tons shipped declined in eastern Canada and improved in the Prairie
region and at Williams Bahcall. Tons shipped in the Prairie region were approximately 8% higher in 2005 compared to 2004, due to
strong oil and gas activity in that area. Demand was strong at the Williams Bahcall operations with approximately a 5% increase in
tons due to customer demand in that region. We believe that the decline in tons shipped in the eastern Canadian regions primarily
related to a slowdown in manufacturing activity and reductions in inventories at our customers’ locations.

In January 2004, steel mills initiated raw material surcharges due to sharp price increases in scrap metal and other input costs
that caused the price of steel to increase substantially. These surcharges, which were being applied to most of the service center
carbon steel products, approximated $190 per ton in September 2004. Since then, many mills have included the surcharge within
their base metal price and eliminated the surcharge as a separate cost. The average price of metal has declined since September
2004; however, the 2005 average price of metal is high compared to the price prior to the implementation of surcharges. Based on
our product mix, the average cost of metal received, including surcharges, in the month of December 2005 was approximately 44%

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 1 1

> management’s discussion and analysis cont’d

For the year ended December 31, 2006

above the price for the month of December 2003 prior to the implementation of surcharges. Based on the same information in the
month of December 2006, the price is approximately 6% above the price for the month of December 2005 due to mill pricing
pressure in the last half of 2006.

Gross margin as a percentage of revenues declined from 30.9% for the year ended December 31, 2004 to 23.1% for the year
ended December 31, 2005.

We estimated that our operating profit for the year ended December 31, 2004 included a before tax inventory holding gain of
approximately $63 million due to rising steel prices. For the year ended December 31, 2005, we estimated that our operating profit
included a before tax inventory holding loss of approximately $38 million due to falling steel prices. The majority of our inventories
are accounted for using average cost. The inventory holding gains or losses were estimated based on the best information
available. We are unable to quantify with precision inventory holding gains or losses due to the complexity of our 56 service center
locations, which buy and sell over 14,000 different SKUs.

The average revenue per invoice for 2005 was approximately $1,888 compared to the average for 2004 of approximately $1,866
and for 2003 of approximately $989.

Operating expenses in the metals service center segment decreased by $23.8 million, or 9%, for 2005 compared to 2004,
primarily as a result of variable compensation programs that reflected the decreased earnings, year over year, and lower
compensation paid in locations that were restructured in 2004 or early 2005.

Metals service center operating profits for 2005 decreased $94.2 million, or 45%, compared to 2004. The decline related to an
unfavourable change in inventory holding gains and losses of approximately $101 million for 2005 compared to 2004, offset by
lower expenses.

Energy Tubular Products

a) Description of operations
These operations distribute oil country tubular goods (OCTG), line pipe, tubes, valves and fittings, primarily to the energy industry
in Western Canada and the western United States, from 5 Canadian and 2 U.S. locations. We purchase these products either from
the pipe processing arms of North American steel mills, independent manufacturers of pipe and pipe accessories or international
steel mills. Our energy tubular products segment operates under the names Comco Pipe and Supply Company, Fedmet Tubulars,
Triumph Tubular & Supply, Pioneer Pipe and Spartan Steel.

Factors affecting results

b)
The following is a general discussion of the factors affecting our energy tubular products segment operations. More specific
information on how these factors impacted 2006, 2005 and 2004 is found in the sections that follow.

Energy Tubular Products

1 2 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

060504030206050403020605040302Operating Profits asa % of RevenuesOperating Profits$ millionsRevenues $ millions 290595395298141447544.64.711.99.16146210.1Oil and gas pricing, which is one of the factors that can impact oil rig count and subsequent drilling activities particularly in Western
Canada, has the ability to significantly affect demand for our product. Oil and gas pricing has been high throughout 2005 and 2006.
Oil and gas prices have dropped during 2006, with gas prices declining most significantly. Oil prices have declined further in 2007.

Oil and gas drilling in Western Canada peaks during the period from October to March; thus revenues and operating profits have
been historically higher during our first and fourth quarters. In 2006, activity declined in the fourth quarter such that fourth quarter
revenues and operating profits approximated those of the third quarter of 2006 and revenues declined approximately 8% from the
fourth quarter of 2005.

Our Canadian operations are affected by the U.S. dollar exchange rate since some products are sourced outside Canada and are
priced in U.S. dollars. While metal pricing has impacted our earnings more significantly, the appreciation of the Canadian dollar has
also contributed by reducing our average cost of metal.

Pricing is influenced by overall demand, trade sanctions and product availability. Trade sanctions are initiated either by steel mills or
government agencies in North America. Trade sanctions have not been a factor for pipe products during the reported periods.

Energy tubular products segment results -- 2006 compared to 2005

c)
Revenues increased 3% to $614.3 million for 2006 compared to 2005. The increase in revenues is related to strong volumes sold
to the oil and gas drilling industry in both Western Canada and the western United States. The second and third quarters of 2005
had significant project revenue related to infrastructure build for the oil sands of northern Alberta that was not present in 2006.
Revenues were significantly higher than the levels prior to 2005.

Gross margin as a percentage of revenues was 16.5% for 2006, an increase from 14.6% for 2005. This improved margin was
generated by higher margins on tubular products in short supply. The 2006 results include a smaller portion of lower margin energy
project revenues resulting in a higher gross margin as a percentage of revenues. Gross margin dollars increased 16% in 2006
mainly related to higher volumes.

Operating expenses were higher by $5.9 million for 2006 compared to 2005 due to higher delivery costs related to volume
increases and variable compensation related to higher profitability.

Operating profits increased by $8.2 million, or 15%, to $62.2 million for 2006 compared to 2005. This increase in operating profits
was driven by higher volumes and gross margins.

Energy tubular products segment results -- 2005 compared to 2004

d)
Revenues increased 51% to $595.2 million in 2005 compared to 2004. Oil and gas related activity in Alberta was the driving factor
for this large increase in volume. Project revenue, mainly from large projects in the oil sands of northern Alberta, accounted for
approximately 23% of the revenue increase. Continued high oil and gas pricing and more rig activity during 2005 compared to 2004
accounted for the rest of the increase in revenue.

This segment’s gross margin as a percentage of revenues was 14.6% for 2005 compared to 19.6% for 2004. The lower margin
mainly relates to the increased cost of goods sold resulting from higher metal pricing.

Operating profits increased by $6.8 million, or 14%, in 2005 compared to 2004. This increase in operating profits was driven by
higher volumes and higher metal prices.

Steel Distributors

a) Description of operations
Our steel distributors act as master distributors selling steel in large volumes to other steel service centers and equipment
manufacturers mainly on an “as is” basis. Our U.S. operation processes some coil for its customer base at its cut to length facility
in Houston, Texas. Our steel distributors source their steel both domestically and offshore. The international sourcing provides our
other business segments with valuable insight regarding international pricing trends and their potential impact on steel markets in
North America.

The main steel products sourced by this segment are structural beam, plate, coils, pipe and tubing. The operations in this sector
are Wirth Steel and Sunbelt Group. Arrow Steel, a division of Sunbelt Group, processes coils.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 1 3

> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Factors affecting results

b)
The following is a general discussion of the factors affecting our steel distributors. More specific information on how these factors
impacted 2006, 2005 and 2004 is found in the sections that follow.

Steel pricing is influenced by overall demand, trade sanctions and product availability both domestically and worldwide. Trade
sanctions are initiated either by steel mills or government agencies in North America. Mill capacity by product line in North America
and international supply and demand impact steel imports and significantly affect product availability.

Demand for steel that is sourced offshore fluctuates significantly, mainly driven by price and product availability in North America.
During 2006, demand was high due to North American shortages of certain products. Our steel distributors have a significant
number of customers who buy from them on a periodic basis, which can result in large fluctuations in revenues reported from
period to period.

Movement in the U.S. dollar has had some effect on our Canadian steel distributor operations since inventory is purchased mainly
in U.S. dollars. Steel is predominantly transacted in U.S. dollars and the Canadian mills adjust the price accordingly. The effect of
the strengthening Canadian dollar was fully offset by rising metal prices.

c) Steel distributors segment results -- 2006 compared to 2005
Steel distributors revenues increased 19% to $559.4 million for 2006 compared to 2005. Higher volumes accounted for most of
the increase in revenues. Volumes were significantly higher due to strong demand for steel.

Gross margin as a percentage of revenues of 18.3% for the year ended December 31, 2006 was higher than the 14.3% for 2005
due to strong demand for our products resulting in higher metal pricing in 2006.

Operating expenses were $5.1 million higher for 2006 compared to 2005, mainly due to variable compensation related to higher
profitability.

Operating profits for 2006 were $76.7 million, which is $30.1 million higher than 2005, generated by higher volumes and selling
prices. Operating profits for 2006 were $1.5 million less than operating profits for our record year in 2004; however, volumes were
more of a factor in 2006 with pricing being the principal factor in 2004.

d) Steel distributors segment results -- 2005 compared to 2004
Steel distributors revenues decreased 1% in 2005 compared to 2004. While revenue was flat, 2005 revenues were generated by
lower average selling prices offset by higher volumes.

Gross margin as a percentage of revenues declined from 23.5% in 2004 compared to 14.3% for 2005. This decline primarily
related to the price of steel being at the highest levels in 2004 and stronger demand for certain products in 2004. The 2005
results were also impacted by holding losses versus holding gains in 2004.

Operating expenses were 37% lower for 2005 compared to 2004, which was mainly due to lower variable compensation.

Operating profits for 2005 were $46.6 million, which was $31.6 million lower than 2004, mainly driven by steel pricing.

Steel Distributors

1 4 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

0605040302060504030206 05040302348469471284281378474.78.116.69.9Operating Profits asa % of RevenuesOperating Profits$ millionsRevenues $ millions 5597713.7 Other -- 2006 Compared to 2005 and 2004
Other revenues and income represents the results of our bulk commodities handling terminal in Thunder Bay, Ontario. Revenues
and operating profits for 2006 have declined due to lower volumes handled.

Corporate Expenses -- 2006 Compared to 2005 and 2004
Corporate expenses increased primarily due to higher stock-based compensation expense in 2006.

Consolidated Results -- 2006 Compared to 2005 and 2004
Operating profits from continuing operations before other costs were $249.0 million in 2006, compared to $201.4 million in 2005
and $323.1 million in 2004. Higher volumes and stable, high metal pricing were the factors that contributed to the increase in
2006. Strong results for 2006 resulted in operating earnings for each of our three metals segments being higher than the results
for the same period in 2005.

Interest Expense
The following table shows the components of our interest expense.

(millions)

Interest on long-term debt

6.375% Senior Notes

10% Senior Notes

8% Convertible Debentures

Other interest (net)

Total interest

2006

2005

2004

14.8

15.2

–

14.8

(8.1)

–

15.2

2.3

6.7

17.5

13.5

2.9

0.5

16.9

3.1

20.0

Consolidated interest expense for 2006 decreased by $10.8 million to $6.7 million compared to 2005. The proceeds from our
issue of common shares in March 2006 were partially used to repay short-term debt and resulted in cash on hand and
corresponding interest income. The change in interest expense on long-term debt relates to lower exchange rates in 2006 on the
US$75 million of unhedged long-term debt.

Debt Restructuring Costs
During the first quarter of 2004, we restructured our long-term debt at interest rates that significantly reduced the interest costs.
We issued US$175 million of 6.375% Senior Notes due March 1, 2014. As of June 1, 2004, all other long-term debt was
redeemed. We also entered into fixed interest cross currency swaps to hedge US$100 million of the 6.375% Senior Notes to
eliminate the foreign exchange exposure. The currency swaps result in an additional interest cost of $0.3 million per quarter,
which is included in the interest expense.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 1 5

060504030206050403020605040302Interest Expense $ millions Total Operating Profits$ millionsTotal Revenues$ billions1.42.62.41.57061323201232020182.72497> management’s discussion and analysis cont’d

For the year ended December 31, 2006

On February 23, 2004, we redeemed US$95.5 million of our 10% Senior Notes at US$1,072.50 per US$1,000 unit. The US$72.50
per unit premium as well as the deferred costs related to the debt redeemed resulted in a charge of $11.3 million in the first
quarter of 2004.

The remaining US$20.1 million of 10% Senior Notes was redeemed on June 1, 2004 at US$1,050 per US$1,000 unit. The
US$50.00 per unit premium and the remaining deferred costs resulted in a charge of $1.9 million in the second quarter of 2004.
The remaining deferred costs of $0.5 million related to the previous bank facility were charged to debt redemption costs in the
fourth quarter of 2004.

Restructuring
We sold our Milton, Ontario facility in May 2006. We realized a gain on sale before income taxes of approximately $1.2 million.
This property was classified as an asset held for sale in 2005. The restructuring charges for 2005 mainly related to our Lachine,
Quebec facility, which was sold in the second quarter of 2005, and our Milton, Ontario facility, which was closed in December 2005,
prior to its sale in 2006.

Income Taxes
Our provision for income taxes for 2006 was $84.8 million, which was higher than 2005 due to higher earnings in 2006. In 2006,
our income tax rate was 34.8%. We estimate our normalized effective income tax rate to be approximately 35%.

Our income tax expense for 2006 was lower as we were able to utilize unrecorded capital losses against the capital gain on the
sale of our Milton facility. During the second quarter of 2006, the Canadian Federal budget, which proposed rate reductions from
2008 to 2010, was enacted. This change reduced our future tax liabilities by approximately $0.4 million resulting in lower tax
expense. Non-deductible expenses related to the accounting treatment of stock options negatively impacted our income tax rate.

During 2005, the Company recorded income tax recoveries of $6.7 million related to tax reassessment, issues under appeal with
the tax authorities and adjustments related to prior years’ taxes. This recovery of taxes reduced the income tax rate for 2005 to
32.6%. Excluding the tax recoveries, our income tax rate for the year ended December 31, 2005 would have been 36.2%. For the
year ended December 31, 2004, the income tax rate of 36.8% was higher than the average combined statutory rate due to non-
deductible items.

Earnings
Net earnings for 2006 were $158.7 million compared to $124.5 million for 2005. Basic earnings per common share for 2006 were
$2.65 compared to $2.47 for 2005. Our higher net earnings in 2006 were driven by strong results in all three metals segments.

1 6 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

060504030206050403020605040302Common Share Appreciation$ per shareCommon Share Price$ per shareDividends Paid per Common Share$ per share0.170.900.5050.295.108.7915.5021.853.691.506.716.351.5026.704.85Shares Outstanding and Dividends
In March 2006, we issued 11 million common shares at $25.75 per common share. As at December 31, 2006, we had
62,366,842 common shares outstanding and at February 19, 2007 we had 62,367,242 common shares outstanding.

The weighted average number of common shares outstanding for 2006 was 59,887,382 compared to 50,461,330 for 2005 and
48,671,915 for 2004. The 2006 increase relates to the public offering of 11 million common shares in March 2006 and the
exercise of employee stock options.

We have returned a portion of our earnings to our shareholders by paying common share dividends of $89.4 million in 2006,
$45.4 million in 2005 and $25.0 million in 2004. The increase relates to additional shares outstanding and the increased dividend
rate. The cash dividend paid was $1.50 per share for 2006, $0.90 per share for 2005 and $0.505 per share for 2004.

Our U.S. Senior Notes indenture provides that any dividend payment in excess of $0.08 per common share per quarter is
considered a restricted payment. We currently have $432 million available for restricted payments.

EBITDA
The following table shows the reconciliation of GAAP earnings from continuing operations to EBITDA:

(millions)

Earnings from continuing operations

Provision for income taxes

Interest expense, net

Earnings before interest and income taxes (EBIT)

Depreciation and amortization

2006

2005

158.7

124.6

84.8

6.7

250.2

20.0

60.4

17.5

202.5

19.2

Earnings before interest, income taxes, depreciation and amortization (EBITDA)

270.2

221.7

2004

180.4

105.3

20.0

305.7

18.6

324.3

We believe that EBITDA may be useful in assessing our operating performance and as an indicator of our ability to service or incur
indebtedness, make capital expenditures and finance working capital requirements. The items excluded in determining EBITDA are
significant in assessing our operating results and liquidity. Therefore, EBITDA should not be considered in isolation or as an
alternative to cash from operating activities or other combined income or cash flow data prepared in accordance with GAAP.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 1 7

05010015020025030035006050403020.00.51.01.52.02.53.03.54.00605040302010203040506070800605040302"02" 38"03" 43"04" 50"05" 51"06" 62"02" 83"03" 71"04" 324"05" 222"06" 270"02" 2.9"03" 3.8"04" 0.6"05" 0.9"06" 0.8060504030206050403020605040302Common Shares OutstandingmillionsInterest BearingDebt to EBITDATimesEBITDA$ millions83222324712.93.80.60.90.83850435162270> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Capital Expenditures
Capital expenditures were $27.6 million for 2006 compared to $26.5 million for 2005. We are currently expanding some of our
locations and adding laser burning equipment to certain of our metals service center operations.

Capital expenditures mainly relate to replacement of capital items, the purchase of additional processing equipment across a broad
base of our operations and upgrades to our existing facilities and computer systems. Our expectation is for capital expenditures to
be at levels higher than depreciation expense over a period of years due to the construction of larger facilities in growing markets
and for expanding product lines and processing capabilities.

Depreciation expense was $18.4 million in 2006 and $17.7 million in 2005.

Liquidity
We stress working capital management to ensure that working capital is minimized and leverage reduced over the economic cycle.
The metals distribution business experiences significant swings in cash flow in order to fund working capital. Inventory and
accounts receivable represent a large percentage of our total assets employed and vary throughout each cycle. At December 31,
2006, current assets represented 85% of our total assets versus 81% at December 31, 2005. Total assets increased from
$1.1 billion at December 31, 2005 to $1.4 billion at December 31, 2006 primarily due to cash on hand from the issue of common
shares in March 2006 and an increase in inventory levels.

The balances disclosed in our consolidated cash flow statements are adjusted to remove the non-cash component related to foreign
exchange rate fluctuations impacting inventory, accounts receivable, accounts payable and income tax balances of our U.S. operations.

Overall inventory turns declined due to an increase in inventory in all segments in the last half of 2006. The increase in inventory
utilized $188.2 million of cash. Although sales volumes remain strong, inventory levels will be reduced over the next several
quarters. Our goal is to ensure that we keep our inventory levels as low as possible while still satisfying the needs of our
customers in order to minimize inventory valuation risk.

Inventory turns are calculated using our cost of sales for the quarter annualized, divided by our inventory position at the end of
the quarter.

Inventory Turns

Metals service centers

Energy tubular products

Steel distributors

Total operations

Dec. 31
2006

Sept. 30
2006

June 30
2006

Mar. 31
2006

3.8

2.3

2.2

2.9

3.7

2.7

4.1

3.4

4.6

2.5

4.7

3.9

4.8

4.5

4.7

Quarter Ended

Dec. 31
2005

4.8

3.8

4.4

Metals service centers inventory turns decreased during the last two quarters compared to prior quarters due to higher inventories
and lower cost of goods sold during the last half of 2006 compared to prior periods. Our metals service centers reduced inventories
by $36.4 million during the fourth quarter of 2006. We expect our metals operations to turn over their inventory at higher rates
than the industry average. Based on information published by the Metals Service Center Institute in its monthly Metals Activity
Report, average inventory turns for U.S. based steel companies for the three months ended December 31, 2006 were
3.0 turns and for Canadian based companies were 2.7 turns.

Both the energy tubular products segment and the steel distributors segment had significantly more inventory at December 31,
2006 compared to December 31, 2005. These inventories are to support anticipated sales in the first quarter of 2007. Our energy
tubular products segment increase partially relates to the timing of receipt for purchases of material from offshore. More import
material was purchased in 2006 due to availability and pricing.

1 8 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

The other major components of working capital are accounts receivable and accounts payable. Accounts receivable as at December 31,
2006, decreased $30.3 million since December 31, 2005 as a result of lower revenues during the fourth quarter of 2006. Accounts
payable decreased $30.9 million in 2006, which mainly relates to a decline in service center trade payables as inventory purchases
were reduced during the fourth quarter of 2006 to help bring the inventory levels more in line with current requirements.

During 2006, we made income tax payments of $71.0 million compared to payments of $110.4 million in 2005. The 2005
payments included final installments of $60.7 million for the 2004 year.

During 2006, we utilized cash of $27.6 million on capital expenditures and $89.4 million on common share dividends. During
2005, we utilized cash of $26.5 million on capital expenditures and $45.4 million on common share dividends.

Free Cash Flow

(millions)

Cash from operating activities before working capital

Purchase of fixed assets

Proceeds on sale of fixed assets

Proceeds from assets held for sale and sale of businesses

2006

2005

178.5

149.6

(27.6)

1.7

6.2

(26.5)

1.6

5.9

2004

210.3

(25.4)

0.8

3.7

158.8

130.6

189.4

Free cash flow may be useful in assessing our ability to pay dividends, reduce outstanding debt and fund working capital growth.
Free cash flow is a non-GAAP measure regularly used by investors and analysts to evaluate companies.

Cash, Debt and Credit Facilities
At December 31, 2006, we had cash and cash equivalents, net of outstanding cheques, of $209.9 million. In March 2006, we
issued 11 million common shares for $25.75 per share resulting in net proceeds of $271.4 million. The proceeds were used to pay
down short-term debt and the remainder is in short-term investments until a suitable acquisition or other use of cash occurs. An
acquisition is not currently imminent.

Our long-term debt balance at December 31, 2006 was $203.9 million. We have outstanding US$175 million of 6.375% Senior
Notes due in 2014. On US$100 million of this debt we have fixed interest cross currency swaps. These swaps eliminate the foreign
exchange exposure on the portion of the debt not hedged by our investment in our U.S. subsidiaries.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 1 9

010020030040050060070080006050403020605040302Inventories$ millions3033295544746640200400600800100006050403020605040302Net Assets Employed$ millions46169870052288905010015020006050403020605040302Free Cash Flow$ millions458189131159"02" 45"03" 8"04" 189"05" 131"06" 159"02" 461"03" 522"04" 700"05" 698"06" 889"02" 329"03" 303"04" 554"05" 474"06" 664> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Cash and Bank Credit Facilities

As at December 31, 2006 (millions)

Bank loans

Cash net of outstanding cheques

Cash

Facilities availability

Letters of credit

Undrawn facilities

Russel Metals
Facility

U.S. Subsidiary
Facility

–

191.3

200.0

54.8

145.2

18.6

58.3

42.1

16.2

Total cash and undrawn facilities

336.5

34.8

Total

–

209.9

258.3

96.9

161.4

371.3

We have a facility, with a syndicate of Canadian and U.S. banks, for a revolving loan of $200 million, including letters of credit,
which expires on October 29, 2009. We may extend this facility annually with the consent of the syndicate. We are entitled to
borrow, on a revolving basis, up to an amount equal to the sum of specified percentages of our eligible accounts receivable and
inventories, to a maximum of $200 million. We are currently entitled to borrow $200 million, including letters of credit, under this
facility. At December 31, 2006, we had no borrowings and had letters of credit of $54.8 million. At December 31, 2005, we had no
borrowings and had letters of credit of $46.1 million under this facility.

In addition, a U.S. subsidiary has its own one-year bank credit facility. The maximum borrowing under this facility at December 31,
2006 is US$50 million. At December 31, 2006, this subsidiary had no borrowings and had letters of credit of US$36.1 million.
At December 31, 2005, this subsidiary had no borrowings and had letters of credit of US$30.6 million.

Cash generated from operating activities before working capital changes was $178.5 million for 2006 and was $149.6 million for
2005. The increase primarily relates to higher earnings.

Based on cash and our bank facilities, we have access to approximately $371 million of cash based on December 31, 2006
balances. In the past, we have made several acquisitions and we believe we can continue to grow by acquisition. We believe we
have the ability to fund future acquisitions through the utilization or expansion of our existing bank facilities. We believe we have
the ability to significantly increase the bank facility, if required.

2 0 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

01020304050600605040302020040060080010000605040302020040060080010000605040302"02" 242"03" 209"04" 211"05" 204"06" 204"02" 222"03" 254"04" 457"05" 539"06" 985"02" 52"03" 51"04" 32"05" 27"06" 19060504030206050403020605040302Shareholders’ Equity$ millionsInterest Bearing Debt$ millionsDebt to Capitalization%5227325124220921120422245725453989519204Contractual Obligations
As at December 31, 2006, we were contractually obligated to make payments under our long-term debt agreement, cross currency
swap agreements and operating lease obligations that come due during the following periods.

(millions)

2007

2008

2009

2010

2011

2012 and beyond

Total

Long-Term Cross Currency
Swaps

Debt Maturities

Long-Term
Debt Interest

Lease
Obligations

–

203.9

15.3

15.2

32.9

10.8

9.0

8.5

7.8

6.1

11.9

203.9

15.3

108.9

54.1

Total

26.0

24.2

23.7

23.0

21.3

264.0

382.2

Our fixed interest cross currency swaps obligate us to purchase US$100 million at $1.3180 for each US$1.00. Based on the
December 31, 2006 exchange rate, we would incur an obligation of $15.3 million in addition to our long-term debt obligation of
$203.9 million. The long-term debt interest in the table includes the impact of our swaps. Actual long-term debt interest has been
estimated based on current exchange rates for the unhedged portion.

Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of the letters of credit disclosed in the bank credit facilities table, operating lease
obligations disclosed in the contractual obligation table and short-term foreign exchange contracts. At December 31, 2006, our
short-term foreign exchange contracts used to hedge specific inventory purchases were approximately US$16.5 million and mature
in the first half of 2007.

We have multiple defined benefit pension plans in Canada, as disclosed in Note 14 to the 2006 annual consolidated financial
statements. During the first quarter of 2006, we made a payment to fund the annual 2006 current and past service obligation of
$7.6 million. This included a special past service contribution of $4.1 million. We expect to contribute approximately $5.5 million
to these plans during 2007.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 2 1

0.00.51.01.52.02.50605040302036912150605040302"02" 5.84"03" 5.9"04" 9.15"05" 10.63"06" 14.34"02" 87"03" 149"04" 169"05" 205"06" 18606050403020605040302Market Capitalization to Book ValueTimes1.50.91.72.11.9Book Value per Common Share$ per share5.905.849.1510.6314.34050010001500200006050403020605040302Market Capitalization$ millions3781947731,1071,665"02" 194"03" 378"04" 773"05" 1107"06" 1665> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Vision and Strategy
The metals distribution business is a segment of a mature, cyclical industry. The use of service centers and steel distributors by
both manufacturers and end users of steel continues to grow. This is evidenced by the growth in the percentage of total steel
shipments from steel producers to service centers. As the distribution segment’s share of steel industry shipments continues to
grow, service centers such as ours can grow their business over the course of a cycle.

We strive to deal with the cyclical nature of the business by operating with the lowest possible net assets throughout the
course of a cycle. In order to achieve this, management emphasizes profitability rather than revenue growth. This intensive asset
management reduces borrowings and therefore interest expense in declining periods in the economic cycle. This in turn creates
higher, more stable returns on net assets over the course of the cycle. Our conservative management approach creates relatively
stronger trough earnings but could cause potential peak earnings to be somewhat muted. Management strongly believes that it is
more prudent to be profitable throughout a cycle, without the spikes in earnings caused by less emphasis on asset management,
and have average earnings over the full range of the cycle in the top deciles of the industry.

Growth from selective acquisitions is also a core strategy. We focus on investment opportunities in businesses that have strong
market niches or provide mass to our existing operations.

In both the energy tubular products and steel distributors segments, all of the business units have significant operations in the
market niche that they service. Consistent with our acquisition philosophy, any new acquisitions in these areas could likely be either
major stand-alone operations or those that complement our existing operations.

In the future, we believe that the length of the steel-based economic cycle will continue to shorten and a management structure
and philosophy that allows the fastest reaction to the changes that affect the industry will be the most successful. We will continue
to invest in business systems to enable faster reaction times to changing business conditions. In addition, management believes
the high level of service and flexibility provided by service centers will enable this distribution channel to capture an increasing
percentage of total steel revenues to end users, allowing for increased growth within the sector.

Risk
The timing and extent of future price changes from the steel producers and their impact on us can not be predicted with any
certainty due to the inherent cyclical nature of the steel industry.

Accounting Policies and Estimates

a) Change in Accounting Policies in 2006
During the first quarter of 2006, as required by Canadian accounting standards, we adopted EIC-156, Accounting by a Vendor for
Consideration Given to a Customer (including a Reseller for the Vendor’s Product). This standard requires us to reduce revenues for
amounts paid to our customers as rebates. As a result, we restated our 2005 income statement, which resulted in a reduction in
revenues and cost of sales of $1.2 million for 2005 and $1.1 million for 2004. This change had no impact on earnings.

During the third quarter of 2006, we adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before the
Vesting Date. The adoption of this standard required us to shorten the amortization period for three employees who will attain the
age of 65 prior to the four year vesting period related to stock options issued in 2006 and prior years. This restatement changed
stock-based compensation expense and net income as follows.

(millions)

Increase in stock-based compensation expense

Decrease in net income

2006

2005

2004

0.9

0.2

–

2 2 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Future Accounting and Reporting Changes

b)
The CICA has issued three new accounting standards: Financial Instruments – Recognition and Measurement, Hedges and
Comprehensive Income, which we are adopting effective January 1, 2007. The principal impacts of the standards are:

(i)

(ii)

(iii)

Other comprehensive income will be a new component of shareholders’ equity and a new statement entitled
Statement of Comprehensive Income will be added to our consolidated financial statements.

Financial assets and liabilities will be required to be classified as available for sale, held to maturity, trading,
other liabilities or loans and receivables.

Items classified as held-for-trading will be measured at fair value with gains and losses recognized in net income.
Assets classified as available-for-sale will be measured at fair value with gains and losses recognized in other
comprehensive income until the item is sold. Other assets and liabilities will be measured at amortized cost
using the effective interest method.

(iv) Derivative instruments including hedges will be recorded on the balance sheet at fair value.

(v)

This new hedging standard will replace our current policy and the hedge on the US$100 million of our Senior Notes
will be recorded at fair value on the balance sheet with any gains or losses recorded in other comprehensive income
until the hedged items are recognized in the consolidated statement of income.

We do not believe these new standards will have a material impact on our consolidated net income.

c) Accounting Estimates
The preparation of our financial statements requires management to make estimates and judgements that affect the reported
amounts. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventory obsolescence, useful
lives of fixed assets, asset retirement obligations, income taxes, restructuring costs, pensions and other post-retirement benefits,
fair values, guarantees, environmental obligations, contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.

Our most significant assets are accounts receivable and inventory.

Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. Assessments are based on aging of receivables, legal issues (bankruptcy status), past collection experience, current
financials or credit agency reports and the experience of our credit personnel. Accounts receivable, which we determined to be
uncollectible, are reserved in the period in which the determination is made. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. During the first
quarter of 2006, we experienced increased bad debts in central Canada resulting in a higher than normal bad debt expense. Our
bad debt experience returned to normal levels for the remainder of 2006.

Inventories
We review our inventory for obsolescence, slow moving product and to ensure that the cost of inventory is not in excess of its
estimated market value. Inventory reserves or write-downs are recorded when cost exceeds the market value and when product is
determined to be slow moving or obsolete. Significant reductions in market value could result in additional write-downs. The
inventory reserve level at December 31, 2006 is consistent with the level at December 31, 2005.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 2 3

> management’s discussion and analysis cont’d

For the year ended December 31, 2006

Other areas involving significant estimates and judgements include:

Income Taxes
We believe that we have adequately provided for income taxes based on all of the information that is currently available. The
calculation of income taxes in many cases requires significant judgement in interpreting tax rules and regulations, which are
constantly changing. Our tax filings are also subject to audits, which could materially change the amount of current and future
income tax assets and liabilities. Any change would be recorded as a charge or a credit to income tax expense.

Employee Benefit Plans
We perform a valuation, at least every three years, for each plan to determine the actuarial present value of the accrued pension
and other retirement benefits. The valuation uses management’s assumptions for the discount rate, expected long-term rate of
return on plan assets, rate of compensation increase, health care cost trend and expected average remaining years of service
of employees.

While we believe that these assumptions are reasonable, differences in actual results or changes in assumptions could materially
affect employee benefit obligations and future net benefit plans costs. We account for differences between actual and assumed
results by recognizing differences in benefit obligations and plan performance over the working lives of the employees who benefit
from the plans.

Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and
reported to senior management on a timely basis so that appropriate decisions can be made regarding public disclosure.

As of December 31, 2006, an evaluation was carried out, under the supervision of and with the participation of management,
including the President and Chief Executive Officer, and the Executive Vice President and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as defined under Canadian Securities Administrators Multilateral Instrument 52-109. Based
on that evaluation, the President and Chief Executive Officer, and the Executive Vice President and Chief Financial Officer concluded
that the design and operation of these disclosure controls and procedures were effective.

The purpose of internal controls over financial reporting as defined by the Canadian Securities Administrators is to provide
reasonable assurance that:

(i)

(ii)

financial statements prepared for external purposes are in accordance with the Company’s generally accepted
accounting principles;

transactions are recorded as necessary to permit the preparation of financial statements, and records are maintained
in reasonable detail;

(iii)

receipts and expenditures of the Company are made only in accordance with authorizations of the Company’s
management and directors; and

(iv) unauthorized acquisitions, uses or dispositions of the Company’s assets that could have a material effect on the
financial statements will be prevented or detected in order to prevent material error in financial statements.

The President and Chief Executive Officer, and the Executive Vice President and Chief Financial Officer have caused management
and other employees to design and document our internal controls over financial reporting. No material weaknesses in the design
effectiveness were identified during the documentation of these internal controls.

No changes were made in our internal control over financial reporting during the year ended December 31, 2006, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2 4 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Fourth Quarter Results
Our sales volumes have declined in all segments for the fourth quarter of 2006 compared to 2005. Revenues for the fourth quarter
of 2006 have decreased 8% compared to the fourth quarter of 2005. Volume declines relate to excess inventory that needs to
work its way through the service centers and a slow down in activity in Alberta and British Columbia related to a pause in the busy
oil and gas industry. The decline in activity in the energy sector relates to lower gas pricing and warmer weather affecting rig activity.

This decline in volumes resulted in lower operating profits in all segments compared to the fourth quarter of 2005. Our basic
earnings per share of $0.49 for the fourth quarter of 2006 compares to that reported for the fourth quarter of 2005 of $0.82.

Outlook
As mentioned earlier, we noticed softness in demand in both the metals service centers and the energy tubular products
segments in the last quarter of 2006. The metals service centers were negatively impacted by the strength of the Canadian dollar.
We believe that this affected our customers who sell manufactured products into the U.S.

We have just finished three years of record earnings, pay one of the highest yielding dividends on the TSX, have more cash than
long-term debt, and are poised to grow the Company both organically and through external acquisitions. Entering 2007, North
American steel prices appear to be stabilizing. The service center industry inventory overhang is shrinking, steel imports are
declining as steel prices outside of North America increase, and demand is improving over the fourth quarter of 2006. We are,
however, far from complacent as we live in a competitive, highly cyclical industry. We are well positioned to capitalize on any
eventualities that may present themselves.

February 19, 2007

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 2 5

> management’s report to the shareholders

The accompanying consolidated financial statements, management’s discussion and analysis and all information in the Annual
Report have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company.

These consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles and,
where appropriate, reflect management’s best estimates and judgements. Management is responsible for the accuracy, integrity
and objectivity of the consolidated financial statements and management’s discussion and analysis within reasonable limits of
materiality and for the consistency of financial data included in the text of the Annual Report with that contained in the consolidated
financial statements.

To assist management in the discharge of these responsibilities, the Company has developed, documented and maintained a
system of internal controls in order to provide reasonable assurance that its assets are safeguarded; that only valid and authorized
transactions are executed; and that accurate, timely and comprehensive financial information is prepared in accordance with
Canadian generally accepted accounting principles. In addition, the Company has developed and maintained a system of disclosure
controls in order to provide reasonable assurance that the financial information is relevant, reliable and accurate. The Company has
evaluated its disclosure controls for the year ended December 31, 2006, and has concluded that they are effective.

The Company’s Audit Committee is appointed annually by the Board of Directors. The Audit Committee, which is composed entirely
of outside directors, meets with management to satisfy itself that management is properly discharging its financial reporting
responsibilities and to review the consolidated financial statements, the management’s discussion and analysis and the report to
shareholders. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated
financial statements, the management’s discussion and analysis and the report to shareholders for presentation to the
shareholders.

The consolidated financial statements have been audited on behalf of the shareholders by the external auditors, Deloitte & Touche
LLP, in accordance with Canadian generally accepted auditing standards. Deloitte & Touche LLP has full and free access to the
Audit Committee.

February 19, 2007

E.M. Siegel, Jr.

President and
Chief Executive Officer

B.R. Hedges

Executive Vice President and
Chief Financial Officer

2 6 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

> auditors’ report

To the Shareholders of Russel Metals Inc.
We have audited the consolidated balance sheets of Russel Metals Inc. as at December 31, 2006 and 2005 and the consolidated
statements of earnings, retained earnings and cash flows for each of the years in the three-year period ended December 31, 2006.
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company
as at December 31, 2006 and 2005 and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2006 in accordance with Canadian generally accepted accounting principles.

Deloitte & Touche LLP
Chartered Accountants

Toronto, Ontario
February 5, 2007

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 2 7

2006

2005

209.9

329.0

664.0

7.4

2.1

1,212.4

189.5

–

6.8

0.4

3.9

9.2

47.1

359.6

474.0

7.0

0.3

888.0

181.8

5.1

7.3

1.0

2.8

9.2

1,422.2

1,095.2

–

283.9

15.0

298.9

15.4

203.9

2.6

6.8

527.6

894.6

2.1

315.3

5.6

323.0

15.3

204.0

8.9

5.3

556.5

538.7

1,422.2

1,095.2

> consolidated balance sheets

At December 31 (millions)

ASSETS

Current

Cash and cash equivalents

Accounts receivable

Inventories

Prepaid expenses and other assets

Income taxes

Property, Plant and Equipment (Note 6)

Assets Held For Sale (Note 4)

Deferred Financing Charges

Future Income Tax Assets (Note 10)

Other Assets

Goodwill (Note 4)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current

Bank indebtedness

Accounts payable and accrued liabilities

Income taxes payable

Other Accrued Liabilities (Note 12)

Long-Term Debt (Note 8)

Pensions and Benefits (Note 14 b))

Future Income Tax Liabilities (Note 10)

Shareholders’ Equity (Note 11)

On behalf of the Board,

C.R. Fiora

Director

A. Benedetti

Director

2 8 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

> consolidated statements of earnings

For the years ended December 31 (millions, except per share data)

2006

2005

2004

Revenues

Cost of sales and operating expenses

Earnings before the following

Restructuring (Note 4)

Debt restructuring costs (Note 8)

Interest expense, net (Note 9)

Earnings before income taxes

Provision for income taxes (Note 10)

Earnings from continuing operations

Loss from discontinued operations (Note 5)

Net earnings for the year

Basic earnings per common share

– continuing operations (Note 11)

Basic earnings per common share

Diluted earnings per common share

– continuing operations

Diluted earnings per common share

> consolidated statements of retained earnings

For the years ended December 31 (millions)

Retained earnings, beginning of the year

Net earnings

Dividends on common shares

Dividends on preferred shares

2,692.1

2,614.1

2,411.4

2,443.1

2,412.7

2,088.3

249.0

(1.2)

–

6.7

243.5

(84.8)

158.7

–

158.7

2.65

2.63

2006

341.8

158.7

(89.4)

–

201.4

(1.1)

–

17.5

185.0

(60.4)

124.6

(0.1)

124.5

2.47

2.44

2005

262.7

124.5

(45.4)

–

323.1

3.7

13.7

20.0

285.7

(105.3)

180.4

(2.6)

177.8

3.70

3.64

3.63

3.57

2004

110.5

177.8

(25.0)

(0.6)

262.7

Retained earnings, end of the year (Note 11)

411.1

341.8

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 2 9

> consolidated cash flow statements

For the years ended December 31 (millions)

Operating activities

Earnings from continuing operations

Depreciation and amortization

Future income taxes

(Gain) loss on sale of fixed assets and assets held for sale

Stock-based compensation

Pension expense (funding) (Note 14)

Restructuring and debt redemption costs

2006

2005

2004

158.7

124.6

20.0

3.9

(1.3)

3.4

(6.2)

–

19.2

6.3

(2.0)

1.5

–

180.4

18.6

5.0

0.3

0.9

–

5.1

Cash from operating activities before working capital

178.5

149.6

210.3

Changes in non-cash working capital items

Accounts receivable

Inventories

Accounts payable and accrued liabilities

Current income taxes

Other

Change in non-cash working capital

Cash (used in) from operating activities

Financing activities

Decrease in bank borrowing

Issue of common shares (Note 11)

Dividends

Deferred financing costs

Issuance of long-term debt

Repurchase of long-term debt

Redemption of preferred shares

30.3

(188.2)

(30.9)

9.2

(0.4)

(180.0)

(1.5)

(2.1)

277.9

(89.4)

(1.1)

–

(2.4)

76.5

(32.2)

(55.6)

–

(13.7)

135.9

(31.2)

4.4

(45.4)

(0.3)

–

Cash from (used in) financing activities

185.3

(72.5)

Investing activities

Purchase of fixed assets

Proceeds on sale of fixed assets

Proceeds from assets held for sale and sale of businesses (Note 4)

Other

Cash used in investing activities

Discontinued operations

Operating activities

Investing activities

Cash from (used in) discontinued operations

Effect of exchange rates on cash

Increase (decrease) in cash

Cash and cash equivalents, beginning of the year

(27.6)

1.7

6.2

(0.9)

(20.6)

–

(0.4)

162.8

47.1

Cash and cash equivalents, end of the year

209.9

(26.5)

1.6

5.9

(4.4)

(23.4)

–

6.5

–

46.5

0.6

47.1

3 0 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

(122.8)

(260.9)

128.5

54.7

(2.1)

(202.6)

7.7

(44.9)

54.4

(25.6)

(9.1)

235.2

(184.7)

(30.0)

(4.7)

(25.4)

0.8

3.7

0.3

(20.6)

(1.2)

0.4

(0.8)

–

(18.4)

19.0

0.6

> notes to the consolidated financial statements

Summary of Significant Accounting Policies
Basis of presentation

1.
a)
The consolidated financial statements include the accounts of Russel Metals Inc. and its subsidiary companies herein referred to
as the Company. The reporting currency is Canadian dollars unless otherwise noted. All inter-company balances, transactions and
profits have been eliminated.

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles.

Cash and cash equivalents

b)
Cash and cash equivalents includes demand deposits, bank term deposits, and investment-grade short-term investments with a
maturity of less than three months at time of purchase. At December 31, 2006, short-term investments were $200.2 million
(2005: $42.7 million). Cash and cash equivalents are recorded at cost, which approximates market value.

Inventories

c)
Inventories are recorded at the lower of cost and net realizable value. Cost is determined on either an average cost basis or an
actual cost basis depending on the business unit.

Property, plant, equipment and depreciation

d)
Property, plant, equipment and leasehold improvements are recorded at cost. Depreciation is provided on a straight-line basis at
rates that charge the original cost of such assets to operations over their estimated useful lives. The rates used are 20 to 40 years
for buildings, 10 years for machinery and equipment, 2 to 5 years for computer equipment, and over the lease term for leasehold
improvements. Depreciation expense was $18.4 million in 2006 (2005: $17.7 million; 2004: $17.3 million).

Deferred financing charges and amortization

e)
Eligible costs incurred relating to financing are deferred and amortized on a straight-line basis over the period of the related
financing. Deferred financing charges are recorded at cost less accumulated amortization. Amortization of deferred financing
charges was $1.6 million in 2006 (2005: $1.5 million; 2004: $1.3 million).

Goodwill

f)
Goodwill represents the excess purchase price paid on acquisitions over the value assigned to identifiable net assets acquired.
The Company reviews goodwill for impairment annually and whenever facts and circumstances indicate that carrying amounts may
not be recoverable. As part of the evaluation, the estimated future undiscounted cash flows associated with the underlying business
operation are compared to the carrying amount of goodwill to determine if a write-down is required. If such an assessment indicates
that the undiscounted future cash flows will not be recovered, the carrying amount is reduced to the estimated fair value (Note 4).

Pensions and other benefit plans

g)
The cost of pension benefits earned by employees covered under defined benefit plans is determined using the projected benefit
method prorated on service and is charged to expense as services are rendered. Actuarial gains and losses and past service costs
are amortized on a straight-line basis over the estimated average remaining service lives of the employee groups utilizing the
corridor approach. The corridor approach amortizes the excess of the net accumulated actuarial gain (loss) over 10% of the greater
of the benefit obligation and the fair value of plan assets. The cost of post-retirement benefits other than pensions is recognized on
an accrual basis.

Income taxes

h)
The Company uses the liability method of income tax allocation. Under this method, future tax assets and liabilities are determined
based on differences between the financial accounting and tax bases of assets and liabilities and are measured using the
substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Future income tax
assets are recognized to the extent that their realization is more likely than not.

Foreign currency translation

i)
The accounts of self-sustaining foreign subsidiaries are translated from U.S. dollars to Canadian dollars at the noon spot rate in
effect at the balance sheet date, which was 1.1653 at December 31, 2006 (2005: 1.1659). Revenues and expenses are
translated at the average rate of exchange during the year. For 2006, the U.S. dollar published average exchange rate was
1.1343 (2005: 1.2114; 2004: 1.3013). The resulting gains or losses are included in the cumulative translation adjustment line
of shareholders’ equity.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3 1

> notes to the consolidated financial statements cont’d

Exchange gains or losses on long-term debt denominated in foreign currencies not designated as a hedge are expensed as incurred.
Exchange gains or losses on the translation of long-term debt denominated in a foreign currency designated as a hedge of the
Company’s net investment in foreign subsidiaries are included in the cumulative translation adjustment line of shareholders’ equity.

Revenue recognition

j)
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, selling price is fixed and
collection is reasonably assured. Revenue on certain sales within the energy tubular products segment, where the Company acts
as an agent, is presented on a net basis. Freight and shipping billed to customers are included in revenue.

Stock-based compensation

k)
The Company uses the fair value-based approach to account for stock-based compensation granted to employees subsequent to
January 1, 2003. Compensation expense is recognized for stock options over their vesting period based on their estimated fair
values on the date of grant with the related credit charged to contributed surplus except for employees who are eligible to retire
during the vesting period (Note 2 a)). Fair value is determined by the Black-Scholes option-pricing model. Compensation expense is
also recognized for deferred share units when issued with changes in the quoted market price from the issue date to the reporting
period date being charged to compensation expense until exercised.

Earnings per share

l)
Basic earnings per common share are calculated using the weighted daily average number of common shares outstanding. The
weighted average number of common shares for 2006 was 59,887,382 (2005: 50,461,330; 2004: 48,671,915). Diluted earnings
per share is calculated using the treasury stock method.

Derivative financial instruments

m)
The Company uses foreign exchange contracts to manage foreign exchange risk on certain committed cash outflows, primarily
inventory purchases. When the derivative instruments have been designated and are highly effective at offsetting risks, hedge
accounting is applied. Hedge accounting requires that gains and losses on the hedge instrument are recognized through income in
the same period or manner as the item being hedged. Realized and unrealized foreign exchange gains and losses not designated
as a hedge are included in income. Derivatives are not entered into for speculative purposes and the use of derivative contracts is
governed by documented risk management policies.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm
commitments or forecasted transactions. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of hedged items.

Use of estimates

n)
The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. In particular, inventories, accounts receivable, asset retirement obligations, fair values, pension and benefit
obligations, other contingencies, and assigned values on net assets acquired represent management’s best estimates. Actual
results could differ from these estimates.

Changes in Accounting Policies
On September 30, 2006, the Company adopted EIC-162, Stock-Based Compensation for Employees Eligible to Retire Before

2.
a)
the Vesting Date. This standard requires that the compensation cost attributable to stock options be recognized over the period
from grant date to the date the employee becomes eligible to retire. The impact of adopting this standard was an increase to the
2006 compensation expense of $0.9 million. The standard requires retroactive restatement of prior periods, and accordingly,
income was reduced and contributed surplus was increased by $0.2 million for the year ended December 31, 2005. The adoption
of this standard also resulted in a change to the diluted shares outstanding due to the restatement of the unamortized
compensation expense for stock compensation (Note 11 g)).

3 2 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

On January 1, 2006, the Company adopted EIC-156, Accounting by a Vendor for Consideration Given to a Customer (including

b)
a Reseller of the Vendor’s Products). This standard requires that the consideration given to a customer be recorded as a reduction
of revenues, not as cost of sales or as an operating expense. The standard requires retroactive restatement of prior periods, and
accordingly, revenues and cost of sales for the year ended December 31, 2005 were reduced by $1.2 million (2004: $1.1 million)
but had no impact on net earnings.

Effective January 1, 2004, the Company adopted the new accounting guideline, AcG-13, Hedging Relationships, which

c)
establishes certain conditions when hedge accounting may be applied. The guideline sets out the requirements for the
identification, designation, documentation and effectiveness of hedging relationships for the purpose of applying hedge accounting.
The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or cash
flows. The Company has applied this standard to the fixed for fixed cross currency swaps entered into on February 20, 2004,
in order to hedge the last US$100 million of its US$175 million U.S. Senior Notes (Note 8). In addition, this standard has been
applied to the Company’s other hedging relationships, namely foreign exchange contracts used to manage certain committed cash
flows and the hedge of the net investment in U.S. subsidiaries.

Effective January 1, 2004, the Company adopted the new CICA (Canadian Institute of Chartered Accountants) Handbook

d)
section 3110, Asset Retirement Obligations. This section established standards for the recognition, measurement and disclosure
of liabilities for asset retirement obligations and the associated asset retirement costs. The adoption of this standard did not have
a material effect on the Company’s results of operations, financial position or cash flows.

Effective January 1, 2004, the Company prospectively adopted the new CICA Handbook section 1100, Generally Accepted
e)
Accounting Principles (GAAP). This standard establishes what constitutes Canadian generally accepted accounting standards and
provides guidance on the GAAP hierarchy. The adoption of this standard did not have a material effect on the Company’s results of
operations, financial position or cash flows.

Effective October 1, 2004, the Company prospectively adopted the new accounting guideline AcG-15, Variable Interest Entities.
f)
The adoption of this standard did not have a material effect on the Company’s results of operations, financial position or cash flows.

Future Accounting Changes

3.
During 2005, the CICA issued three new accounting standards: CICA Handbook section 1530, Comprehensive Income; CICA
Handbook section 3855, Financial Instruments – Recognition and Measurement; and CICA Handbook section 3865, Hedges. These
standards, which must be adopted together, are effective for fiscal years beginning on or after October 1, 2006. The Company is
adopting these standards effective January 1, 2007. In accordance with the standards, prior periods will not be restated.

Comprehensive Income

a)
This standard provides guidance on the presentation of comprehensive income, which is defined as the change in equity during a
period from transactions and other events from non-owner sources. Comprehensive income is comprised of net income and other
comprehensive income (OCI). OCI includes certain gains and losses that are recognized outside of net income. The major
components of the Company’s OCI are the cumulative translation adjustment (Note 11) and the effective portion of cash flow
hedges including the fixed for fixed cross currency swaps which are designated as a cash flow hedge of US$100 million of our
Senior Notes. Our consolidated financial statements will include a new Statement of Comprehensive Income. The accumulated OCI,
which includes the Company’s cumulative translation adjustment, will be presented as a new category of Shareholders’ Equity in
our Consolidated Balance Sheets.

Financial Instruments – Recognition and Measurement

b)
This standard provides guidance for recognizing and measuring financial assets, financial liabilities and non-financial derivatives
which are to be classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. Financial
assets and financial liabilities classified as held-for-trading will be measured at fair value with gains and losses recognized in net
income. Financial assets classified as held-to-maturity, loans and receivables, and financial liabilities not classified as held-for-sale
will be measured at amortized cost using the effective interest method.

Derivative instruments, including embedded derivatives, must be recorded on the balance sheet at fair value. Changes in fair value
will be recognized in net income, except for derivatives designated as cash flow hedges, for which the related fair value change will be
recognized in OCI.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3 3

> notes to the consolidated financial statements cont’d

Available-for-sale financial assets will be measured at fair value. Unrealized gains and losses on available-for-sale financial assets
and derivatives designated as cash flow hedges will be recorded through OCI.

The standard provides an accounting policy choice on the treatment of transactions costs. The Company’s accounting policy for
transaction costs will be to net them with the associated debt and to amortize them using the effective interest method.

Hedges

c)
This standard replaces existing hedge accounting guidance in CICA Handbook section 1650, Foreign Currency Translation, and
accounting guideline AcG-13, Hedging Relationships, and provides requirements for the designation, documentation and disclosure
of qualifying hedge relationships. The Company’s cash flow hedges on the first US$100 million of its US$175 million Senior Notes
will be recorded at fair value on the balance sheet with gains and losses recorded through OCI until realized. The adoption of the
hedging standard is not expected to have a material effect of the Company’s results of operations or cash flows; however, the
effective portion of the cash flow hedges will be recorded as a component of OCI.

Transitional Adjustment

d)
The transitional adjustments relating to financial instruments, including embedded derivatives, will be recorded in opening retained
earnings as at January 1, 2007. These adjustments will include (i) financial instruments classified as held-for-trading that were not
previously recorded at fair value, and (ii) deferred gains and losses on discontinued hedging relationships that do not qualify for
hedge accounting under the new standards.

Adjustments arising as a result of re-measuring hedging instruments designated as cash flow hedges are recognized in the opening
balance of accumulated OCI.

Restructuring and Goodwill
Restructuring

4.
a)
Restructuring of the Company’s metals service center segment’s operations as a result of acquisitions is charged to income as
incurred. Under certain conditions, restructuring relating to the acquired operation is included in the net assets acquired.

Restructuring charged to income is summarized as follows:

(millions)

Gain on Assets Held for Sale

Impairment loss – Ontario branch

Ontario branch severance and other employee termination costs

Acier Leroux restructuring and unutilized acquisition

Restructuring

2006

2005

2004

(1.2) $

(2.9)

–

1.3

0.5

–

(1.2) $

(1.1)

–

3.7

During 2005, the Company announced the closure of its Milton, Ontario branch. The Company determined, based on a valuation,
that the carrying amount of the property and equipment was greater than the fair value and recorded an impairment loss in 2005 of
$1.3 million. On December 31, 2005, the Company vacated the property, and accordingly, classified its carrying value of $5.1 million
as an Asset Held for Sale. On May 18, 2006, the Company sold the Milton, Ontario location for $6.2 million. The resulting gain of
$1.2 million was recorded in restructuring. Previously, the Company provided for contractual termination costs of $0.5 million relating
to the employees terminated at this location in 2005.

During 2004, the Company incurred a restructuring charge of $3.7 million related to the restructuring of the Russel Metals’ locations
as a result of its acquisition of Acier Leroux in July 2003. These costs primarily related to the restructuring of the Ontario region and
ongoing costs associated with the Company’s Lachine property which was closed on December 31, 2003 as part of the rationalization
of operations due to the Acier Leroux acquisition and classified as an Asset Held for Sale. On May 2, 2005, the Company sold its
Lachine property for net proceeds of $5.8 million. The resulting before tax gain of $2.9 million was recorded in restructuring.

The Company recorded restructuring expenses of $0.3 million in 2005, relating to the costs of the Lachine property prior to sale.
Also in 2005, the Company recorded restructuring income of $0.3 million relating to costs accrued as part of the fair value of Acier
Leroux net assets acquired that were not required. These costs primarily related to the resolution of matters relating to Poutrelles
Delta (Note 5).

3 4 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Goodwill impairment

b)
The Company completed its annual goodwill impairment tests, using projected discounted cash flows during the fourth quarter of
2006 and 2005, resulting in no impairment charge.

Discontinued Operations and Divestitures

5.
During 2005, the Company disposed of two operations acquired in 2003 as part of the Acier Leroux acquisition.

On May 10, 2005, the Company sold its investment in Armabec Inc., a metals service center, for book value less selling costs. In the
second quarter of 2005, as a result of this divestiture, the Company classified Armabec Inc. as discontinued, and the revenue and
results of operations for the period from January 1, 2005 to the date of sale and the comparative year ended December 31, 2004
were reclassified to discontinued operations accordingly.

On December 23, 2004, the Company received an offer pursuant to the Shareholders Agreement whereby the minority
shareholders would purchase the Company’s holdings of Poutrelles Delta Inc. For the year ended December 31, 2004, the
Company classified Poutrelles Delta as discontinued and recorded a loss to fair value of $0.6 million. On February 23, 2005,
the Company sold its investment in Poutrelles Delta, for $4.1 million in cash. The write-down to fair value at December 31, 2004
resulted in no additional gain or loss upon sale. The revenue and results of operations for Poutrelles Delta for 2005 and prior
periods were reclassified as discontinued.

During 2004, the Company disposed of two asset groups acquired in 2003 with the Acier Leroux acquisition.

On May 14, 2004, the Company sold the inventory and certain fixed assets of the Dollard Steel operation for book value of $1.5 million,
and on July 30, 2004, the Company sold the inventory and fixed assets of its Plattsburgh, New York operation for its book value of
US$0.4 million. As part of the acquisition of Acier Leroux, the Company had adopted a formal plan to dispose of the Acier Leroux U.S.
operations and classified them as discontinued, all of which were divested. The Company has certain residual obligations relating to
these operations. At December 31, 2006, the remaining liability was $1.8 million (2005: $2.4 million).

During the year ended December 31, 2004, the Company incurred an additional charge of $3.2 million, net of tax, relating to
long-term lease obligations and other environmental cleanup costs for operations classified as discontinued in 1995.

Basic and fully diluted loss per share from discontinued operations was $nil (2005: $nil; 2004: $0.06).

Property, Plant and Equipment

(millions)

Land and buildings

Machinery and equipment

Leasehold improvements

Cost

2006

Net

Cost

144.0

103.3

132.8

207.8

26.1

76.2

10.0

193.5

25.6

2005

Net

96.5

75.3

10.0

377.9

189.5

351.9

181.8

The Company has certain significant asset retirement obligations relating to the land lease for its Thunder Bay Terminal operations
whose lease term expires in 2017. The landlord has the option to retain the facilities or to require the Company to remove them.
In addition, the Company has certain end-of-lease obligations in six of its service center operations.

During the year ended December 31, 2006, the Company increased its probability-weighted undiscounted expected cash flow
relating to its asset retirement obligations by $0.1 million (2005: $1.3 million) and the probability-weighted discounted expected
cash flow by $nil (2005: $0.3 million) primarily as a result of an increase in forecasted costs. The probability range is 50% – 99%
and the discount rate used was 9%. The asset retirement obligation, including applicable accretion at December 31, 2006, was
$0.5 million (2005: $0.4 million) and the undiscounted expected cash flow relating to its asset retirement obligation was
$1.6 million (2005: $1.5 million).

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3 5

> notes to the consolidated financial statements cont’d

Revolving Credit Facilities

7.
On October 6, 2006, the Company extended its credit facility for an additional one-year period to October 29, 2009. This facility
was originally entered into with a syndicate of banks on October 29, 2004. This facility provides a line of credit to a maximum of
$200 million, including letters of credit. This three-year facility provides for annual extensions. Borrowings under this facility are
restricted by certain financial covenants which the Company was in compliance with at December 31, 2006. The obligations of the
Company under this agreement are secured by a pledge of trade accounts receivable and inventories of a significant portion of the
Company’s operations. At December 31, 2006 and 2005, the Company had no borrowings and letters of credit of $54.8 million and
$46.1 million, respectively. Deferred charges relating to the previous bank facility of $0.5 million were charged to income in 2004.

In addition, a U.S. subsidiary has its own credit facility. The maximum borrowing under this facility is US$50.0 million. At December 31,
2006 and 2005, this subsidiary had no borrowings and letters of credit of US$36.1 million and US$30.6 million, respectively.

Long-Term Debt

8.
The long-term debt is comprised of the following:

(millions)

6.375% US$175 million Senior Notes due March 1, 2014

2006

203.9

2005

204.0

On February 20, 2004, the Company issued US$175 million Senior Notes due March 1, 2014, bearing interest at 6.375%. The
proceeds of this issue were used to redeem US$95.5 million of the 10% Senior Notes due June 1, 2009, including a call premium
for 1.0725; the $30 million 8% Subordinated Debentures due June 15, 2006; and the $30 million Class II preferred shares during
the first quarter of 2004. The remaining US$20.1 million of 10% Senior Notes were redeemed on June 1, 2004, including a call
premium of 1.05. The call premiums and deferred charges of $2.5 million relating to the redeemed debt were charged to income
in 2004.

The Company entered into fixed for fixed cross currency swaps with major banks to manage the foreign currency exposure on the last
US$100 million of the 6.375% Senior Notes. On the swaps, the Company receives U.S. denominated interest at 6.375% on a notional
US$100 million and pays Canadian dollar interest at 7.12% on a notional $131.8 million. As part of the swaps, the Company
exchanged US$100 million for $131.8 million on February 20, 2004 and will receive US$100 million for $131.8 million on March 1,
2014. Both the swap counterparties and the Company have the right to early terminate the swaps in the first quarter of 2009. On a
monthly basis, the Senior Notes are recorded at month-end exchange rates, and the difference between the swap rate of $1.3180 and
the month-end rate on the US$100 million relating to the swap is recorded separately in Other Assets or Other Accrued Liabilities.

The US$175 million Senior Notes are redeemable, in whole or in part, at the option of the Company on or after March 1, 2009 at
103.188% of the principal amount declining rateably to 100% of the principal amount on or after March 1, 2012. In addition, the Senior
Notes are also redeemable, in whole, at the option of the Company at any time at 100% of the principal amount in the event of certain
changes affecting Canadian withholding taxes. The Senior Notes contain certain restrictions on the payment of common share dividends
in excess of $0.08 per share per quarter. On May 17, 2006, the Company completed a consent solicitation with its bondholders to
amend the provisions of the indenture for its Senior Notes. In return for the payment of a consent fee of $5.00 per $1,000, the
Company’s reporting obligations were amended to require the Company to file annual reports, quarterly reports and other continuous
disclosure documents only with Canadian provincial regulators. The total consent fee of US$0.8 million has been recorded as a deferred
charge and is being amortized on a straight-line basis over the remaining term of the debt. Other costs relating to the consent solicitation
were expensed in the second quarter. The Company was in compliance with all debt covenants at December 31, 2006.

Interest Expense

(millions)

Interest on long-term debt

Other interest expense

Other interest income

2006

2005

14.8

15.2

0.4

(8.5)

2.3

–

6.7

17.5

2004

16.9

3.1

–

20.0

Total interest paid by the Company in 2006 was $14.8 million (2005: $17.7 million; 2004: $20.1 million).

3 6 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

10.
a)

Income taxes
The non-current future income tax balances consist of:

(millions)

Future income tax assets

Tax benefits of loss carryforwards

2006

2005

Plant and equipment

Pensions and benefits

Other timing

Gross future income tax assets

Valuation allowance

Total future income tax assets

Future income tax liabilities

Plant and equipment

Pensions and benefits

Other timing

Items charged to equity

Total future income tax liabilities

Net future income taxes

The Company’s effective income tax rate is derived as follows:

Average combined statutory rate

Rate difference of U.S. companies

Recognition of previously unrecorded tax benefits

Statutory tax rate changes

Stock compensation not deductible

Other

Average effective tax rate

The details of the income tax provision are as follows:

(millions)

Current provision

Future provision

Statutory rate adjustments

0.2

0.4

0.9

0.2

1.7

(1.3)

0.4

(7.7)

(0.1)

(0.8)

1.8

(6.8)

(6.4) $

2006

34.5%

1.1%

(0.5%)

(0.2%)

0.5%

(0.6%)

34.8%

2005

35.5%

0.7%

(1.3%)

–

0.3%

(2.6%)

32.6%

0.8

(0.5)

1.0

1.6

2.9

(1.9)

1.0

(6.2)

2.1

1.1

(2.3)

(5.3)

(4.3)

2004

36.0%

0.9%

–

(0.1%)

36.8%

2006

2005

80.9

54.1

4.3

(0.4)

6.3

–

2004

100.2

5.1

–

84.8

60.4

105.3

Income taxes paid in 2006 were $71.0 million (2005: $110.4 million; 2004: $47.3 million).

The Company has Canadian net operating losses carried forward for tax purposes, for which a valuation allowance has been

e)
recorded, that expire as follows: 2007: $0.3 million; 2008: $0.5 million and thereafter: $0.3 million.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3 7

> notes to the consolidated financial statements cont’d

11. Shareholders’ Equity
a)

The components of shareholders’ equity are as follows:

(millions)

Common shares

Retained earnings

Contributed surplus (related to stock-based compensation)

Cumulative translation adjustment

2006

491.2

411.1

3.5

(11.2)

2005

208.1

341.8

1.3

(12.5)

894.6

538.7

At December 31, 2006, the authorized share capital of the Company consists of:

(i) an unlimited number of common shares without nominal or par value;

(ii) an unlimited number of Class I preferred shares without nominal or par value, issuable in series; and

(iii) an unlimited number of Class II preferred shares without nominal or par value, issuable in series.

The directors have the authority to issue the Class I and Class II preferred shares in series and fix the designation, rights,
privileges and conditions to be attached to each series, except that the Class I shares shall be entitled to preference over the
Class II shares with respect to the payment of dividends and the distribution of assets in the event of liquidation, dissolution or
winding-up of the Company.

The Company redeemed 1,200,000 cumulative, redeemable Class II preferred shares on March 22, 2004 (Note 8).

The number of common shares issued and outstanding at December 31 was as follows:

Balance, December 31, 2004

Stock options exercised

Balance, December 31, 2005

Common share issue

Stock options exercised

Balance, December 31, 2006

Number of
Shares

Amount
(millions)

49,887,659

768,350

50,656,009

11,000,000

710,833

62,366,842

203.1

5.0

208.1

275.3

7.8

491.2

On March 16, 2006, the Company closed its public offering of 10,000,000 common shares at a price of $25.75 per share and
received net proceeds of $246.7 million. The Company granted the underwriters an option, exercisable, in whole or in part, and at
any time up to 30 days following March 16, 2006 to purchase up to an additional 1,000,000 common shares on the same terms as
the issue. These additional shares were issued on March 30, 2006 for net proceeds of $24.7 million. In addition to the underwriters’
fees, expenses of $0.5 million have also been netted from the proceeds of this offering and the tax benefits of $3.9 million
associated with the share issue costs have been recorded in share capital.

The Company has a shareholder-approved share option plan, the purpose of which is to provide the employees of the

d)
Company and its subsidiaries with the opportunity to participate in the growth and development of the Company. The number of
common shares that may be issued under the share option plan is 5% of the current issued and outstanding common shares. The
options are exercisable on a cumulative basis to the extent of 20% per year of total options granted, except that under certain
specified conditions the options become exercisable immediately. The consideration paid by employees for purchase of common
shares is added to share capital.

3 8 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

The following is a continuity of options outstanding:

Number of Options
2005

2006

Weighted Average Exercise Price
2005

2006

Balance, beginning of the year

1,869,466

1,793,816

11.12

Granted

Exercised

Expired and forfeited

Balance, end of the year

Exercisable

865,000

(710,833)

(9,600)

856,000

(768,350)

(12,000)

2,014,033

1,869,466

326,233

275,666

25.88

9.23

19.20

18.09

20.29

The outstanding options have an exercise price range as follows:

6.52

15.85

5.71

6.75

11.12

11.87

2005

–

852,800

553,600

463,066

2006

858,500

633,600

371,400

150,533

2,014,033

1,869,466

(number of options)

$25.75 – $26.30

$15.85

$5.50 – $9.15

$3.00 – $5.49

Options outstanding

The options expire in the years 2007 to 2016 and have a weighted average remaining contractual life of 7.5 years (2005: 8.2 years).

The Black-Scholes option-pricing model assumptions used to compute compensation expense under the fair value-based
method are as follows:

Dividend yield

Expected volatility

Expected life

Risk-free rate of return

2006

2005

2004

29%

5 yrs

25%

7 yrs

29%

7 yrs

Weighted average fair value of options granted

5.05

2.93

1.89

e)
The Company has established a Deferred Share Unit (DSU) plan for its directors. A DSU entitles the holder to receive, upon
redemption, a cash payment equivalent to the market value of a common share at the redemption date. DSUs are credited to the director
accounts on a quarterly basis and vest immediately. At December 31, 2006, there were 20,981 DSUs outstanding (2005: 18,024).

Total compensation cost for stock-based compensation is as follows:

(millions)

Stock options

Deferred share units

Diluted share amounts as restated were computed as follows:

(number of shares)

Weighted average shares outstanding

Dilution impact of stock options

Diluted weighted average shares outstanding

2006

2005

2004

3.4

0.2

3.6

1.5

0.3

1.8

0.8

0.1

0.9

2006

2005

2004

59,887,382

50,461,330

48,671,915

562,688

591,797

912,714

60,450,070

51,053,127

49,584,629

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 3 9

> notes to the consolidated financial statements cont’d

Fair value

12. Financial Instruments
a)
The fair value of long-term debt as at December 31, 2006 and 2005 is estimated based on the last quoted trade price, where it
exists, or on the current rates available to the Company for similar debt of the same remaining maturities. The fair value of the
Company’s debt at December 31, 2006 was $194.5 million (2005: $197.9 million).

Concurrent with the issue of the Senior Notes, the Company entered into fixed for fixed cross currency swaps with major banks
(Note 8). At December 31, 2006, the fair value of the liability relating to these swaps was $29.4 million (2005: $29.8 million).
The change in the spot foreign exchange rate on the swaps of $15.4 million (2005: $15.3 million) is recorded as an Other Accrued
Liability. At December 31, 2006, the Company had forward exchange contracts outstanding (Note 12 d)) whose fair value was
$0.8 million. At December 31, 2005, the fair value of forward contracts approximated their contract value.

As at December 31, 2006 and 2005, the estimated fair value of other financial assets, liabilities and off-balance sheet instruments
approximates their carrying value.

Credit risk

b)
The Company, in the normal course of business, is exposed to credit risk relating to accounts receivable from its customers. This
risk is mitigated by the fact that its customer base is geographically diverse and in different industries. The Company is also
exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts and the fixed
for fixed cross currency swaps. The Company mitigates this risk by entering into forward contracts and swaps with members of the
credit facility syndicate.

Interest rate risk

c)
The Company is not exposed to significant interest rate risk. The Company’s long-term debt is at fixed rates. The Company’s bank
debt, if any, that is used to finance working capital, which is short-term in nature, is at floating interest rates.

Foreign exchange risk

d)
The Company uses foreign exchange contracts with maturities of less than a year to manage foreign exchange risk on certain future
committed cash outflows. As at December 31, 2006, the Company had outstanding forward foreign exchange contracts in the
amounts of US$16.5 million and ¤nil, maturing in the first half of 2007 (2005: US$58.7 million and ¤2.9 million). The foreign
exchange gain on U.S. denominated financial assets and liabilities included in 2006 operating earnings from continuing operations
was $1.7 million (2005: $1.6 million; 2004: $2.3 million).

The Company has designated US$75 million of the Senior Notes as a hedge of its net investment in foreign subsidiaries.

13. Segmented Information
The Company conducts business primarily in three metals business segments.

ii)

iii)

Metals service centers
The Company’s network of metals service centers provides processing and distribution services on a broad line of
metal products in a wide range of sizes, shapes and specifications, including carbon hot rolled and cold finished steel,
pipe and tubular products, stainless steel and aluminum. The Company services all major geographic regions of
Canada and certain regions in the Midwest region of the United States.

Energy tubular products
The Company’s energy tubular products operations distribute oil country tubular products, line pipe, tubes, valves and
fittings, primarily to the energy sector in western Canada and the western United States.

Steel distributors
The Company’s steel distributors act as master distributors selling steel to customers in large volumes, mainly on an
“as is” basis. The steel distributors source their steel domestically and offshore.

The Company has segmented its operations on the basis of type of customer, management reporting and geographic segments
in which it operates. The inter-segment sales from steel distributors to metals service centers were $85.1 million (2005: $57.4 million;
2004: $54.4 million). These sales, which are at market rates, are eliminated in the following table.

4 0 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Results by business segment:

(millions)

Segment Revenues

Metals service centers

Energy tubular products

Steel distributors

Other

Segment Operating Profits

Metals service centers

Energy tubular products

Steel distributors

Other income

Corporate expenses

Capital Expenditures

Metals service centers

Energy tubular products

Steel distributors

Other

Depreciation Expense

Metals service centers

Energy tubular products

Steel distributors

Other

Identifiable Assets

Metals service centers

Energy tubular products

Steel distributors

Identifiable assets by segment

Assets not included in segments

Cash

Income tax assets

Deferred financing charges

Other assets

Corporate and other operating assets

Total assets

2006

2005

2004

1,507.9

1,538.5

1,530.9

614.3

559.4

2,681.6

10.5

595.2

468.7

2,602.4

11.7

395.3

471.2

2,397.4

14.0

2,692.1

2,614.1

2,411.4

126.4

115.2

62.2

76.7

265.3

1.9

(18.2)

54.0

46.6

215.8

2.4

(16.8)

249.0

201.4

24.4

23.6

2.8

0.3

0.1

1.5

0.2

1.2

27.6

26.5

15.8

15.1

1.1

0.4

1.1

1.0

0.4

1.2

18.4

17.7

209.4

47.2

78.2

334.8

4.6

(16.3)

323.1

24.4

0.8

–

0.2

25.4

14.8

1.1

0.5

0.9

17.3

618.7

359.3

195.3

583.8

281.0

138.1

662.4

228.3

192.4

1,173.3

1,002.9

1,083.1

209.9

2.5

6.8

3.2

26.5

47.1

1.3

7.3

2.8

33.8

0.6

7.6

8.4

2.6

44.2

1,422.2

1,095.2

1,146.5

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 4 1

> notes to the consolidated financial statements cont’d

Results by geographic segment:

(millions)

Segment Revenues

Canada

United States

Segment Operating Profits

Canada

United States

Identifiable Assets

Canada

United States

2006

2005

2004

1,999.8

1,983.8

1,769.2

681.8

618.6

628.2

2,681.6

2,602.4

2,397.4

190.8

161.3

74.5

54.5

265.3

215.8

946.4

839.4

226.9

163.5

232.5

102.3

334.8

903.0

180.1

1,173.3

1,002.9

1,083.1

The Company maintains defined benefit pension plans, post-retirement benefit plans and defined contribution pension plans in

14. Pensions and Benefits
a)
Canada and 401(k) defined contribution pension plans in the United States. Actuarial valuations are performed on defined benefit
plans every three years or earlier if required. The most recent valuations for the Company’s defined benefit pension plans are as follows:

Number of Plans

Valuation Date

January 1, 2004

November 1, 2004

January 1, 2005

December 31, 2005

January 1, 2006

All of the Company’s pension plans had a measurement date of December 31, 2006.

The components of the Company’s pension and benefit expense include the following:

(millions)

Defined benefit pension plans

Benefits earned during the year

Interest cost on benefit obligation

Expected return on plan assets

Curtailment loss

Settlement loss

Other

Post-retirement benefits

Defined contribution plans paid during the year

Related to discontinued operations

Pension and benefit expense

4 2 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

2006

2005

2004

2.3

4.4

(4.8)

1.8

4.5

(4.2)

–

0.7

2.6

0.4

0.6

3.6

–

0.3

2.4

0.4

0.8

3.6

(0.2)

(0.3)

3.4

3.3

1.5

4.2

(3.9)

0.1

0.2

0.3

2.4

–

0.8

3.2

(0.2)

3.0

The actuarial determinations were based on the following assumptions in each year:

Assumed discount rate – year end

Expected long-term rate of return on plan assets

Rate of increase in future compensation

Rate of increase in future government benefits

2006

2005

2004

5.0%

7.0%

4.0%

3.5%

5.0%

7.0%

4.0%

3.5%

6.0%

7.0%

4.0%

3.5%

The health care cost trend rates used were 5% for dental and 10% (2005: 10%; 2004: 8%) graded out for medical, which is reduced
0.5% per year until 5% and 5% thereafter. A 1% change in trend rates would result in either an increase in the accrued benefit
obligation for post-retirement benefits of $0.8 million or a decrease of $0.7 million and either an increase in net periodic cost of
$38,000 or a decrease of $31,000.

The following information pertains to the Company’s defined benefit pension and other benefit plans, excluding those which

b)
are in the process of being wound up.

(millions)

Reconciliation of accrued benefit obligation

Pension Plans

Other Benefit Plans

2006

2005

2006

2005

Balance, beginning of the year

87.9

74.2

6.9

Current service cost

Participant contribution

Interest cost

Benefits paid

Plan amendments

Actuarial (gain) loss

Balance, end of the year

Reconciliation of fair value of plan assets

Balance, beginning of the year

Actual return of plan assets

Employer contributions

Employee contributions

Benefits paid

Balance, end of the year

Unamortized amounts

Funded status – (deficit)

Unrecognized prior service cost

Unamortized net actuarial loss

Accrued benefit asset (liability)

2.3

0.3

4.4

(4.1)

–

(0.2)

1.8

0.3

4.5

(5.4)

0.6

11.9

–

0.3

(0.4)

–

90.6

87.9

6.8

66.3

59.9

6.7

8.9

0.3

(4.1)

8.0

3.5

0.3

(5.4)

–

0.4

–

(0.4)

78.1

66.3

–

(12.5) $

(21.6) $

(6.8) $

0.8

14.8

0.9

17.5

–

1.1

3.1

(3.2) $

(5.7) $

6.4

–

0.4

(0.4)

–

0.5

6.9

–

0.4

–

(0.4)

–

(6.9)

–

1.2

(5.7)

As at December 31, 2006 and 2005, all the plans in the above table had an unfunded obligation. In the first quarter of 2006, the
Company contributed $7.6 million, which represented the minimum required annual contributions and $4.1 million for prior service costs.

The other benefit plans represent obligations to retired employees of sold or closed businesses. No active employees are entitled
to post-retirement benefits.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 4 3

> notes to the consolidated financial statements cont’d

(millions)

Defined contribution plans

Fair value of plan assets

Canadian plans

401(k) U.S. plans

2006

2005

6.3

23.6

29.9

6.5

22.9

29.4

The Company has a number of plans in the process of being wound up that relate to previously discontinued operations with no
further benefit obligation. The resolution of the surplus may result in sharing arrangements with employees of those operations.
The fair value of the plan assets and surplus at December 31, 2006 is $2.0 million (2005: $2.8 million).

As at December 31, 2006, approximately 40% of all pension plan assets were invested in equities, 40% in fixed income

c)
securities, and 20% in cash and cash equivalents. The expected return on plan assets is based on the fair value of plan assets.
Management endeavours to have an asset mix of approximately 55% in equities, 40% in fixed income securities and 5% in cash
and cash equivalents. The investment policy allows up to 30% in cash and cash equivalents. The volatility of the markets has
caused management to invest a correspondingly greater percentage of the pension plan assets in cash and cash equivalents.
The plan assets are not invested in either derivatives or real estate assets.

The expected annual benefits to be paid from the plans are as follows:

(millions)

2007

2008

2009

2010

2011

2012 – 2016

Pension
Plans

Other
Benefit Plans

3.5

3.6

3.8

4.1

4.2

26.7

0.4

0.5

2.5

Total

3.9

4.0

4.2

4.5

4.7

29.2

As a result of a recent court decision, the Company may be subject to a surplus sharing arrangement on one of its pension plans as
a result of a partial plan windup. The timing and the amount of surplus subject to sharing is currently being reviewed by the Company.

The elements of defined benefit costs recognized in the year are as follows:

Current service costs

Interest on accrued benefit obligation

Actual return on assets

Actuarial (gain) loss on accrued benefit obligation

Prior service costs

Elements of future benefit costs

Adjustments to recognize the long-term nature of employee benefit costs:

Difference between expected and actual return on assets

Difference between actuarial losses recognized and actuarial losses incurred

Difference between prior service costs recognized and prior service costs incurred

Defined benefit cost recognized

2006

2.3

4.8

(6.7)

(0.2)

–

0.2

1.9

0.8

0.1

3.0

2005

1.8

4.8

(8.0)

12.4

0.6

11.6

3.8

(12.1)

(0.5)

2.8

4 4 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

15. Contingencies, Guarantees and Commitments
a)
The Company and certain of its subsidiaries have been named defendants in a number of legal actions. Although the
outcome of these claims cannot be determined, management intends to defend all claims and has recorded provisions based on
its best estimate of the potential losses. In the opinion of management, the resolution of these matters is not expected to have a
materially adverse effect on the Company’s financial position, cash flows or operations.

The Company and its subsidiary companies have operating lease commitments, with varying terms, requiring approximate

b)
annual payments as follows: 2007: $10.8 million; 2008: $9.0 million; 2009: $8.5 million; 2010: $7.8 million; 2011: $6.1 million;
2012 and beyond: $11.9 million. Rental expense on operating leases was as follows: 2006: $11.8 million; 2005: $11.1 million;
and 2004: $13.6 million.

The Company is incurring site cleanup and restoration costs related to properties not utilized in current operations.
c)
Remedial actions are currently underway at three sites. The estimated costs of these cleanups have been provided for based on
management’s best estimates. Additional costs may be incurred at these or other sites as site cleanup and restoration progress,
but the amounts cannot be quantified at this time.

The Company has also entered into other agreements that provide indemnifications to counterparties in certain transactions
d)
including underwriting agreements. These indemnifications generally require the Company to indemnify the counterparties for costs
incurred as a result of losses from litigation that may be suffered by counterparties arising from those transactions. The Company
does not expect to make a payment on these indemnifications and, accordingly, no liability has been accrued.

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 4 5

> metals service centers directory

Operating under the name
Russel Metals, unless
otherwise noted.

CANADA
BRITISH COLUMBIA
Operating under the name
A.J. Forsyth throughout BC

Delta (Vancouver) – Regional
Office
830 Carlisle Road, V3M 5P4
Tel: (604) 525-0544

Campbell River
2710 Vigar Road, V9W 6A3
Tel: (250) 287-8841

Fort Nelson
4850 44th Avenue, V0C 1R0
Tel: (250) 774-7553

Fort St. John
Mile 49 1/2 Alaska Highway,
V1J 4M6
Tel: (250) 785-5641

Kelowna
8955 Grigg Road, V4V 2N5
Tel: (250) 766-6050

Kitimat
815 Enterprise Avenue, V8C 2P1
Tel: (250) 632-4702

Nanaimo
1950 East Wellington Road,
V9S 5V2
Tel: (250) 753-1555

Prince George
1154 Pacific Street, V2N 5S3
Tel: (250) 563-1274

990 Industrial Way, V2N 5S1
Tel: (250) 563-1274

ALBERTA
Calgary
5724 40th Street SE, T2C 2A1
Tel: (403) 279-6600

Edmonton
7016 99th Street NW, T6E 3R3
Tel: (780) 439-2051

5730 72A Avenue NW, T6B 3L1
(Specializing in plate processing)
Tel: (780) 439-2051

2471 76th Avenue NW, T6P 1P6
(Specializing in non-ferrous sales)
Tel: (780) 440-0779

Grande Prairie
11035 89th Avenue, T8V 5B9
Tel: (780) 539-3193

Red Deer
6724 Golden West Avenue, T4P 1A8
Tel: (403) 346-2096

SASKATCHEWAN
Regina
445 1st Avenue E, S4N 4Z3
Tel: (306) 721-6411

475 1st Avenue E, S4N 4Z3
Tel: (306) 721-9355

Saskatoon
922 51st Street E, S7K 5C7
Tel: (306) 931-3338

MANITOBA
Winnipeg
1359 St. James Street, R3H 0K9
Tel: (204) 772-0321

1510 Clarence Avenue, R3T 1T6
Tel: (204) 475-8584

ONTARIO
Mississauga (Toronto) –
Regional Office
1900 Minnesota Court,
Suite 210, L5N 3C9
(Ontario general line sales)
Tel: (800) 268-0750

Aberfoyle (Guelph)
24 Nicholas Beaver Road, N1H 6H9
(Specializing in plate processing)
Tel: (519) 767-3800

Burlington
Milspec Industries
5036 South Service Road, L7L 5Y7
(Specializing in strapping)
Tel: (905) 333-0646

Cambridge
15 Cherry Blossom Road, N3H 4R7
Tel: (519) 650-1666

Hamilton
175 Shaw Street, L8N 3S2
(Specializing in non-ferrous sales)
Tel: (905) 522-5930
(Specializing in chain)
Tel: (905) 522-1130

Kingston
191 Dalton Avenue, K7K 6C2
Tel: (613) 546-1281

London
685 Hale Street, N5W 1J1
Tel: (519) 451-1140

Oldcastle (Windsor)
4051 Delduca Drive, N0R 1L0
Tel: (519) 737-1549

Ottawa
2420 Stevenage Drive, K1G 3W3
Tel: (613) 738-2961

Port Robinson
York – Ennis
200 South Street North, L0S 1K0
Tel: (905) 384-9794

4 6 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Stoney Creek (Hamilton)
Russel Metals – B&T Steel
1052 South Service Road, L8E 6G3
(Specializing in flat rolled)
Tel: (905) 643-3008

Thetford Mines
Mégantic Métal
1400, boulevard Frontenac Est,
G6G 5R9
Tel: (418) 338-3188

NEW BRUNSWICK
Edmundston
25, rue Richards, E3V 4H4
Tel: (506) 739-9561

Sackville
141 Crescent Street, E4L 3V2
Tel: (506) 364-1234

Saint John
37 McIlveen Drive,
McAllister Industrial Park,
E2L 4B3
Tel: (506) 635-0005

NOVA SCOTIA
Halifax – Regional Office
28 Lakeside Park Drive, B3T 1A3
Tel: (902) 876-7861

NEWFOUNDLAND
Mount Pearl
11 Panther Place,
Donovans Industrial Estates,
A1N 5B7
Tel: (709) 364-3300

UNITED STATES
Russel Metals Williams Bahcall
Appleton, Wisconsin
975 North Meade Street,
54912 – 1054
Tel: (920) 734-9271

Green Bay, Wisconsin
895 Hinkle Street, 54303
Tel: (920) 497-1020

Milwaukee, Wisconsin
999 West Armour Avenue, 53221
Tel: (414) 481-7100

Baldwin International
Solon, Ohio
30403 Bruce Industrial Parkway,
44139
Tel: (440) 248-9500

McCabe Steel
687 Arvin Avenue, L8E 5R2
Tel: (905) 643-8284

Thunder Bay
620 Norah Crescent, P7C 5V8
Tel: (807) 622-8898

QUEBEC
Boucherville – Regional Office
Acier Leroux
1331, rue Graham-Bell, J4B 6A1
Tel: (450) 641-4360

Acier Richler
1330, rue Graham-Bell, J4B 6H5
(Specializing in non-ferrous sales)
Tel: (450) 449-5112

Amos
Acier Leroux
1675, route de l’Aéroport, J9T 3A8
Tel: (819) 732-8381

Baie-Comeau
Acier Leroux
55, avenue William-Dobell, G4Z 1T8
Tel: (418) 296-8626

Chicoutimi
Acier Leroux
2149, rue de la Fonderie, G7H 8C1
Tel: (418) 545-8881

Jonquière
Métaux Russel
2420, rue Bauman, G7S 4S4
Tel: (418) 548-3103

Quebec
Acier Loubier
5225, rue John Molson, G1X 3X4
Tel: (418) 656-9911

Rimouski
Acier Leroux
221, rue des Négociants, G5M 1B7
Tel: (418) 724-4937

Saint-Augustin-de-Desmaures
Acier Leroux
167, rue de Rotterdam, G3A 2K2
Tel: (418) 878-5737

Sept-Îles
Acier Leroux
533, boulevard Laure Est, G4R 4K2
Tel: (418) 962-6374

Terrebonne
Acier Leroux
1025, boulevard des Entreprises,
J6Y 1V2
(Specializing in structurals)
Tel: (450) 622-2060

> energy tubular products directory

Fedmet Tubulars
Calgary, Alberta
700 9th Avenue SW,
Suite 2200, T2P 3V4
Tel: (403) 237-0955

Triumph Tubular & Supply
Calgary, Alberta
441 5th Avenue SW,
Suite 875, T2P 2V1
Tel: (403) 262-3777

CANADA
Comco Pipe and Supply Company
Edmonton, Alberta
5910 17th Street NW, T6P 1S5
Tel: (780) 440-2000

Calgary, Alberta
9307 48th Street SE, T2C 2R1
Tel: (403) 203-0766

Stonewall, Manitoba
116 4th Street E, R0C 2Z0
Tel: (204) 467-8797

Guelph, Ontario
Kerr Industrial Park, N1H 6H9
Tel: (519) 763-1114

Sarnia, Ontario
1018 Prescot Drive
N7T 7H3
Tel: (519) 332-6666

UNITED STATES
Pioneer Pipe
Denver, Colorado
1660 Lincoln Street,
Suite 2300, 80264
Tel: (303) 289-3201

Aurora, Colorado
2401 Picadilly Road, 80019
Tel: (303) 307-9021

Lindon, Utah (Provo)
1610 West 200 South, 84042
Tel: (801) 224-8739

Houston, Texas
2203 Timberloch Place,
Suite 125-1,
The Woodlands, 77380
Tel: (281) 292-2875

Spartan Steel Products
Evergreen, Colorado
2942 Evergreen Parkway,
Suite 207, 80439
Tel: (303) 670-9048

> steel distributors directory

CANADA
Wirth Steel
Montreal, Quebec
1 Westmount Square,
Suite 200, H3Z 2P9
Tel: (514) 939-5555

Burnaby, British Columbia
4603 Kingsway,
Suite 308, V5H 4M4
Tel: (604) 436-1741

UNITED STATES
Sunbelt Group L.P.
Houston, Texas
1990 Post Oak Boulevard,
Suite 950, 77056-3817
Tel: (713) 840-0550

Overland Park, Kansas
8717 W. 110th Street,
Suite 240, 66210
Tel: (913) 491-6660

Arrow Steel Processors
Houston, Texas
8710 Clinton Drive, 77029
Tel: (713) 673-0666

> other

Thunder Bay Terminals Ltd.
Thunder Bay, Ontario
Station F, McKellar Island,
P7C 5J7, Canada
Tel: (807) 625-7800

R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT 4 7

> definitions

Book value per share

EBITDA

Equity value divided by ending shares outstanding.

Earnings from continuing operations before

Debt as % of capitalization

Total net interest bearing debt excluding cash on

deduction of interest, income taxes, depreciation

and amortization.

hand divided by common shareholders’ equity plus

Earnings multiple

interest bearing debt excluding cash on hand.

Period ending common share price divided by basic

Debt to EBITDA

earnings per common share.

Total interest bearing debt excluding cash on hand

Free cash flow

divided by EBITDA.

Dividend per share

The December 15th quarterly dividend annualized.

Dividend yield

The dividend per share divided by the year end

common share price.

EBIT

Earnings from continuing operations before

deduction of interest and income taxes.

Cash from operating activities before change in

working capital less capital expenditures plus

proceeds on sale of assets.

Market capitalization

Outstanding common shares times market price

of a common share at December 31.

Return on capital employed

EBIT over net assets employed.

4 8 R U S S E L M E TA L S 2 0 0 6 A N N U A L R E P O RT

Russell Cover 3/23/07 11:27 AM Page 2

corporate profile

Russel Metals is one of the largest metals distribution companies in North America.

> russel metals inc. directory

We conduct business primarily in three metals distribution segments: metals service centers; energy tubular

products; and steel distributors.

> businesses at a glance

metals service centers

energy tubular products

steel distributors

The main steel products sourced by
this segment are structural beam,
plate, coils, pipe and tubing.

Head Office

Shareholder Information

Transfer Agent and Registrar

Stock Symbol:
The Toronto Stock Exchange – RUS

CIBC Mellon Trust Company
P.O. Box 7010, Adelaide Street Postal Stn.,
Toronto, Ontario, Canada, M5G 2W9
Answer line: Toronto (416) 643-5500
Toll free: 1-800-387-0825
E-mail: inquiries@cibcmellon.ca

Internet: www.cibcmellon.ca

Board of Directors

Officers

Alain Benedetti
Corporate Director

James F. Dinning
Chairman of the Board,
Western Financial Group Inc.

Carl R. Fiora
Corporate Director,
steel industry executive

Anthony F. Griffiths
Corporate Director,
Chairman of the Board,
Russel Metals Inc.

Robbert Hartog
President,
Robhar Investments Ltd.

Lise Lachapelle
Corporate Director

John W. Robinson
Corporate Director,
steel industry executive

Edward M. Siegel, Jr.
President and Chief Executive Officer,
Russel Metals Inc.

Anthony F. Griffiths
Chairman of the Board
Toronto

Edward M. Siegel, Jr.
President and
Chief Executive Officer
Mississauga

Brian R. Hedges
Executive Vice President
and Chief Financial Officer
Mississauga

Marion E. Britton
Vice President, Chief Accounting
Officer and Assistant Secretary
Mississauga

Lesley M.S. Coleman
Vice President and Controller
Mississauga

William M. O’Reilly
Secretary
Davies Ward Phillips & Vineberg, LLP
Toronto

Elaine G. Toomey
Assistant Secretary
Mississauga

Management Team

Edward M. Siegel, Jr.
President and
Chief Executive Officer

Brian R. Hedges
Executive Vice President and
Chief Financial Officer

Marion E. Britton
Vice President,
Chief Accounting Officer and
Assistant Secretary

David J. Halcrow
Vice President, Purchasing and
Inventory Management

Maureen A. Kelly
Vice President, Information
Systems

Corporate Governance

Detailed disclosure concerning the Company’s governance practices may be found in the Management Proxy Circular.

Russell Cover 3/23/07 11:27 AM Page 1

metals service centers

energy tubular products

steel distributors

Operating as:

• Comco Pipe and Supply Company

• Wirth Steel

• Fedmet Tubulars

• Sunbelt Group

• Triumph Tubular & Supply

• Arrow Steel

• Pioneer Pipe

• Spartan Steel Products

Operating as:

• Russel Metals

• Métaux Russel

• A.J. Forsyth

• Acier Leroux

• Acier Loubier

• Acier Richler

• B&T Steel

• Leroux Steel

• Mégantic Métal

• McCabe Steel

• York-Ennis

• Russel Metals Williams Bahcall

• Baldwin International

www.russelmetals.com

M
E

2 0 0 6
A n n u a l
R e p o r t

Five Consecutive
Years of Dividend
Increases

Record
Share Price
in 2006

Equity
Tripled Since
2003

Rewarding
Our
Shareholders

Industry-
Leading Return
on Capital

Increased
Market
Capitalization

TSX
Leading
Dividend Yield