2016 ANNUAL REPORT
FOCUSED
FOCUSED ON
PROCESSING
We continue to focus on growing our value-added processing
capabilities as we look to add more value to our product
offerings. Our processes continue to grow in sophistication
with the addition of fiber lasers, tube lasers, stretcher
leveling, drilling, machining and other processes that add to
our already extensive value-added services. Each market and
customer base are typically unique. We serve as conduit from
the manufacturers to the customer and add value through
sophisticated processing to be a further link in the supply
chain.
EFFICIENCY
We manage our businesses on a decentralized basis by
empowering local management to be accountable for their
operations which fosters an entrepreneurial style throughout
the organization. This culture is augmented and supported
by centralized services such as information systems, legal,
finance, purchasing and human resources which lead to an
optimal and efficient use of resources.
PROGRESSION
Customer focused, employee driven defines our philosophy
and our vision of ensuring our strongest talent is in the right
position. During 2016 we had our first Next Generation
conference where our leaders of tomorrow came together to
discuss our entrepreneurial culture, centralized services and
future opportunities within the organization. In addition, we
made several internal promotions to allow our best to grow,
maintain and solidify our unique culture for the future to
enable the organization to prosper.
MODERNIZATION
Our processes have evolved; streamlining our operations
through real time electronic invoicing and receiving on
the plant floor. Our bar-coding functionality maintains
real time traceability and processing of all materials, costs
and shipments from the moment they arrive on site. We
announced a major ERP modernization project that kicked
off in January 2017 that will combine the functionality of our
current system with modern code.
TA BLE OF CONTENTS
Financial Highlights
A Discussion with our Chair of the Board, CEO and President
Management’s Responsibility for Financial Reporting
Management’s Discussion and Analysis
Independent Auditor’s Report
Consolidated Financial Statements
1
2
5
6
24
25
FINANCIAL HIGHLIGHTS
OPERATING RESULTS (millions)
Revenues
Net earnings
EBIT
Adjusted EBIT (Note)
Adjusted EBIT as a % of revenue
Adjusted EBITDA (Note)
EBITDA as a % of revenue
Basic earnings per common share ($)
BALANCE SHEET INFORMATION (millions)
Metals
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable and accruals
Net working capital - Metals
Fixed assets
Goodwill and intangibles
Net assets employed in metals operations
Other operating assets
Net income tax assets (liabilities)
Pension and benefit assets (liabilities)
Other corporate assets and liabilities
Total net assets employed
CAPITALIZATION (millions)
Bank indebtedness, net of (cash)
Long-term debt (incl. current portion)
Total interest bearing debt, net of (cash)
Market capitalization
Total firm value
OTHER INFORMATION (Notes)
Shareholders' equity (millions)
Book value per share ($)
Free cash flow (millions)
Capital expenditures (millions)
Depreciation and amortization (millions)
Earnings multiple
Firm value as a multiple of adjusted EBIT
Firm value as a multiple of adjusted EBITDA
Interest bearing debt/EBITDA
Debt as a % of capitalization
Market capitalization as a % of book value
Return on equity
Return on capital employed
COMMON SHARE INFORMATION
Ending outstanding common shares
Average outstanding common shares
Dividend yield
Dividend per share
Dividends paid as a % of free cash flow
Share price - High
Share price - Low
Share price - Ending
Notes:
---------------------------------------------Years ended-----------------------------------------------
2014
2012
2013
2015
2016
$2,578.6
62.8
119.0
91.3 (1)
3.5%
126.4 (1)
4.9%
$1.02
$3,111.6
(87.6)
(86.1)
118.7 (1)
3.8%
153.8 (1)
4.9%
($1.42)
$3,869.3
123.6
217.0
226.9 (1)
5.9%
261.7 (1)
6.8%
$2.01
$3,187.8
83.3
146.0
151.2 (1)
4.7%
184.8 (1)
5.8%
$1.37
$3,000.1
97.9 (2)
175.3 (2)
175.3 (2)
5.8%
200.8
6.7%
$1.63 (2)
$358.9
615.8
8.5
(276.3)
706.9
239.7
85.7
1,032.3
(1.1)
(7.3)
(11.0)
(38.5)
$974.4
$(146.8)
295.9
149.1
1,579.2
$1,728.3
$825.3
$13.37
$77.4
$16.7
$35.1
25.1
18.9
13.7
2.3
26%
191%
8%
9%
$333.4
712.5
10.7
(269.7)
786.9
267.8
92.0
1,146.7
(1.9)
25.4
(21.7)
(33.1)
$1,115.4
$(49.2)
295.7
246.5
991.6
$1,238.1
$868.9
$14.08
$0.6
$38.3
$35.1
nm
10.4
8.0
1.9
25%
114%
(10%)
11%
$566.6
930.8
11.6
(486.0)
1,023.0
249.8
214.3
1,487.1
1.5
(23.4)
(26.1)
(42.3)
$1,396.8
$(29.2)
461.0
431.8
1,597.4
$2,029.2
$965.0
$15.65
$124.8
$48.2
$34.8
12.9
8.9
7.8
1.8
32%
166%
13%
16%
$455.9
766.3
5.9
(383.7)
844.4
228.4
218.7
1,291.5
10.1
(11.3)
(23.1)
(42.6)
$1,224.6
$(116.2)
458.4
342.2
1,913.1
$2,255.3
$882.4
$14.48
$92.0
$27.2
$33.6
22.9
14.9
12.2
2.5
34%
217%
9%
12%
$455.6
764.0
7.1
(381.5)
845.2
225.3
192.1
1,262.6
16.0
(8.2)
(38.7)
(47.3)
$1,184.4
$(100.8)
455.8
355.0
1,662.2
$2,017.2
$829.4
$13.78
$99.4
$33.7
$25.5
16.9
11.5
10.0
2.3
35%
200%
12%
15%
61,735,485
61,704,990
5.9%
$1.52
121%
$27.78
$13.95
$25.58
61,702,560
61,696,592
9.5%
$1.52
nm
$27.81
$14.36
$16.07
61,674,228
61,321,767
5.9%
$1.52
72%
$37.63
$25.07
$25.90
60,946,393
60,780,520
4.5%
$1.40
92%
$31.62
$23.23
$31.39
60,204,636
60,128,534
5.1%
$1.40
82%
$28.97
$22.52
$27.61
(1) Adjusted EBIT and EBITDA excludes the gain on sale of properties of $27.7 million in 2016, goodwill and long-lived asset impairment charge
of $123.4 million in 2015, provision for product warranty of $20 million in 2015 and inventory provision of $61.3 million for 2015 and $14.6 million
for 2014, asset impairment charge of $9.9 million in 2014, and a $5.2 million in 2013.
(2) Restated due to adoption of IAS 19 (Amended 2011)
(3) This chart includes certain financial measures that are not prescribed by Canadian generally accepted accounting principles (GAAP) or have
standardized meanings, and thus, may not be comparable to similar measures presented by other companies, for example EBIT and EBITDA
and Other Information. 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. 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 the inside back cover of our Annual Report. See financial statements for GAAP earnings.
RUSSEL METALS INC.12016 ANNUAL REPORT DISCUSSION WITH…
JIM DINNING, CHAIR OF THE BOARD
BRIAN HEDGES, CHIEF EXECUTIVE OFFICER
JOHN REID, PRESIDENT AND CHIEF OPERATING OFFICER
Q. Your theme is "Focused"; can you explain why?
John We are continually focusing on ways to improve the business both internally and externally. We
constantly challenge ourselves to streamline our practices and lower costs. We have achieved this
through automation on the shop floor, such as automated receiving, electronic invoicing and real-time
warehouse inventory management. In addition, we continue to focus on adding value to our service
centers through state-of-the-art, value-added processing equipment such as stretch levellers, lasers,
tube lasers, thermal cutting and machining combinations.
Brian
In a mature industry, a critical component of our corporate culture is to ensure that every employee
understands and appreciates the discipline required to be focused on adding value and eliminating
costs from every step of the process.
Q. Your energy competitors lost money in 2016 whereas you didn't; to what do you
attribute these positive results?
Brian We have the best people in the industry, who maintain a disciplined approach to managing working
capital and are focused on providing complete service offerings to their customers in Western
Canada; where we have a leading market position.
John The addition of Apex has provided the intended stability. The MRO component of the business is
less impacted by downturns in the energy sector as the existing wells must be maintained.
Q. The challenges in the oil patch are well documented; when do you see a recovery on
the horizon?
Jim After 2015, I said "It's all in the recovery; 2016 simply had to be better." Turns out it was better
despite headwinds in the first and second quarters. One quarter into 2017, we are confident that the
worst is behind us. We are cautiously optimistic; albeit moderately.
John The recovery has started to take hold and will continue to improve. The pace of the recovery largely
depends on the price of oil and the changing political climate in both North America and the OPEC
Nations.
Q. Much has been written about the oversupply of steel in the world market. The U.S.
has tried to deal with this problem by way of trade actions. Is this strategy working
and do you expect rising prices in 2017 as a consequence?
John The trade actions taken in North America are having a positive impact and are a good first step in
establishing fair trade in North America. The laws of economics, however, continue to create price
pressure as we remain out of balance with supply in excess of demand.
Brian Late in 2016 prices started to recover but recent history suggests that these increases will be
tempered later in 2017.
RUSSEL METALS INC.22016 ANNUAL REPORT
Jim Dinning
Chair of the Board
Brian Hedges
Chief Executive Officer
John Reid
President & COO
Q. What are you excited about looking into next year?
Jim Our Russel team across the continent. These last two years were hard on our people but they
showed their resilience and ability to rise to the challenge. They can hardly wait to show what they
can do in a stronger economy; once again.
Brian The energy market is improving with positive actions by the Canadian government and indications
from the new administration in the U.S. The increased likelihood of merger activities as indicated by
new opportunities will also allow us to return to our historical growth trends.
John The continued improvement in the energy market.
Q. What is your biggest concern going into 2017?
Jim Walls and other barriers. People building walls to stop the free flow of people and goods.
John The disruption of traditional trade lanes within the supply chain.
Brian There is a strain on the variable compensation plans as the depressed energy market causes lower
compensation resulting in a negative impact on morale.
Q. You have maintained a dividend policy for the last two years during the energy
downturn. What is your view on the dividend policy in 2017?
Jim Russel is a dividend and growth story; "and"... not "or". We think this combination is good for
shareholders and for business. Russel's operations generate a healthy cash flow. We will continue
to grow the Company and pay the dividend at a rate we are confident we can afford over the
economic cycle.
Brian We see dividends as a way to reward our shareholders through a return of capital. In the current
environment we have lower capital requirements, cash on hand and very modest and inexpensive
long-term debt. We will maintain a conservative capital structure to allow us to grow working capital
as the business volumes and revenues return to prior levels.
Q. Last year you indicated that the Company was well-positioned to take advantage of
acquisitions as they present themselves; can you provide us with an update?
Brian Opportunities are presenting themselves and we evaluate them individually based on the long-term
value-added opportunity for our shareholders. Our focus is on increasing shareholder value rather
than growth at any cost which makes us both patient and disciplined acquirers.
John We completed a small acquisition Jackson Pipe at the end of 2016, which adds processing
capabilities and new customers to the JMS operations. We remain focused on growing our service
center footprint in the U.S.
RUSSEL METALS INC.32016 ANNUAL REPORT
Q. Your largest acquisition in the last number of years was Apex, which was in the
energy sector; given the economic downturn - any regrets?
Jim None. We would do it over again. Apex is a good business delivering strong earnings. More
importantly, with the acquisition of Apex we also acquired the best field team in the business.
John
I am extremely pleased. Historically Apex has performed well at each extreme of the energy cycle.
This downturn has been no different.
Brian The Apex management aggressively managed costs in this tough environment and generated one of
the strongest returns on net assets of our business units.
Q.
In 2014 you anticipated potential new ERP software system; can you provide us with
an update on the project?
Brian The decision to embark on modernization of our current system, which was launched in January
2017, was made after fully investigating other available options. We own the source code of our
service center ERP system and feel the enhancements we have made provide us with a competitive
advantage.
John The modernization project will allow us to maintain our existing ERP advantages yet progress into
modern code in order to take advantage of new technology in the future.
Q. Your Board has a strong mix of business leaders with diverse skills; are there any
changes that you would like to see in your Board composition in 2017 and beyond?
Jim We have got one of the strongest Boards of all Canadian public companies. In 2016, we recruited
Barbara Jeremiah of Pittsburgh; she comes to us as a seasoned former executive at Alcoa. We will
have some retirements in 2018 and beyond, so we will be in recruitment mode for the next couple of
years. We aim to maintain a strong but practical governance style.
Q. Have there been changes in the management ranks in 2016?
John The ultimate capstone to a successful management career is how a manager developed their people
and ultimately their successors. Our culture has produced a unique group of leaders who have
demonstrated the ability to develop our leaders of tomorrow. Our bias is to promote from within but,
in certain circumstances, we have recruited some of the industry's best talent. John Maclean, a 30
year veteran of the steel industry, joined us three years ago and has recently been promoted to VP of
Canadian Service Centers. Craig Bolton, with 19 years of service center experience, is now
managing the British Columbia region. Internal service center appointments included Bruce Robb
expanding his role to encompass Alberta, Manitoba and Saskatchewan. Mark Fine took the reins of
Russel Metals Williams Bahcall; and Rocky Gannelli of Baldwin International.
Brian
In steel distributors, the talented Fernando Ferreira was promoted to President in anticipation of
future leadership changes at Wirth. In the energy segment, Travis Peckham has been well prepared
as successor to Bruce McBean, who retired from Triumph Tubulars in January 2017 after 40 years in
the industry. Also, retiring in 2016 were service center leaders; Rod Smith at Russel Metals Williams
Bahcall and Ed Weber at Baldwin International. I would like to thank each of these exceptional
operators for their service to Russel and their personal friendship with me and the rest of our team.
RUSSEL METALS INC.42016 ANNUAL REPORT
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated financial statements, Management's Discussion and Analysis of Financial
Condition 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 International Financial Reporting
Standards, as issued by the International Accounting Standards Board, 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 of Financial
Condition 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 International Financial Reporting
Standards. 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 internal and disclosure controls for the year ended December 31, 2016, and has disclosed the
results of this evaluation in its Management Discussion and Analysis of Financial Condition.
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 and the
Management's Discussion and Analysis of Financial Condition. The Audit Committee reports its findings to the
Board of Directors for consideration in approving the consolidated financial statements and the Management's
Discussion and Analysis of Financial Condition for presentation to the shareholders.
The consolidated financial statements have been audited on behalf of the shareholders by the external auditors,
Deloitte LLP, in accordance with Canadian generally accepted auditing standards. Deloitte LLP has full and
free access to the Audit Committee.
February 16, 2017
B. R. Hedges
Chief Executive Officer
M. E. Britton
Executive Vice President and
Chief Financial Officer
RUSSEL METALS INC.52016 ANNUAL REPORT
RUSSEL METALS INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2016
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") of
Russel Metals Inc. and its subsidiaries provides information to assist readers of our audited Consolidated
Financial Statements for the year ended December 31, 2016, including the notes thereto and should be read in
conjunction with these financial statements. All dollar references in our financial statements and in this report
are in Canadian dollars unless otherwise stated.
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.
Unless otherwise stated, the discussion and analysis contained in this MD&A are as of February 16, 2017.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this MD&A constitute forward-looking statements or information within the
meaning of applicable securities laws, including statements as to our future capital expenditures, our outlook,
the availability of future financing and our ability to pay dividends. Forward-looking statements relate to future
events or our future performance. All statements, other than statements of historical fact, are forward-looking
statements. Forward-looking statements are often, but not always, identified by the use of words such as
"seek", "anticipate", "plan", "continue", "estimate", "expect", "may", "will", "project", "predict", "potential",
"targeting", "intend", "could", "might", "should", "believe" and similar expressions. Forward-looking statements
are necessarily based on estimates and assumptions that, while considered reasonable by us, inherently
involve known and unknown risks, uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in such forward-looking statements, including the factors described
below.
We are subject to a number of risks and uncertainties which could have a material adverse effect on our future
profitability and financial position, including the risks and uncertainties listed below, which are important factors
in our business and the metals distribution industry. Such risks and uncertainties include, but are not limited to:
the volatility in metal prices; volatility in oil and natural gas prices; cyclicality of the metals industry and the
industries that purchase our products; decreased capital and other expenditures in the energy industry; product
claims from customers; significant competition that could reduce our market share; the interruption in sources of
metals supply; manufacturers selling directly to our customer base; material substitution; credit risk of our
customers; lack of credit availability; change in our credit ratings; currency exchange risk; restrictive debt
covenants; non-cash asset impairments; the unexpected loss of key individuals; decentralized operating
structure; the availability of future acquisitions and their integration; the failure of our key computer-based
systems, including our enterprise resource and planning systems; failure to renegotiate any of our collective
agreements and work stoppages; litigious business environment; environmental liabilities; environmental
concerns or changes in government regulations; legislation on carbon emissions; workplace health and safety
laws and regulations; significant changes in laws and governmental regulations; fluctuation of our common
share price; dilution; and variability of dividends.
While we believe that the expectations reflected in our forward-looking statements are reasonable, no
assurance can be given that these expectations will prove to be correct, and our forward-looking statements
included in this MD&A should not be unduly relied upon. These statements speak only as of the date of this
MD&A and, except as required by law, we do not assume any obligation to update our forward-looking
statements. Our actual results could differ materially from those anticipated in our forward-looking statements
including as a result of the risk factors described above and under the heading "Risk" later in this MD&A, and
under the heading "Risk Management and Risks Affecting Our Business" in our most recent Annual Information
Form and are otherwise disclosed in our filings with securities regulatory authorities which are available on
SEDAR at www.sedar.com.
RUSSEL METALS INC.62016 ANNUAL REPORT
NON-GAAP MEASURES
This MD&A includes a number of measures that are not prescribed by Canadian 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.
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 products, and steel distributors.
Our net earnings for 2016 were $63 million compared to a loss of $88 million in 2015. Earnings per share was
$1.02 for 2016 compared to a loss per share of $1.42 for 2015.
Our 2016 and 2015 earnings were impacted by certain items that were non-recurring in nature. The following
table highlights our operating results by removing these onetime charges:
Earnings (loss) per share
Net earnings (loss) per share
Gain on sale of properties
Withholding tax
Asset impairments
Change in fair value of contingent consideration
Product warranty claim and other
Adjusted earnings per share
2016
2015
$ 1.02
(0.27)
0.03
-
-
-
$ (1.42)
-
-
1.87
(0.43)
0.29
$ 0.78
$ 0.31
In 2016, we capitalized on the opportunity to sell our Blytheville, Arkansas property. We have entered into a 20
year lease to leaseback approximately one-third of the building space comprised of two buildings to house our
JMS Russel Metals coil processing operation. In addition we sold redundant land in Quebec, entered into a
sale and leaseback transaction in Ontario and closed one of our British Columbia branches and disposed of the
property. These transactions resulted in a pre-tax gain of $28 million.
Also in the 2016 fourth quarter, we repatriated US$40 million to Canada and paid US$2 million in non-
deductible withholding tax. The repatriation of the funds, which were not required to fund our U.S. operations,
allowed us to repay Canadian dollar bank borrowings and reduce interest costs.
Certain of the 2015 adjustments were a direct result of the economic slowdown in energy due to the weakness
in the price of oil and natural gas affecting demand and product prices in our energy products segment. In the
fourth quarter of 2015 we recorded a onetime charge of $124 million related to the impairment of certain assets,
goodwill and intangibles. The impairment test in the fourth quarter of 2016 determined that remaining goodwill
was not impaired.
During 2015, we recorded finance income of $27 million resulting from the reduction of the fair value of
expected earnout payments under Apex Distribution and Apex Monarch acquisition agreements. The
forecasted future earnings of these operations is not expected to result in any further earnout payments.
In 2015, we estimated a potential liability of $20 million related to a customer claim. The customer alleged that
the product was defective and that the manufacturer did not meet the specifications for the goods. Although
primary responsibility of the alleged defective product lies with the manufacturer we were included in the claim.
We are in the process of finalizing the settlement agreement and we believe that the provision recorded in 2015
is adequate to satisfy the obligation.
RUSSEL METALS INC.72016 ANNUAL REPORT
While not included in adjusted earnings per share in the above table, our operating results included inventory
write-downs in 2016 and 2015. Inventory write-downs in 2016 were recorded primarily in our energy products
segment due to lower demand and obsolescence concerns relating to older inventory at certain operations. In
steel distributors, steel pricing recovered in early 2016 resulting in a reversal of previous net realizable value
inventory provisions.
A summary of inventory write-downs and write-ups by segment is as follows:
Segment (millions)
Metals service centers
Energy products
Steel distributors
2016
2015
$ 0.7
12.4
(2.1)
$ 11.0
$ 2.0
37.3
22.0
$ 61.3
SUMMARIZED FINANCIAL INFORMATION
The following tables disclose selected information related to revenues, earnings and common shares over the
last three years.
2016
(in millions, except
per share data and volumes)
Revenues
Earnings from operations
Net earnings
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
$ 662.1
16.6
7.8
$ 623.7
30.0
16.4
$ 639.2
27.6
15.9
$ 653.6
17.1
22.7
Year
Ended
Dec. 31
$ 2,578.6
91.3
62.8
Basic earnings per common share
$ 0.13
$ 0.27
$ 0.26
$ 0.37
$ 1.02
Diluted earnings per common share
$ 0.13
$ 0.27
$ 0.26
$ 0.36
$ 1.01
Total assets
Non-current financial liabilities
Dividends paid
Market price of common shares
High
Low
$ 1,541.8
$ 295.4
$ 0.38
$ 1,569.0
$ 295.6
$ 0.38
$ 1,556.7
$ 295.7
$ 0.38
$ 1,508.5
$ 295.8
$ 0.38
$ 1,508.5
$ 295.8
$ 1.52
$ 20.19
$ 13.95
$ 24.89
$ 19.34
$ 24.92
$ 19.92
$ 27.78
$ 19.81
$ 27.78
$ 13.95
Shares outstanding end of quarter
Average shares outstanding
Number of common shares traded
61,702,560
61,702,560
19,655,847
61,703,560
61,702,736
16,045,311
61,703,560
61,703,560
7,357,465
61,735,485
61,711,054
9,655,118
61,735,485
61,704,990
52,713,741
RUSSEL METALS INC.82016 ANNUAL REPORT
2015
(in millions, except
per share data and volumes)
Revenues
Earnings (loss) from operations
Net earnings (loss)
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
Year
Ended
Dec. 31
$ 903.9
36.6
18.5
$ 761.3
31.1
16.4
$ 773.4
19.0
12.8
$ 673.0
(29.3)
(135.3)
$ 3,111.6
57.4
(87.6)
Basic earnings (loss) per common share
$ 0.30
$ 0.27
$ 0.21
$ (2.19)
$ (1.42)
Diluted earnings (loss) per common share
$ 0.30
$ 0.27
$ 0.21
$ (2.19)
$ (1.42)
Total assets
Non-current financial liabilities
Dividends paid
Market price of common shares
High
Low
$ 1,981.8
$ 480.8
$ 0.38
$ 1,901.2
$ 483.1
$ 0.38
$ 1,877.3
$ 315.2
$ 0.38
$ 1,607.0
$ 295.2
$ 0.38
$ 1,607.0
$ 295.2
$ 1.52
$ 26.34
$ 22.39
$ 27.81
$ 22.35
$ 23.14
$ 18.23
$ 24.05
$ 14.36
$ 27.81
$ 14.36
Shares outstanding end of quarter
Average shares outstanding
Number of common shares traded
61,701,628
61,678,145
17,543,301
61,701,628
61,701,628
15,792,944
61,701,628
61,701,628
15,319,931
61,702,560
61,702,226
18,350,285
61,702,560
61,696,592
67,006,461
2014
(in millions, except
per share data and volumes)
Revenues
Earnings from operations
Net earnings
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
$ 924.0
53.5
29.0
$ 893.3
56.4
30.5
$ 1,038.8
63.4
33.0
$ 1,013.2
53.6
31.1
Year
Ended
Dec. 31
$ 3,869.3
226.9
123.6
Basic earnings per common share
$ 0.47
$ 0.50
$ 0.54
$ 0.50
$ 2.01
Diluted earnings per common share
$ 0.46
$ 0.48
$ 0.52
$ 0.49
$ 1.95
Total assets
Non-current financial liabilities
Dividends paid
Market price of common shares
High
Low
$ 1,883.9
$ 489.6
$ 0.35
$ 1,900.1
$ 490.0
$ 0.35
$ 2,019.8
$ 493.5
$ 0.38
$ 2,042.8
$ 487.8
$ 0.38
$ 2,042.8
$ 487.8
$ 1.46
$ 31.50
$ 27.78
$ 34.43
$ 29.90
$ 37.63
$ 33.50
$ 35.11
$ 25.07
$ 37.63
$ 25.07
Shares outstanding end of quarter
Average shares outstanding
Number of common shares traded
61,026,590
60,966,768
9,008,334
61,414,260
61,159,759
9,379,761
61,632,896
61,497,827
10,266,671
61,674,228
61,653,232
18,618,067
61,674,228
61,321,767
47,272,833
RUSSEL METALS INC.92016 ANNUAL REPORT
RESULTS OF OPERATIONS
The following table provides operating profits before interest, other finance expense or income, gain on sale of
properties, asset impairments, product warranty claims and income taxes. 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 are consistent with the segment reporting in our consolidated financial
statements.
(in millions, except percentages)
Segment Revenues
Metals service centers
Energy products
Steel distributors
Other
Segment Operating Profits
Metals service centers
Energy products
Steel distributors
Corporate expenses
Other
Operating profits
Inventory Write-down, net
Metals service centers
Energy products
Steel distributors
Segment Gross Margin as a % of Revenues
Metals service centers
Energy products
Steel distributors
Total operations
Segment Operating Profit as a % of Revenues
Metals service centers
Energy products
Steel distributors
Total operations
ANNUAL FINANCIAL HIGHLIGHTS
(in millions, except per share amounts)
Revenues
Operating profits
Net earnings (loss)
Basic earnings (loss) per share
2016
$ 1,383.5
881.2
304.5
9.4
$ 2,578.6
$ 58.1
18.9
29.0
(18.6)
3.9
$ 91.3
$ 0.7
12.4
(2.1)
$ 11.0
21.6%
15.5%
18.5%
19.5%
4.2%
2.1%
9.5%
3.5%
2015
2016 change
as a % of 2015
(7%)
(28%)
(24%)
(17%)
39%
(43%)
(49%)
59%
$ 1,481.1
1,227.1
398.4
5.0
$ 3,111.6
$ 41.9
33.0
(3.6)
(12.5)
(1.4)
$ 57.4
$ 2.0
37.3
22.0
$ 61.3
19.1%
14.5%
5.1%
15.6%
2.8%
2.7%
(0.9%)
1.8%
2016
$ 2,579
91
63
1.02
2015
$ 3,112
57
(88)
(1.42)
2014
$ 3,869
227
124
2.01
RUSSEL METALS INC.102016 ANNUAL REPORT
Results of our U.S. operations for the year ended December 31, 2016 were converted at $1.3256 per US$1
compared to $1.2788 per US$1 for the year ended December 31, 2015. The decline of the average Canadian
dollar in 2016 versus 2015 increased revenues, expenses and profits for our U.S. operations when translated to
Canadian dollars. Our U.S. operations represented approximately 31% of our total revenues. The exchange
rate used to translate the balance sheet at December 31, 2016 was $1.3427 per US$1 versus $1.3840 per
US$1 at December 31, 2015.
Description of operations
METALS SERVICE CENTERS
a)
We provide processing and distribution services to a broad base of approximately 43,000 end users through a
network of 50 Canadian locations and 14 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 Southeastern and Midwestern regions in the United
States. Within Canada, our service centers operate under the names Russel Metals, Métaux Russel, A.J.
Forsyth, Acier Leroux, Acier Loubier, Alberta Industrial Metals, B&T Steel, Leroux Steel, Mégantic Métal, Russel
Metals Processing, Russel Metals Specialty Products, Métaux Russel Produits Spécialisés, McCabe Steel and
York-Ennis. Our U.S. service centers operate under the names Russel Metals Williams Bahcall, JMS Russel
Metals, Norton Metals and Baldwin International.
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 2016 and 2015 is found in the section that follows.
Steel prices fluctuate significantly throughout the steel cycle. Steel prices are influenced by overall international
demand, trade sanctions, iron ore prices, scrap steel prices and product availability. Volatile metal prices cause
fluctuations in our operating results. During the first half of 2016, steel prices rose but due to an absence of
demand to support the mill increases, they declined in the third quarter of 2016. Partly due to increased
dumping duties reducing imports as a result of affirmative trade actions, steel price increases were announced
during the 2016 fourth quarter that resulted in higher steel prices at year end and into the first quarter of 2017.
Steel prices declined for most of 2015 resulting in steel prices at lower levels than the industry had seen since
the early 2000`s.
Supply side management, practiced by steel producers in North America, and international supply and demand,
which impact steel imports, affect product availability. Trade sanctions are initiated either by steel mills or by
government agencies in North America. During 2016, the U.S. Department of Commerce issued an affirmative
ruling on trade cases of various products including cold rolled coil, coated coils, hollow structural sections, hot
rolled coil and cut-to-length plate from various countries. On January 18, 2017, the U.S. Department of
Commerce announced its affirmative final determination on cut-to-length plate from China. All of these rulings
were positive for U.S. steel mills and steel prices.
In the second half of 2016 an investigation was initiated on Vietnamese cold rolled and coated steel products
which were converted from hot rolled steel produced in China. The U.S. producers claimed that the process of
cold rolling does not represent a substantial transformation required in order to change the country of origin. A
favourable ruling would provide further support to steel prices.
Our operating results are affected by the inherent risk of the cyclicality of the metals industry and the industries
that purchase our products. Demand for our product is significantly affected by economic cycles. Revenues
and operating profits fluctuate with the level of general business activity in the markets served. We are most
impacted by the manufacturing, resource (including oil and gas), and construction segments of the North
American economy.
Canadian service centers, which represent the majority of our metals service center revenues, have operations
in most regions of Canada and are affected by general regional economic conditions. Our large market share
and diverse customer base of approximately 26,000 Canadian customers mean that our results tend to mirror
the performance of the regional economies of Canada. Our U.S. operations, which have approximately 17,000
customers, are impacted by the local economic conditions in the regions that they serve.
RUSSEL METALS INC.112016 ANNUAL REPORT
Results of our Canadian operations can be affected by the U.S. dollar exchange rate since some products are
sourced outside of Canada and are priced in U.S. dollars. Movement in the Canadian dollar has a short-term
impact on inventory prices.
Metals service centers segment results -- 2016 compared to 2015
c)
Revenues for 2016 decreased 7% to $1.4 billion compared to 2015 revenues of $1.5 billion. Tons shipped in
the metals service centers segment in 2016 were approximately 2% lower than 2015. We experienced volume
increases in 2016 in our British Columbia and Quebec regions. Shipments decreased in Alberta due to the
continued decreased activity related to energy industry customers. Our U.S. operations and our other
Canadian regions had shipments slightly lower than 2015. The average selling price of metal for 2016 was
approximately 4% lower than the average selling price for 2015. Average selling prices improved during the
second half of 2016 but still remained below the 2015 average price.
Gross margin as a percentage of revenues was 21.6% which was higher than 2015 gross margins of 19.1%.
The increased gross margin percentage resulted from our continued growth in value-added processing.
Our average revenue per invoice for 2016 was approximately $1,497 compared to $1,714 for 2015, reflecting
smaller order size caused by the slowing economy. We handled approximately 3,670 transactions per day in
2016 compared to 3,460 per day in 2015, an increase of 6%.
Operating expenses for 2016 decreased $1 million from 2015, mainly related to lower manpower levels, salary
reductions and work share arrangements due to weaker demand in Western Canada. Adjusting for the
translation of our U.S. operations to Canadian dollars, the decrease was $2 million compared to 2015. We
reduced our workforce by approximately 1% in 2016 and 8% in 2015.
Metals service centers operating profits for 2016 were $58 million compared to $42 million for 2015; this
increase mainly related to improved gross margins.
Description of operations
ENERGY PRODUCTS
a)
We distribute oil country tubular goods (OCTG), line pipe, tubes, valves and fittings, primarily to the energy
industry in Western Canada and the United States. A significant portion of our business units are clustered in
Alberta and Saskatchewan, Canada, and in the U.S., in Colorado and Texas. A large portion of our inventories
are located in third party yards ready for distribution to customers throughout North America. In addition, we
operate from 49 Canadian and 19 U.S. facilities mainly to support our valve and fitting operations. The majority
of these facilities are oil field stores which form the Apex Distribution network. We purchase our products from
the pipe division of North American steel mills, independent manufacturers of pipe, valves and fittings,
international steel mills and other distributors. Our energy products segment operates under the names Apex
Distribution, Apex Monarch, Apex Remington, Apex Western Fiberglass, Comco Pipe and Supply Company,
Fedmet Tubulars, Triumph Tubular & Supply, Pioneer Pipe and Spartan Energy Tubulars.
Factors affecting results
b)
The following is a general discussion of the factors affecting our energy products segment operations. More
specific information on how these factors impacted 2016 and 2015 is found in the section that follows.
The price of oil and natural gas can impact rig counts and drilling activities, which affects demand for our
products. Oil and gas prices which had declined since 2014, stabilized in 2016. This severe drop and
continued low level of the price of oil caused a reduction in capital spending projects and rig activity of our
energy product customers during 2015 and 2016.
RUSSEL METALS INC.122016 ANNUAL REPORT
Prices for pipe products are influenced by overall demand, trade sanctions, product availability and metal
prices. Trade sanctions are initiated either by steel mills or by government agencies in North America. Both
the Canadian and U.S. governments have imposed duties on certain Chinese pipe, which remain in effect and
reduce imports of these products. The U.S. government initiated reviews in 2015 and 2016 on pipe from a
number of other countries. Due to the overstocked inventory position of the industry and low demand, prices
remained under pressure for most of 2016 despite the trade sanctions put in place. During the fourth quarter of
2016 and into early 2017, price increases have been announced. Prices of valves and fittings are not as
sensitive to steel price fluctuations because they are highly engineered value-added products.
Drilling activity in Western Canada historically peaks during the period from October to March.
Energy products segment results -- 2016 compared to 2015
c)
Revenues in our energy products segment decreased 28% to $0.9 billion for 2016, compared to $1.2 billion for
2015 due to lower activity at all operations in the segment. Revenues from our Canadian operations servicing
oil and gas drilling decreased 37% compared to 2015.
Gross margin as a percentage of revenue was 15.5% for 2016 compared to 14.5% in 2015. All of our energy
products operations experienced pricing and margin pressure due to lower demand and excess inventories in
the industry. We recorded inventory write-downs of $12 million in 2016 compared to $37 million in 2015. The
2016 write-downs related primarily to obsolescence concerns on older inventory in line pipe and OCTG. The
2015 write-downs primarily related to net realizable value issues due to the slowdown in the energy sector.
Operating expenses were $118 million or 27% lower for 2016 compared to 2015 due to cost containment
measures such as reduced manpower, variable compensation programs and other cost reductions consistent
with the activity in the segment. During the year we reduced our workforce by approximately 12% in addition to
the 17% reduction in 2015.
This segment generated lower operating profits of $19 million for 2016 compared to $33 million for 2015, mainly
related to decreased volumes.
Description of operations
STEEL DISTRIBUTORS
a)
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 has a cut-to-length facility operating
under the name Arrow Steel, located in Houston, Texas where it processes coil for its customers. Our steel
distributors source their steel both domestically and off shore.
The main steel products sourced by this segment are structural beam, plate, coils, pipe and tubing; however,
product volumes vary based on the economy and trade actions in North America. Our steel distributors operate
under the names Wirth Steel and Sunbelt Group. Arrow Steel processes and levels coil products.
Factors affecting results
b)
The following is a general discussion of the significant factors affecting our steel distributors. More specific
information on how these factors impacted 2016 and 2015 is found in the section that follows.
Steel prices are 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. Trade
actions currently exist on plate, coil and pipe from specified countries. Additional duties have been levied by
the U.S. government in 2016. Steel imports are affected both by mill capacity by product line in North America,
as well as international supply and demand. These factors significantly affect product availability in North
America.
Demand for steel that is sourced off shore fluctuates significantly and is mainly driven by price and product
availability in North America. Our steel distributors have a significant number of customers who buy product
from them on a periodic basis which can result in large fluctuations in revenues reported from period to period.
RUSSEL METALS INC.132016 ANNUAL REPORT
Steel distributors segment results -- 2016 compared to 2015
c)
Steel distributors revenues decreased 24% to $305 million for 2016 compared to $398 million in 2015 mainly
due to lower demand.
Gross margin as a percentage of revenues was 18.5% for 2016 compared to 5.1% for 2015. In 2015 declining
steel prices resulted in lower margins than historical norms leading to inventory write-downs of $22 million. In
2016, rising prices resulted in a higher gross margin percentage and a reversal of $2 million in previous
inventory provisions.
Operating expenses for 2016 were $28 million compared to $24 million in 2015 mainly due to higher variable
compensation and the translation of our U.S. operations due to the stronger U.S. dollar.
Steel distributors operating income was $29 million compared to an operating loss of $4 million in 2015 as a
result of stronger gross margins.
CORPORATE EXPENSES -- 2016 COMPARED TO 2015
Corporate expenses were $19 million in 2016 compared to $13 million in 2015 due to higher share-based
compensation as a result of the increase in share price. During 2016 the share price increased to $25.58 from
$16.07 at December 31, 2015 which resulted in an expense of $4 million in 2016 compared to income of $3
million in 2015 due to the mark to market on certain share-based compensation.
CONSOLIDATED RESULTS -- 2016 COMPARED TO 2015
Operating profits were $91 million in 2016 compared to $57 million in 2015.
GAIN ON SALE OF PROPERTIES
In December 2016 we closed the sale of the Blytheville, Arkansas property. We entered into a 20 year lease for
approximately one third of the square footage to house our JMS Russel Metals coil processing operation. In
addition, we sold excess land in Quebec, entered into a sale and leaseback transaction for the Comco Pipe
branch in Ontario and closed and sold our branch in Campbell River, British Columbia. These transactions
resulted in a pre-tax gain of $28 million or $0.27 per share.
ASSET IMPAIRMENT
During 2015, we recorded asset impairment charges of $2 million for fixed assets, $19 million for intangibles
and $103 million for goodwill.
The drop in the price of oil throughout 2015 resulted in lower activity levels at both Apex Distribution and Apex
Monarch which were acquired in 2012 and 2013, respectively. Both of these operations remain profitable;
however, based on forecasts of expected future cash flows we recorded a write-down of $90 million of goodwill
and $17 million of intangible assets related to these energy product segment acquisitions.
The metals service centers segment recorded asset impairment charges of $2 million for fixed assets, $2 million
for intangibles and $13 million for goodwill related to lower demand and reduced steel prices.
INTEREST EXPENSE AND INCOME
Net interest expense was $22 million for 2016 compared to $41 million for 2015. Interest expense for 2015
included a non-cash charge of $5 million on the redemption of our convertible debentures on November 4,
2015. The redemption of the convertible debentures resulted in lower debt levels and lower corresponding
interest expense in 2016.
OTHER FINANCE EXPENSE AND INCOME
We recorded finance income of $27 million in 2015 related to the lower fair value of the contingent
consideration associated with the Apex Distribution and Apex Monarch acquisitions. The forecasted future
earnings of these two operations are not expected to result in a payment under the applicable earnouts, which
expire in 2017 and 2018 respectively.
RUSSEL METALS INC.142016 ANNUAL REPORT
INCOME TAXES
We recorded a provision for income taxes of $35 million in 2016 compared to a tax recovery of $12 million for
2015. Our effective income tax rate for 2016 was 35.5% compared to 12.4% for 2015. The effective tax rate
for 2016 was higher due to higher U.S. corporate tax rates on the property sale in Arkansas and the non-
recoverable withholding tax of US$2 million on the repatriation of US$40 million to Canada. The 2015 rate was
impacted by non-taxable items such as goodwill impairment and contingent consideration.
NET EARNINGS
Net earnings for 2016 was $63 million compared to a net loss of $88 million in 2015. Basic earnings per share
for 2016 was $1.02 per share compared to basic loss per share of $1.42 per share in 2015.
SHARES OUTSTANDING AND DIVIDENDS
The weighted average number of common shares outstanding for 2016 was 61,704,990 compared to
61,696,592 for 2015. The weighted average number of common shares outstanding increased as a result of
the exercise of options. Common shares outstanding at December 31, 2016 and February 16, 2017 were
61,735,485.
We paid common share dividends of $94 million or $1.52 per share in 2016 and 2015.
We have $300 million 6.0% Senior Notes due April 19, 2022. The indenture for our Senior Notes has
restrictions related to the payment of quarterly dividends in excess of $0.35 per share. We currently have a
basket of approximately $217 million available for restricted payments, which is adjusted for 50% of our net
earnings or losses on a quarterly basis. This basket is available for dividend payments greater than $0.35 per
share which, at the current dividend rate, utilizes approximately $7 million per annum of the restricted payment
basket.
Under our syndicated bank facility, the payment of dividends is subject to excess borrowing base availability of
not less than four times the declared dividend. We do not believe this requirement will restrict our ability to pay
dividends as our borrowing base, which is based on percentages of accounts receivable and inventories, has
traditionally been in excess of our borrowings plus four times the current dividend. In addition, if our excess
borrowing base were to be below four times our dividend, we believe we would be able to obtain a waiver or
finance our short-term cash requirements with alternate financing structures and pay the dividend.
EBITDA
The following table shows the reconciliation of net earnings to adjusted EBITDA:
(millions)
Net earnings (loss)
Provision for (recovery of) income taxes
Interest and finance expense, net
Gain on sale of properties
Asset impairment charges and other
Adjusted earnings before interest, finance and income taxes (adjusted EBIT)
Depreciation and amortization
Adjusted earnings before interest, finance, income taxes,
depreciation and amortization (adjusted EBITDA)
2016
2015
$ 62.8
34.5
21.7
(27.7)
-
91.3
35.1
$ (87.6)
(12.4)
13.9
-
143.5
57.4
35.1
$ 126.4
$ 92.5
We believe that adjusted EBITDA, a non-GAAP measure, 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 adjusted EBITDA are significant in
assessing our operating results and liquidity. Adjusted 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.
RUSSEL METALS INC.152016 ANNUAL REPORT
CAPITAL EXPENDITURES
Capital expenditures were $17 million in 2016 compared to $38 million in 2015. Depreciation expense was $29
million in 2016 and $28 million in 2015.
LIQUIDITY
At December 31, 2016, we had net cash, defined as cash less bank indebtedness, of $147 million compared to
$49 million at December 31, 2015.
We generated cash of $94 million from operations during 2016 equal to our dividend payments. In addition, we
generated cash of $81 million from working capital reductions. We utilized cash of $17 million for capital
expenditures. Due to our revenue decline we determined that our existing capital infrastructure was adequate
to meet the current needs of our customers resulting in lower capital expenditures in 2016. We expect future
capital expenditures to approximate depreciation.
Due to our cyclical business, we experience significant swings in working capital which impact cash flow.
Inventory and accounts receivable represent a large percentage of our total assets employed and vary
throughout each cycle. Accounts receivable and inventory comprise our largest liquidity risks. Our customers
are impacted by the current economic climate and our strong collections experience might be negatively
impacted should the economic conditions not improve, leading to increased bad debt expense. The cyclical
nature of our business leads to significant price fluctuations that may result in inventory provisions.
Total assets were $1.5 billion at December 31, 2016 compared to $1.6 billion at December 31, 2015. At
December 31, 2016 current assets excluding cash represented 75% of our total assets excluding cash versus
74% at December 31, 2015.
Inventory reductions generated cash of $93 million in 2016. Inventories were reduced in our energy products
and steel distributor segments during 2016. Inventories represented 41% of our total assets at December 31,
2016 compared to 44% at December 31, 2015.
Inventory by Segment (millions)
Metals service centers
Energy products
Steel distributors
Total
Inventory Turns (quarters ended)
Metals service centers
Energy products
Steel distributors
Total
Dec. 31
2016
$ 252
288
76
$ 616
Sept. 30
2016
$ 249
302
84
June 30
2016
$ 260
340
81
Mar. 31
2016
$ 235
353
90
Dec. 31
2015
$ 225
398
89
$ 635
$ 681
$ 678
$ 712
Dec. 31
2016
Sept. 30
2016
June 30
2016
Mar. 31
2016
Dec. 31
2015
4.2
2.9
3.5
3.5
4.4
2.4
2.8
3.2
4.3
1.7
3.3
2.9
4.6
2.3
2.5
3.2
4.7
2.6
3.8
3.4
At December 31, 2016, our metals service centers had higher inventory tons compared to 2015 at average
prices similar to December 31, 2015. The expectation of future price increases resulted in slightly higher
purchasing levels in the fourth quarter of 2016.
During 2016 our energy products operations continued to reduce inventory levels further to correspond to lower
activity levels at our energy customers. During 2016 we recorded inventory write-downs of $12 million primarily
due to obsolescence concerns. We will continue to monitor our inventory levels based on energy customers'
activity levels.
Lower demand at our steel distributors segment, along with import tariffs caused the operations in this segment
to further reduce inventory levels and purchases in 2016.
RUSSEL METALS INC.162016 ANNUAL REPORT
Accounts receivable utilized cash of $26 million in 2016 due to higher revenues in energy products and steel
distributors operations in December 2016. Accounts receivable represented 27% of our total assets excluding
cash at December 31, 2016 compared to 23% at December 31, 2015.
During 2016, we made income tax payments less recoveries of $3 million compared to $35 million for 2015. At
December 31, 2015, we had a current income tax receivable of $24 million due to installment overpayments
and income taxes on losses which were recovered in 2016 on filing of the 2015 tax returns.
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.
FREE CASH FLOW
(millions)
Cash from operating activities before non-cash working capital
Purchase of property, plant and equipment
2016
2015
$ 94.1
(16.7)
$ 38.9
(38.3)
$ 77.4
$ 0.6
We believe that 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.
DEBT
As at December 31 (millions)
Long-term debt
6.0% $300 million Unsecured Senior Notes due April 19, 2022
Finance leases obligations, maturing 2016 to 2017
Current portion
2016
2015
$ 296
-
296
-
$ 295
1
296
(1)
$ 296
$ 295
On November 4, 2015, we redeemed our Convertible Debentures at par of $174 million plus accrued interest.
CASH AND BANK CREDIT FACILITY
As at December 31, 2016 (millions)
Bank loans
Cash net of outstanding cheques
Net cash
Letters of credit
Facility
Borrowings and letters of credit
Letters of credit
Facility availability
Available line based on borrowing base
Credit Facility
$ (43)
190
147
(39)
$ 108
$ 350
50
$ 400
$ 400
We have a credit facility with a syndicate of Canadian and U.S. banks totaling $400 million which expires
September 21, 2019. The syndicated facility consists of availability of $350 million under Tranche I to be
utilized for borrowings and letters of credit, and $50 million under Tranche II to be utilized only for letters of
credit. Letters of credit are issued under Tranche II first and additional needs are issued under Tranche I. The
borrowings and letters of credit are available 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 $400 million.
RUSSEL METALS INC.172016 ANNUAL REPORT
As of December 31, 2016, we were entitled to borrow and issue letters of credit totaling $400 million under this
facility. At December 31, 2016, we had $43 million in borrowings and $39 million of letters of credit outstanding.
At December 31, 2015 we had $94 million in borrowings and letters of credit of $29 million.
At December 31, 2016, we were in compliance with all of our financial covenants.
With our cash, cash equivalents and our bank facility we have access to approximately $497 million of cash
based on our December 31, 2016 balances. The use of our bank facilities has been predominantly to fund
working capital requirements, acquisitions and trade letters of credit for inventory purchases. These lines may
be used to support increased working capital needs when volumes and steel prices increase.
CONTRACTUAL OBLIGATIONS
As at December 31, 2016, we were contractually obligated to make payments as per the following table:
Contractual Obligations
(millions)
Accounts payable
Debt
Long-term debt interest
Operating leases
Total
Payments due in
2017
$ 314
-
18
23
2018
and 2019
2020
and 2021
2022 and
thereafter
$ -
-
36
35
$ -
-
36
22
$ -
300
10
23
Total
$ 314
300
100
103
$ 355
$ 71
$ 58
$ 333
$ 817
As part of the purchase consideration for Apex Distribution and Apex Monarch we agreed to pay additional cash
consideration during the five years ending 2017 and 2018, respectively, based on earnings before interest and
taxes and return on net assets. Based on our assumptions of the expected future activity levels in the areas
served by these operations we determined the fair value of future obligations to be zero. Improvements in the
markets served may result in other finance expense and possible future contingent consideration payments.
We have obligations related to multiple defined benefit pension plans in Canada, as disclosed in Note 14 of our
2016 consolidated financial statements. During 2016, we contributed $14 million to these plans including an
additional $8 million funding requirement due to the merger of certain of our pension plans. We expect to
contribute approximately $5 million to these plans during 2017. The defined benefit obligations reported in the
consolidated financial statements use different assumptions than the going concern actuarial valuations
prepared for funding. In addition, the actuarial valuations provide a solvency valuation, which is a valuation
assuming the plan is wound up at the valuation date. Our reported funding obligations would increase by $6
million on a solvency basis and thus additional funding could be required based on solvency if the plans were
wound up. We estimate the impact of a 0.25% change in the discount rate on the solvency obligation would be
approximately $5 million.
We have disclosed our obligations related to environmental litigation, regulatory actions and remediation in our
Annual Information Form under the heading "Environmental Regulation". These obligations relate to previously
divested or discontinued operations and do not relate to the metals distribution business.
OFF-BALANCE SHEET ARRANGEMENTS
Our off-balance sheet arrangements consist of the letters of credit disclosed in the bank credit facility table and
operating lease obligations disclosed in the contractual obligations table.
RUSSEL METALS INC.182016 ANNUAL REPORT
ACCOUNTING ESTIMATES
The preparation of our consolidated 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 valuation, useful lives of fixed assets, asset impairment, fair values, income
taxes, pensions and benefits obligations, guarantees, decommissioning liabilities, contingencies, contingent
consideration, litigation and assigned values on net assets acquired. 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 inventories.
Accounts Receivable
An allowance for doubtful accounts is maintained 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, credit agency reports and the experience of
our credit personnel. Accounts receivable which we determine to be uncollectible are reserved in the period in
which the determination is made. If the financial condition of our customers was to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. Our reserve for bad debts
at December 31, 2016 of approximately $5 million is approximately $1 million lower than our reserve at
December 31, 2015.
Inventories
We review our inventories to ensure that the cost of inventories is not in excess of its estimated net realizable
value and for obsolete and slow moving product. Inventory reserves or write-downs are recorded when cost
exceeds the estimated selling price less cost to sell and when product is determined to be slow moving or
obsolete. The inventory reserves of approximately $40 million at December 31, 2016 were approximately $28
million lower than the level at December 31, 2015 as inventory provisions have decreased as inventory levels
were reduced.
Other areas involving significant estimates and judgements include:
Goodwill Impairment
The determination of whether goodwill and intangibles are impaired requires the estimation of future cash flows
and an appropriate discount rate to determine value in use. An impairment occurs when the book value of the
assets associated with a particular cash generating unit is greater than the value in use. The assessment of
future cash flows and the discount rate requires significant judgment.
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 reduction in income tax expense.
Business Combinations
For each acquisition we review the fair value of assets acquired. Where we deem it appropriate, we hire
outside business valuators to assist in the assessment of the fair value of property, plant, equipment,
intangibles and contingent consideration of acquired businesses. The assessment of fair values for contingent
consideration is completed quarterly and requires significant judgement.
Contingent Liabilities
Provisions for claims and potential claims are determined on a case by case basis. We recognize contingent
loss provisions when it is determined that a loss is probable and when we are able to reasonably estimate the
obligation. This determination takes significant judgement and actual cash outflows might be materially
different from estimates. In addition, we may receive claims in the future that could have a material impact on
our financial results.
RUSSEL METALS INC.192016 ANNUAL REPORT
The Company and certain of its subsidiaries have been named defendants in a number of legal actions.
Although the outcome of these legal actions cannot be determined, management intends to defend all such
legal actions and has recorded provisions, as required, based on its best estimate of the potential losses. In the
opinion of management, the resolution of these legal actions is not expected to have a material adverse effect
on our financial position, cash flows or operations.
The Company and the manufacturer of certain energy products have received a customer claim of
approximately $90 million relating to product that was distributed by us from 2010 to 2012. The customer
alleged that the product was defective and that the manufacturer did not meet the specifications for the goods.
Although primary responsibility of the alleged defective product lies with the manufacturer we have been
included in the claim. We are in the process of finalizing our settlement documentation on this claim. We
believe that our $20 million provision recorded in 2015 should be adequate to satisfy the obligation.
Employee Benefit Plans
At least every three years, our actuaries perform a valuation, for each defined benefit plan to determine the
actuarial present value of the benefits. The valuation uses management's assumptions for the interest rate,
rate of compensation increase, rate of increase in government benefits 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 plan cost.
We account for differences between actual and assumed results by recognizing differences in benefit
obligations and plan performance immediately in other comprehensive income.
We had approximately $129 million in plan assets at December 31, 2016, which is $18 million higher than
December 31, 2015. The discount rate used on the employee benefit plan obligation for December 31, 2016
was 3.75%, which is 0.25% lower than the discount rate at December 31, 2015.
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.
The purpose of internal controls over financial reporting as defined by the Canadian Securities Administrators is
to provide reasonable assurance that:
(i)
financial statements prepared for external purposes are in accordance with the Company's generally
accepted accounting principles,
(ii) 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 Chief Executive Officer and the Executive Vice President and Chief Financial Officer have caused
management and other employees to design and document our disclosure controls and procedures and our
internal controls over financial reporting. An evaluation of the design and operating effectiveness of the
disclosure controls and internal controls over financial reporting was conducted as at December 31, 2016. The
design and evaluation of internal controls was completed using the framework and criteria established in
"Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
Based on our evaluation, we have concluded that our disclosure controls and procedures and our internal
controls over financial reporting were effective to provide reasonable assurance that information related to our
consolidated results and decisions to be made on those results were appropriate.
RUSSEL METALS INC.202016 ANNUAL REPORT
VISION AND STRATEGY
The metals distribution business is a segment of a mature, cyclical industry. 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. 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 a cycle. Our conservative
management approach creates relatively stronger trough earnings but could cause potential peak earnings to
be somewhat muted. Management believes that this strategy will result in higher profits through a cycle and we
will have average earnings over the cycle in the top deciles of the industry.
We have significant investments in business units that service the oil and gas industry. We endeavour to
manage the inventories and costs in these businesses to enable us to react to the variability of oil and gas
prices.
Growth from selective acquisitions is also part of our strategy. We focus on investment opportunities in metals
businesses that have strong market niches or provide mass to our existing operations. New acquisitions could
be either major stand-alone operations or ones that complement our existing operations. We made small
acquisitions in 2014, 2015 and 2016 and we continue to review opportunities for acquisitions.
We believe that the steel-based pricing cycle will continue to be short and volatile, and a management structure
and philosophy that allows the fastest reaction to changes that affect the industry will be the most successful.
We will continue to invest in our business systems to enable faster reaction times to changing business
conditions.
RISK
The timing and extent of future price changes from steel producers and their impact on us cannot be predicted
with any certainty due to the inherent cyclical nature of the steel industry, modest capacity utilization rates for
North American steel producers and historically high import levels.
A large portion of our revenues are dependent on the oil and gas industry whose activity fluctuates with oil and
gas prices. Our acquisitions between 2012 and 2015 of oil field store operations increased our exposure to the
oil and gas industry; however, they have provided a more stable stream of earnings for the energy products
segment. The price of oil dropped significantly during 2015 and remained at low levels in 2016 resulting in
lower revenues in this segment. There is no certainty as to when the price of oil and natural gas will increase,
driving demand for some of our products.
We have implemented an enterprise risk management program. The enterprise risk management program and
a summary of the risks affecting our business is described under the heading "Risk Management and Risks
Affecting Our Business" in our most recent Annual Information Form, which section is incorporated by reference
in this "Risk" section of our MD&A.
RUSSEL METALS INC.212016 ANNUAL REPORT
FOURTH QUARTER RESULTS
The following table provides operating profit before interest, taxes and other income or expense in a format
consistent with our annual results.
(millions, except percentages)
Segment Revenues
Metals service centers
Energy products
Steel distributors
Other
Segment Operating Profits
Metals service centers
Energy products
Steel distributors
Corporate expenses
Other
Operating profits
Inventory Write-down, net
Metals service centers
Energy products
Steel distributors
Segment Gross Margin as a % of Revenues
Metals service centers
Energy products
Steel distributors
Total operations
Segment Operating Profit as a % of Revenues
Metals service centers
Energy products
Steel distributors
Total operations
Quarters Ended December 31
2016
2015
$ 329.5
241.7
79.3
3.1
$ 326.3
274.1
71.5
1.1
2016
change as
a % of 2015
1%
(12%)
11%
$ 653.6
$ 673.0
(3%)
$ 7.2
5.3
7.6
(4.6)
1.6
$ 4.2
(14.5)
(17.9)
-
(1.1)
$ 17.1
$ (29.3)
$ 0.4
4.7
0.5
$ 0.5
27.0
19.3
$ 5.6
$ 46.8
20.6%
13.8%
16.1%
17.9%
2.2%
2.2%
9.6%
2.6%
18.8%
6.7%
(17.8%)
10.1%
1.3%
(5.3%)
(25.0%)
(4.4%)
Revenues in the fourth quarter were down 3% from the same quarter in 2015. Operating income was $17
million including inventory write-downs of $6 million.
Tons shipped in the fourth quarter of 2016 for metals service centers were consistent with the fourth quarter of
2015 and selling prices were 1% higher than the fourth quarter of 2015. Gross margin as a percentage of
revenues increased from 18.8% for the fourth quarter of 2015 to 20.6% for the fourth quarter of 2016 due to
more stable steel prices in 2016 and continued growth in value-added processing.
The operating results of our energy products segment of $5 million for the fourth quarter of 2016 were stronger
compared to a loss of $15 million in the same quarter last year. In the 2016 fourth quarter we recorded
inventory provisions relating to obsolescence concerns on older inventory of $5 million compared to net
realizable value reserves of $27 million in the fourth quarter of 2015.
Steel distributors operating results were positively affected by more stable steel prices in 2016. This segment
reported operating income of $8 million in the quarter compared to a loss of $18 million in the same quarter last
year due to higher gross margin percentage on higher revenues in 2016 and inventory write-downs of $19
million in 2015.
RUSSEL METALS INC.222016 ANNUAL REPORT
During the 2016 fourth quarter we sold certain properties including our Arkansas property and completed the
closure and sale of our Campbell River, British Columbia property for a pre-tax gain of $28 million.
During the 2015 fourth quarter we recorded asset impairment charges of $124 million and a charge of $20
million for a product warranty claim. Also during the fourth quarter of 2015 we recorded finance income of $21
million related to a reduction of our contingent consideration obligation.
Earnings per share for the fourth quarter of 2016 was $0.37 compared to a loss per share of $2.19 for the fourth
quarter of 2015.
OUTLOOK
The conditions experienced at the end of 2016 should positively impact the first quarter of 2017. Consequently
we expect net income in the first quarter of 2017 to be higher than the 2016 first quarter. Metals service centers
should benefit from rising steel prices, while we expect our energy segment to experience higher year over year
demand during the quarter based on increased rig counts.
RUSSEL METALS INC.232016 ANNUAL REPORT
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Russel Metals Inc.
We have audited the accompanying consolidated financial statements of Russel Metals Inc., which comprise
the consolidated statements of financial position as at December 31, 2016 and December 31, 2015, and the
consolidated statements of earnings (loss), consolidated statements of comprehensive income (loss),
consolidated statements of cash flow and consolidated statements of changes in equity for the years then
ended, and a summary of significant accounting policies and other explanatory information.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements
in accordance with International Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor's Responsibility
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 comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
consolidated financial statements. The procedures selected depend on the auditor's judgment, including the
assessment of the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's
preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a
basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of Russel Metals Inc. as at December 31, 2016 and December 31, 2015, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Deloitte LLP
Chartered Professional Accountants
Licensed Public Accountants
February 16, 2017
Toronto, Ontario
RUSSEL METALS INC.242016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
For the years ended December 31
(in millions of Canadian dollars, except per share data)
Revenues
Cost of materials (Note 7)
Employee expenses (Note 18)
Other operating expenses (Note 18)
Impairment of goodwill and long-lived assets (Note 8 & 10)
Gain on sale of properties (Note 8)
Product warranty provision (Note 25)
Earnings (loss) before interest, finance expense and provision for income taxes
Interest expense (Note 19)
Other finance income (Note 19)
Earnings (loss) before provision for income taxes
Provision for (recovery of) income taxes (Note 20)
Net earnings (loss) for the year
Basic earnings (loss) per common share (Note 17)
Diluted earnings (loss) per common share (Note 17)
2016
2015
$ 2,578.6
2,076.9
250.5
159.9
-
(27.7)
-
119.0
21.7
-
97.3
34.5
$ 3,111.6
2,624.6
254.8
174.8
123.5
-
20.0
(86.1)
40.6
(26.7)
(100.0)
(12.4)
$ 62.8
$ (87.6)
$ 1.02
$ (1.42)
$ 1.01
$ (1.42)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31
(in millions of Canadian dollars)
Net earnings (loss) for the year
Other comprehensive income
Items that may be reclassified to earnings
Unrealized foreign exchange (losses) gains on translation of foreign operations
Items that may not be reclassified to earnings
Actuarial gains on pension and similar obligations,
net of taxes of $0.3 million (2015: $0.3 million)
Other comprehensive income (loss)
Total comprehensive income (loss)
The accompanying notes are an integral part of these consolidated financial statements.
2016
2015
$ 62.8
$ (87.6)
(14.8)
82.8
0.8
(14.0)
0.9
83.7
$ 48.8
$ (3.9)
RUSSEL METALS INC.252016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31
(in millions of Canadian dollars)
ASSETS
Current
Cash and cash equivalents (Note 5)
Accounts receivable (Note 6)
Inventories (Note 7)
Prepaid expenses
Income taxes
Property, Plant and Equipment (Note 8)
Deferred Income Tax Assets (Note 20)
Financial and Other Assets (Note 9)
Goodwill and Intangibles (Note 10)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (Note 11)
Accounts payable and accrued liabilities (Note 12)
Income taxes payable
Current portion long-term debt (Note 13)
Long-Term Debt (Note 13)
Pensions and Benefits (Note 14)
Deferred Income Tax Liabilities (Note 20)
Provisions and Other Non-Current Liabilities (Note 21)
Shareholders' Equity (Note 15)
Common shares
Retained earnings
Contributed surplus
Accumulated other comprehensive income
Total Shareholders' Equity
2016
2015
$ 181.8
359.4
615.8
8.5
6.6
$ 143.4
333.5
712.5
10.7
24.2
1,172.1
1,224.3
239.7
5.9
5.1
85.7
267.8
15.8
7.1
92.0
$ 1,508.5
$ 1,607.0
$ 34.9
313.5
5.3
0.1
$ 94.2
303.1
0.4
0.5
353.8
295.8
11.0
14.5
8.1
683.2
532.4
161.9
15.9
115.1
825.3
398.2
295.2
21.7
14.2
8.8
738.1
531.7
192.1
15.2
129.9
868.9
Total Liabilities and Shareholders' Equity
$ 1,508.5
$ 1,607.0
The accompanying notes are an integral part of these consolidated financial statements.
ON BEHALF OF THE BOARD,
A. Laberge
Director
J. A. Hanna
Director
RUSSEL METALS INC.262016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31
(in millions of Canadian dollars)
Operating activities
Net earnings (loss) for the year
Depreciation and amortization
Provision for (recovery of) income taxes
Interest expense
Gain on sale of property, plant and equipment
Share-based compensation
Difference between pension expense and amount funded
Impairment of goodwill and long-lived assets
Debt accretion, amortization and other
Interest paid
Change in fair value of contingent consideration
2016
2015
$ 62.8
35.1
34.5
21.7
(29.2)
0.9
(9.7)
-
0.7
(22.7)
-
$ (87.6)
35.1
(12.4)
40.6
(1.9)
1.2
(3.9)
123.5
9.5
(38.5)
(26.7)
Cash from operating activities before non-cash working capital
94.1
38.9
Changes in non-cash working capital items
Accounts receivable
Inventories
Accounts payable and accrued liabilities
Other
Change in non-cash working capital
Income tax paid, net
Cash from operating activities
Financing activities
Increase (decrease) in bank indebtedness
Issue of common shares
Dividends on common shares
Issuance of long-term debt
Repayment of long-term debt
Deferred financing
Cash used in financing activities
Investing activities
Purchase of property, plant and equipment
Proceeds on sale of property, plant and equipment
Purchase of business
Proceeds from sale of investment
Payment of contingent consideration
Cash from (used in) investing activities
Effect of exchange rates on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
(26.1)
92.5
12.2
2.2
80.8
(2.9)
172.0
(59.3)
0.6
(93.8)
0.2
(0.7)
-
(153.0)
(16.7)
45.8
(4.7)
1.8
(0.1)
26.1
(6.7)
38.4
143.4
258.1
276.3
(172.6)
0.8
362.6
(35.3)
366.2
70.0
0.5
(93.8)
-
(174.9)
(1.0)
(199.2)
(38.3)
3.3
(27.3)
-
(17.5)
(79.8)
2.8
90.0
53.4
Cash and cash equivalents, end of the year
$ 181.8
$ 143.4
The accompanying notes are an integral part of these consolidated financial statements.
RUSSEL METALS INC.272016 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions of Canadian dollars)
Balance, January 1, 2016
Payment of dividends
Net income for the year
Other comprehensive income
for the year
Recognition of share-based
compensation
Share options exercised
Transfer of net actuarial gains
on defined benefit plans
Common
Shares
$ 531.7
-
-
Retained
Earnings
$ 192.1
(93.8)
62.8
-
-
0.7
-
-
-
-
0.8
Accumulated
Other
Contributed Comprehensive
Income
Surplus
Total
$ 15.2
-
-
$ 129.9
-
-
$ 868.9
(93.8)
62.8
-
0.9
(0.2)
-
(14.0)
(14.0)
-
-
(0.8)
0.9
0.5
-
Balance, December 31, 2016
$ 532.4
$ 161.9
$ 15.9
$ 115.1
$ 825.3
(in millions of Canadian dollars)
Balance, January 1, 2015
Payment of dividends
Net loss for the year
Other comprehensive income
for the year
Recognition of share-based
compensation
Share options exercised
Redemption of debentures
Transfer of net actuarial gains
on defined benefit plans
Common
Shares
$ 531.2
-
-
-
-
0.5
-
-
Equity
Component
Retained Contributed Comprehensive of Convertible
Debentures
Earnings
Accumulated
Other
Income
Surplus
Total
$ 344.0
(93.8)
(87.6)
$ 14.1
-
-
$ 47.1
-
-
$ 28.6
-
-
$ 965.0
(93.8)
(87.6)
-
-
-
28.6
0.9
-
1.2
(0.1)
-
-
83.7
-
83.7
-
-
-
(0.9)
-
-
(28.6)
-
1.2
0.4
-
-
Balance, December 31, 2015
$ 531.7
$ 192.1
$ 15.2
$ 129.9
$ -
$ 868.9
The accompanying notes are an integral part of these consolidated financial statements.
RUSSEL METALS INC.282016 ANNUAL REPORT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
GENERAL BUSINESS DESCRIPTION
Russel Metals Inc. (the "Company"), a Canadian corporation with common shares listed on the Toronto Stock
Exchange, is a metals distribution company operating in various locations within North America.
The Company primarily distributes steel and other metal products in three principal business segments:
Metals Service Centers
The Company's network of metals service centers carries a broad line of metal products in a wide range of
sizes, shapes and specifications. The Company purchases these products primarily from North American
steel producers and packages and sells them to end users in accordance with their specific needs.
Energy Products
These operations carry a specialized product line focused on the needs of its energy industry customers. The
Company purchases these products primarily from the pipe divisions of North American steel mills or from
independent manufacturers.
Steel Distribution
The Company's steel distributors act as master distributors, selling steel in large volumes to other metals
service centers and large equipment manufacturers. This segment sources its steel both domestically and off
shore.
The Company's registered office is located at 6600 Financial Drive, Mississauga, Ontario, L5N 7J6.
NOTE 2
BASIS OF PRESENTATION
These consolidated financial statements, including comparatives, have been prepared in accordance with
International Financial Reporting Standards ("IFRS").
These consolidated financial statements have been prepared on a going concern basis under the historical
cost convention, as modified by the revaluation of financial assets and financial liabilities (including derivative
instruments) at fair value through the consolidated statement of earnings (loss). Historical cost is generally
based on the fair value of the consideration given in exchange for assets at the time of the transaction.
The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting
estimates. It also requires management to exercise judgment in applying the Company's accounting policies.
These consolidated financial statements are presented in Canadian dollars, which is the Company's functional
currency.
These consolidated financial statements were authorized for issue by the Board of Directors on February 16,
2017.
Basis of consolidation
ACCOUNTING POLICIES
a)
The consolidated financial statements include the accounts of Russel Metals Inc. and its subsidiaries.
Subsidiaries are entities controlled by the Company. Control is achieved when the Company has the power to
govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial
statements of subsidiaries are included in the consolidated financial statements from the date the control
commences until the date the control ceases. Accounting policies for all subsidiaries are consistent with those
of the parent and all intercompany transactions, balances, income and expenses are eliminated on
consolidation.
To facilitate a better understanding of the Company's consolidated financial statements, significant accounting
policies, estimates and judgements are disclosed with the related financial note disclosure.
RUSSEL METALS INC.292016 ANNUAL REPORT
Impairment of long lived non-financial assets
b)
Non-financial tangible and definite life intangible assets are reviewed for an indication of impairment at each
statement of financial position date. If an indication of impairment exists, the asset's recoverable amount is
estimated.
An impairment loss is recognized when the carrying amount of an asset or cash generating unit ("CGU")
exceeds its recoverable amount. Impairment losses are recognized in net earnings for the period. Impairment
losses recognized relating to CGUs are allocated first to reduce the carrying amount of any goodwill allocated
to the CGU and then to reduce the carrying amount of the other assets in the CGU on a pro-rata basis.
The recoverable amount is the greater of the asset's fair value less costs to sell and its value in use. In
assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the risks specific to the
asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is
determined for the CGU to which the asset belongs.
An impairment loss is reversed if there is an indication that there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net of depreciation or
amortization, if no impairment loss had been recognized. An impairment loss with respect to goodwill is never
reversed.
Revenue recognition
c)
Revenue is measured at the fair value of the consideration received or receivable, net of discounts, and after
eliminating intercompany sales. Freight and shipping costs billed to customers are also included in revenue.
Revenue from the sale of goods is recognized when the Company has transferred to the buyer the significant
risks and rewards of ownership of the goods, no longer retains control over the goods sold, the amount of
revenue can be measured reliably, it is probable that the economic benefits associated with the transaction will
flow to the Company, and the costs incurred or to be incurred in respect of the transaction can be measured
reliably.
Foreign currency
d)
The accounts of foreign subsidiaries whose functional currency is the U.S. dollar are translated from U.S.
dollars to Canadian dollars at the noon spot rate in effect at the statement of financial position date, which was
$1.3427 per US$1 at December 31, 2016 (December 31, 2015: 1.3840 per US$1). Monetary items receivable
or payable to a foreign subsidiary for which settlement is neither planned nor likely to occur form part of the net
investment in the foreign subsidiary. Revenues and expenses are translated at the average rate of exchange
during the year. For the year ended December 31, 2016, the average U.S. dollar Bank of Canada noon
exchange rate was $1.3256 per US$1 (2015: $1.2788 per US$1). The resulting gains or losses from the
translation of the foreign subsidiaries and those items forming part of the net investment are included in other
comprehensive income.
Goodwill, intangibles and fair value adjustments arising on the acquisition of a foreign subsidiary are treated as
assets and liabilities of the foreign subsidiary and translated at the rate in effect at the statement of financial
position date.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of financial statements requires management to make certain judgements and estimates
about the future. Judgement is commonly used in determining whether a balance or transaction should be
recognized in the consolidated financial statements and estimates and assumptions are more commonly used
in determining the measurement of recognized transactions and balances. However, judgement and estimates
are often interrelated. Estimates and assumptions are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are believed to be reasonable under
the circumstances.
RUSSEL METALS INC.302016 ANNUAL REPORT
The Company's management also makes estimates for net realizable value and obsolescence provisions
relating to inventory, fair values, guarantees, long-lived asset and goodwill impairment, decommissioning
obligations, contingencies and litigation. These estimates are based 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.
NOTE 3
FUTURE ACCOUNTING CHANGES
IFRS 9 Financial Instruments
In July 2014, the IASB released IFRS 9 which replaces IAS 39, Financial Instruments: Recognition and
Measurement ("IAS 39"). This standard establishes principles for the financial reporting of financial assets and
financial liabilities that will present relevant and useful information to users of financial statements for their
assessment of the amounts, timing and uncertainty of an entity's future cash flows. The standard also includes
a new general hedge accounting standard which will align hedge accounting more closely with risk
management. It does not fully change the types of hedging relationships or the requirement to measure and
recognize ineffectiveness; however, it will permit more hedging strategies that are used for risk management to
qualify for hedge accounting and introduce more judgment to assess the effectiveness of a hedging
relationship. Adoption of IFRS 9 is mandatory and will be effective for annual periods beginning on or after
January 1, 2018 with earlier adoption permitted. The Company will not be early adopting this standard. The
adoption of this standard is not expected to have a significant impact on the Company's financial position or
results of operations.
IFRS 15 Revenue from Contracts with Customers
In May 2014, the IASB released IFRS 15 Revenue from Contracts with Customers, which establishes
principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from an
entity's contracts with customers. IFRS 15 is effective for annual periods beginning on or after January 1,
2018, with earlier adoption permitted. The Company will not be early adopting IFRS 15 and has elected to
adopt the standard using the modified retrospective approach. It provides a single model in order to depict the
transfer of promised goods or services to customers. The core principle of IFRS 15 is that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which an entity expects to be entitled in exchange for those goods and services. IFRS 15 also
requires more comprehensive disclosures about the nature, amount, timing and uncertainty of revenue and
cash flows arising from an entity's contracts with customers. The Company's implementation team has made
significant progress in completing its implementation plan and the Company does not expect any required
changes in the information systems in order to implement the standard.
The Company does not expect that the application of IFRS 15 will have a material effect on the financial
statements as the Company does not have long-term service contracts, multiple element arrangements or any
complex revenue transactions. The standard will result in increased disclosure on sources of revenues.
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16, Leases, which sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer ("lessee")
and the supplier ("lessor"). IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with
earlier adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on
its consolidated financial statements. IFRS 16 replaces the previous leases standard, IAS 17 Leases, and
related interpretations. The most significant effect of the new requirements will be an increase in lease assets
and financial liabilities as IFRS 16 eliminates the classification of leases as either operating leases or finance
leases for a lessee. All leases are 'capitalized' by recognising the present value of the lease payments and
showing them either as lease assets (right-of-use assets) or together with property, plant and equipment. As
lease payments are made over time, a company also recognises a financial liability representing its obligation
to make future lease payments.
RUSSEL METALS INC.312016 ANNUAL REPORT
NOTE 4
BUSINESS ACQUISITIONS
ACCOUNTING POLICIES
The Company accounts for its acquisitions using the acquisition method whereby assets acquired and
liabilities assumed are recorded at their estimated fair values with the surplus of the aggregate consideration
relative to the fair value for the identifiable net assets recorded as goodwill.
The acquisition method of accounting is used to account for the acquisition of subsidiaries as follows:
(i)
cost of consideration is measured as the fair value of the assets given, equity instruments issued,
liabilities incurred or assumed and any non-controlling interest acquired at the acquisition date;
(ii)
identifiable assets acquired and liabilities assumed are measured at fair value at the acquisition date;
(iii)
(iv)
the excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as
goodwill;
if the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net
assets is re-assessed and any residual difference is recognized directly in net earnings;
(v) any costs directly attributable to the business combination are expensed as incurred; and
(vi) contingent consideration is measured at fair value at the acquisition date and changes in fair value are
recognized in net earnings.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The fair value of assets acquired and liabilities assumed in a business combination is estimated based on
information available at the date of acquisition and involves considerable judgement in determining the fair
values assigned to property, plant, equipment and intangible assets acquired and liabilities, including
contingent consideration, assumed on acquisition. The determination of these fair values involves analysis
including the use of discounted cash flow analysis, estimated future margins, future growth rates and
estimated future customer attrition. There is measurement uncertainty inherent in this analysis, particularly in
the fair value measurement of contingent consideration, and actual results could differ from estimates.
SUPPORTING INFORMATION
2016 Acquisition
On December 12, 2016, the Company acquired the operating assets of Jackson Pipe & Steel, a metals service
center located in Texarkana, Texas. The following is a summary of the net assets acquired:
(millions)
Inventories
Accounts receivable
Property, plant and equipment
Accounts payable
Net assets acquired
Consideration:
Cash
$ 1.9
1.4
3.2
(1.8)
$ 4.7
$ 4.7
This acquisition complements the Company's existing JMS Russel Metals operation in Hope, Arkansas and
allows the Company to enhance its value added service in Texas, Arkansas, Oklahoma and Louisiana.
If the acquisition had taken place at the beginning of 2016, management estimated that the acquired business
would have provided revenues of $13.3 million and earnings before interest, finance expense and provision for
income taxes of $0.2 million.
RUSSEL METALS INC.322016 ANNUAL REPORT
2015 Acquisition
On May 15, 2015, the Company completed an acquisition of certain operating assets of Western Fibreglass
Pipe Sales Ltd., a distributor of fibreglass pipe within the oil and gas industry with locations in Estevan,
Saskatchewan and Red Deer, Alberta. The following is a summary of the net assets acquired:
(millions)
Inventories
Accounts receivable
Other
Property, plant and equipment
Deferred income tax liability
Intangibles
Net identifiable assets acquired
Consideration:
Cash
$ 18.5
5.6
(0.2)
0.5
(0.3)
3.2
$ 27.3
$ 27.3
This acquisition complements the Company's Apex Distribution operation within the energy products segment
and added fibreglass pipe and fittings product lines, design capabilities and technical services to the Apex
Distribution product lines.
The consolidated statement of earnings for the year ended December 31, 2015, includes incremental revenues
of $11.0 million and earnings before interest, finance expense and provision for income taxes of $0.8 million
attributable to the business acquired.
If the acquisition had taken place at the beginning of 2015, management estimated that the acquired business
would have provided revenues of $21.1 million and earnings before interest, finance expense and provision for
income taxes of $3.2 million.
NOTE 5
CASH AND CASH EQUIVALENTS
ACCOUNTING POLICIES
Cash includes demand deposits and cash equivalents include bank term deposits and short-term investments
with a maturity of less than three months at time of purchase. The financial instrument designation for cash
and cash equivalents is loans and receivables.
SUPPORTING INFORMATION
(millions)
Cash on deposit
Cash equivalents
2016
$ 20.2
161.6
$ 181.8
2015
$ 18.7
124.7
$ 143.4
NOTE 6
ACCOUNTS RECEIVABLE
ACCOUNTING POLICIES
Trade receivables are amounts due from customers from the sale of goods or rendering of services in the
ordinary course of business. Trade receivables are classified as current assets if payment is due within one
year or less. The financial instrument designation for trade receivables is loans and receivables. Trade
receivables are measured at amortized cost, which approximates fair value.
The Company maintains an allowance for doubtful accounts to provide for the impairment of trade receivables.
The expense relating to doubtful accounts is included within "Other operating expenses" in the consolidated
statements of earnings (loss).
RUSSEL METALS INC.332016 ANNUAL REPORT
In order to minimize the risk of uncollectability of trade receivables, the Company performs regular credit
reviews for all customers with significant credit limits. Trade receivables are analyzed on a case by case basis
taking into account a customer's past credit history as well as its current ability to pay and uncollectible
amounts are recorded as an allowance for doubtful accounts.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company assesses the collectability of accounts receivable. An allowance for doubtful accounts is
estimated based on customer creditworthiness, current economic trends and past experience.
SUPPORTING INFORMATION
(millions)
Trade receivables
Other receivables
The following is the continuity of the allowance for doubtful accounts:
(millions)
Allowance for Doubtful Accounts
Balance, beginning of the year
Increases to reserve
Amounts written off
Adjustments
Balance, end of the year
2016
$ 352.0
7.4
$ 359.4
2015
$ 325.9
7.6
$ 333.5
2016
2015
$ 5.9
1.3
(2.9)
0.4
$ 4.7
$ 3.9
3.2
(1.4)
0.2
$ 5.9
At December 31, 2016 and 2015 the allowance for doubtful accounts was less than 2.0%, of accounts
receivable. An increase in the allowance of 1% of accounts receivable would decrease pre-tax earnings by
approximately $3.6 million for the year ended December 31, 2016 (2015: $3.3 million).
As at December 31, 2016 (millions)
Current
Past Due
1-30 Days
Past Due
31-60 Days
Past Due
Over 60 Days
Total Trade
Receivables
Trade Receivables
Gross trade receivables
Allowance for doubtful accounts
$ 207.7
-
$ 113.3
(0.1)
$ 27.3
(0.3)
$ 8.4
(4.3)
$ 356.7
(4.7)
Total net trade receivables
$ 207.7
$ 113.2
$ 27.0
$ 4.1
$ 352.0
As at December 31, 2015 (millions)
Current
Past Due
1-30 Days
Past Due
31-60 Days
Past Due
Over 60 Days
Total Trade
Receivables
Trade Receivables
Gross trade receivables
Allowance for doubtful accounts
$ 175.4
(0.1)
$ 112.7
(0.3)
$ 30.0
(0.3)
$ 13.7
(5.2)
$ 331.8
(5.9)
Total net trade receivables
$ 175.3
$ 112.4
$ 29.7
$ 8.5
$ 325.9
NOTE 7
INVENTORIES
ACCOUNTING POLICIES
Inventories are recorded at the lower of cost and net realizable value. Cost is determined on an average cost
basis. Net realizable value is the estimated selling price in the ordinary course of business less the estimated
costs necessary to make the sale. Inventories are written down to net realizable value when the cost of
inventories is estimated to be greater than the recoverable amount due to declining selling prices. When
circumstances that previously caused inventories to be written down below cost no longer exist, the amount of
the write-down previously recorded is reversed.
RUSSEL METALS INC.342016 ANNUAL REPORT
ACCOUNTING ESTIMATES AND JUDGEMENTS
Inventories are reviewed to ensure that the cost of inventories is not in excess of its estimated net realizable
value and for obsolete and slow moving product. Inventory reserves or write-downs are recorded when cost
exceeds the estimated selling price less cost to sell and when product is determined to be slow moving or
obsolete.
The Company's determination of the net realizable value of inventory requires the use of assumptions such as
future selling prices and costs to sell. There is measurement uncertainty in these estimates. Actual selling
prices and costs to sell could differ from these estimates.
SUPPORTING INFORMATION
During the year ended December 31, 2016, the Company recorded an inventory write-down to net realizable
value of $13.8 million (2015: $61.3 million) which has been recognized as part of cost of materials. Inventories
of $2.1 billion (2015: $2.6 billion) were expensed in cost of materials. During 2016, the Company recognized
the reversals of $2.8 million (2015: $nil) of previous inventory write-downs to net realizable value.
NOTE 8
PROPERTY, PLANT AND EQUIPMENT
ACCOUNTING POLICIES
Property, plant, equipment and leasehold improvements are recorded at cost. Component accounting is used
for both buildings and machinery and equipment. Components that make up a material portion of the original
cost of the asset and have a significantly different estimated useful life than the parent asset are considered to
be significant components. For buildings, roofs are the only significant component. For machinery and
equipment there are various significant components depending on the asset. Depreciation starts when the
asset or significant component is ready for use and is provided on a straight-line basis at rates that charge the
original cost of such asset, less residual values, to operations over their estimated useful lives. Periods of
depreciation are 15 to 25 years for roofs, 20 to 40 years for buildings, 3 to 10 years for machinery and
equipment components, 10 to 25 years for machinery and equipment, and over the lease term for leasehold
improvements. Depreciation ceases at the earlier of when the asset or component is derecognized, or when it
is held for sale or included in a group that is classified as held for sale. Residual values and useful lives are
reviewed at the end of each annual reporting period and whenever facts and circumstances indicate a
reduction in residual value or useful life. Changes in the estimates of residual values and useful lives are
reflected in earnings in the period of the change and future periods, as appropriate.
Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are
capitalized as part of the cost of that asset. Other borrowing costs not directly attributable to a qualifying asset
are expensed in the period incurred.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company reviews the estimated useful lives of property, plant and equipment at the end of each annual
reporting period, and whenever events or circumstances indicate a change in useful life. Estimated useful
lives of items of property, plant and equipment are based on a best estimate and the actual useful lives may be
different.
RUSSEL METALS INC.352016 ANNUAL REPORT
SUPPORTING INFORMATION
Cost (millions)
Balance, December 31, 2014
Business acquisition (Note 4)
Additions
Disposals
Asset impairment
Foreign exchange
Balance, December 31, 2015
Business acquisition (Note 4)
Additions
Disposals
Foreign exchange
Land and
Buildings
Machinery
and Equipment
Leasehold
Improvements
$ 237.6
-
16.8
(0.4)
-
7.8
$ 261.8
2.6
3.1
(26.9)
(1.6)
$ 323.6
0.5
20.6
(10.5)
(1.6)
12.9
$ 345.5
0.6
13.3
(11.4)
(2.5)
$ 25.9
-
0.9
(0.6)
-
0.8
$ 27.0
-
0.3
(0.4)
(0.1)
Total
$ 587.1
0.5
38.3
(11.5)
(1.6)
21.5
$ 634.3
3.2
16.7
(38.7)
(4.2)
Balance, December 31, 2016
$ 239.0
$ 345.5
$ 26.8
$ 611.3
Accumulated depreciation and amortization
(millions)
Land and
Buildings
Machinery
and Equipment
Leasehold
Improvements
Balance, December 31, 2014
Depreciation and amortization
Disposals
Foreign exchange
Balance, December 31, 2015
Depreciation and amortization
Disposals
Foreign exchange
$ 96.2
8.3
(0.2)
3.1
$ 107.4
8.1
(11.5)
(0.7)
$ 220.3
19.1
(9.5)
7.8
$ 237.7
20.1
(10.2)
(0.8)
$ 20.8
0.7
(0.4)
0.3
$ 21.4
0.6
(0.4)
(0.1)
Total
$ 337.3
28.1
(10.1)
11.2
$ 366.5
28.8
(22.1)
(1.6)
Balance, December 31, 2016
$ 103.3
$ 246.8
$ 21.5
$ 371.6
Net Book Value (millions)
December 31, 2015
December 31, 2016
$ 267.8
$ 239.7
All items of property, plant and equipment are recorded and held at cost.
Land, included in land and buildings, was $43.2 million (2015: $45.7 million).
Depreciation of $8.1 million was included in cost of materials (2015: $8.0 million) and depreciation of $20.7
million (2015: $20.1 million) was included in other operating expenses.
In 2016, the Company sold certain properties in Arkansas, Quebec, Ontario and British Columbia for proceeds
of $44.5 million resulting in a pre-tax gain of $27.7 million. The Company entered into a long-term lease for a
portion of the Arkansas property at fair value.
Impairment of Assets
The Company reviews the carrying value of long-lived assets for impairment whenever there are events or
changes in circumstances that indicate that the carrying amount may not be recoverable.
During 2015, the Company completed an impairment review of assets and identified that assets associated
with one of its metal service centers were impaired because of the deteriorated financial condition of the
operation due to continued operating losses. An asset impairment charge was recorded on underutilized
machinery and equipment based on estimated salvage value of this machinery and equipment.
RUSSEL METALS INC.362016 ANNUAL REPORT
These asset impairment charges were included in the consolidated statement of earnings and reduced the
carrying value of the associated assets on a pro-rated basis. No asset impairments were identified during
2016.
NOTE 9
FINANCIAL AND OTHER ASSETS
ACCOUNTING POLICIES
Eligible costs incurred relating to the short-term revolving credit facility 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. Eligible costs related to long-term debt financing are capitalized to the carrying
amount of the associated debt and amortized using the effective interest method.
SUPPORTING INFORMATION
(millions)
Deferred charges on revolving credit facility
Investments and advances
Other
2016
$ 1.2
0.7
3.2
$ 5.1
2015
$ 1.7
2.1
3.3
$ 7.1
Amortization of deferred financing charges was $0.5 million (2015: $0.3 million). Investments and advances
were acquired in acquisitions and were initially recorded at fair value. During the year ended December 31,
2016, the Company sold an investment previously acquired in its Apex Distribution acquisition.
NOTE 10
GOODWILL AND INTANGIBLES
ACCOUNTING POLICIES
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets
acquired at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. The
Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances
indicate that the assets might be impaired. When testing goodwill, the carrying values of the CGUs or group of
CGUs including goodwill are compared with their respective recoverable amounts (higher of fair value less
costs to sell and value in use) and an impairment loss, if any, is recognized for the excess. A CGU is the
smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.
Intangible assets are comprised of customer relationships, trademarks and non-competition agreements. They
are recorded at cost, which for business acquisitions represents the fair value at the date of acquisition less
accumulated amortization and accumulated impairment losses. Customer relationships are amortized on a
straight line basis over their estimated useful life of 15 to 17 years. Non-competition agreements are
amortized over the period of the agreement. Useful lives are reviewed at the end of each reporting period and
adjusted if appropriate.
Trademarks are not amortized as they have an indefinite life; however, they are tested for impairment annually
or more frequently if events or changes in circumstances indicate that the assets might be impaired. When
testing indefinite life intangibles for impairment, the carrying values of related CGUs or group of CGUs
excluding goodwill, are compared to their recoverable amounts.
ACCOUNTING ESTIMATES AND JUDGEMENTS
Intangible assets and goodwill arise from business combinations. Upon acquisition, the Company identifies
and attributes fair values of intangible assets with the residual value allocated to goodwill acquired. These
determinations involve estimates and assumptions regarding cash flow projections, economic risk and the
weighted average cost of capital. If future events or results differ adversely from these estimates and
assumptions, the Company could record increased amortization or impairment charges.
The determination of impairment of goodwill and intangibles involves estimates and assumptions regarding
cash flow projections and estimated discount rates. There is measurement uncertainty inherent in this
analysis.
RUSSEL METALS INC.372016 ANNUAL REPORT
SUPPORTING INFORMATION
(millions)
Goodwill
Intangibles
Goodwill
a)
The continuity of goodwill is as follows:
Goodwill (millions)
Balance, beginning of the year
Impairment of goodwill
Foreign exchange
Balance, end of the year
2016
$ 27.2
58.5
$ 85.7
2015
$ 27.6
64.4
$ 92.0
2016
2015
$ 27.6
-
(0.4)
$ 128.5
(103.1)
2.2
$ 27.2
$ 27.6
In 2015, the Company recognized an impairment of goodwill related to Apex Distribution, Apex Monarch and
certain metal service center operations. The remaining goodwill relates to the metals service centers segment
located in Canada and the U.S.
Impairment of goodwill
b)
In determining whether goodwill is impaired, the Company estimates the recoverable amount of CGUs or
groups of CGUs to which goodwill is allocated. Management considers the operations below to be CGUs or
groups of CGUs as they represent the lowest level at which goodwill is monitored for internal management
purposes. Accordingly, goodwill was allocated to each CGU or group of CGUs as follows:
Allocation of Goodwill (millions)
2016
2015
Metals service centers
U.S.
Southeast
Canadian
Alberta
Atlantic / Ontario
$ 13.9
$ 14.3
11.0
2.3
11.0
2.3
$ 27.2
$ 27.6
The Company uses a discounted cash flow technique to determine the value in use for the above noted CGUs
or groups of CGUs. Key assumptions used by management include forecasted cash flows based on financial
plans approved by management covering a five year period and expected growth in future earnings
subsequent to 2017, of 2% to 3% in line with expected inflation and discount rates. The assumptions are
based on historical data, industry cyclicality and expected market developments.
The Company uses a weighted average cost of capital ("WACC") to calculate the present value of its projected
cash flows. WACC reflects the current market assessment of the time value of money and the risks specific to
that asset. This is an estimate of the overall required rate of return on an investment and serves as the basis
for developing an appropriate discount rate. Determination of the WACC requires separate analysis of the cost
of equity and debt, and considers a risk premium based on an assessment of risks related to each unit.
For 2016, the pre-tax weighted average cost of capital used was 14.6% (2015: 15.8%) for metals service
centers and 18.0% (2015: 18.8%) for energy products. To monitor potential impairment exposure, the
Company performs a sensitivity analysis. For 2016 and 2015 a 1% increase in the respective discount rate
would not trigger a further goodwill impairment.
RUSSEL METALS INC.382016 ANNUAL REPORT
The Company performed goodwill impairment tests to determine recoverable amounts during the fourth
quarter of 2016 and 2015. The recoverable amounts are determined based on a value in use calculation. In
2015, the recoverable amounts did not exceed the carrying amounts in the Manitoba/Saskatchewan and
Quebec operations in metals service centers and the Apex Distribution and Apex Monarch operations in
energy products which resulted in the recognition of an impairment of $103.1 million. The goodwill impairment
was mainly due to the declining steel and oil price environment, which resulted in reduced spending and
outlook for the customer base of these operations.
In 2016, the estimated recoverable amount of all units exceeded their carrying values. As a result, no
impairment was recorded.
Intangibles
c)
The continuity of intangibles, which are comprised of customer relationships and non-competition agreements
acquired through business combinations, within the metals service centers and energy products segments is
as follows:
Cost (millions)
Balance, beginning of the year
Business acquisitions (Note 4)
Impairment of intangible assets
Foreign exchange
Metals
Service Centers
$ 18.1
-
-
(0.2)
Energy
Products
$ 70.7
-
-
-
Total
2016
$ 88.8
-
-
(0.2)
Total
2015
$ 98.5
3.2
(13.8)
0.9
Balance, end of the year
$ 17.9
$ 70.7
$ 88.6
$ 88.8
Accumulated amortization (millions)
Balance, beginning of the year
Amortization
Metals
Service Centers
Energy
Products
Total
2016
Total
2015
$ (8.4)
(1.1)
$ (16.0)
(4.6)
$ (24.4)
(5.7)
$ (17.7)
(6.7)
Balance, end of the year
$ (9.5)
$ (20.6)
$ (30.1)
$ (24.4)
Carrying amount
December 31, 2015
December 31, 2016
$ 64.4
$ 58.5
During the fourth quarter of 2015, the Company performed an impairment test on the CGUs, using the same
assumptions noted in goodwill impairment testing. This resulted in an impairment of intangible assets in the
Manitoba/Saskatchewan operation in the metals service centers segment and the Apex Monarch operation in
the energy products segment. The recoverable amount was determined based on a value in use calculation.
The carrying amount of intangible assets as at December 31, 2016 relates to customer relationships arising
from the acquisition of JMS Metals Services, Norton Metal Products, Alberta Industrial Metals, Apex
Distribution, Apex Western Fiberglass and other entities. The remaining amortization period for customer
relationships is 7 to 14 years.
NOTE 11
REVOLVING CREDIT FACILITY
The Company has a credit agreement with a syndicate of banks which provides $400 million available for
borrowings and letters of credit with a term to September 21, 2019. The syndicated facility consists of
availability of $350 million under Tranche I to be utilized for borrowings and letters of credit and $50 million
under Tranche II to be utilized only for letters of credit. Letters of credit are issued under Tranche II first and
additional needs are issued under Tranche I. The borrowings and letters of credit are available on a revolving
basis, up to an amount equal to the sum of specified percentages of the Company's eligible accounts
receivable and inventories, to a maximum of $400 million. The obligations of the Company under this
agreement are secured by a pledge of trade accounts receivable and inventories.
RUSSEL METALS INC.392016 ANNUAL REPORT
The Company was in compliance with the financial covenants at December 31, 2016. At December 31, 2016,
the Company had borrowings of $43.0 million (2015: $94.0 million) and letters of credit of $38.9 million (2015:
$29.1 million) under this facility.
NOTE 12
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
ACCOUNTING POLICIES
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of
business. Trade payables are classified as current liabilities if payment is due within one year or less. Trade
payables are recognized initially at fair value and subsequently measured at amortized cost.
SUPPORTING INFORMATION
(millions)
Trade accounts payable and accrued expenses
Accrued interest
2016
$ 309.9
3.6
$ 313.5
2015
$ 299.2
3.9
$ 303.1
NOTE 13
LONG-TERM DEBT
ACCOUNTING POLICIES
Long-term debt is recognized initially at fair value, net of transaction costs incurred. Long-term debt is
subsequently recorded at amortized cost with any difference between the proceeds (net of transactions costs)
and the redemption value recognized in net earnings over the term of the debt using the effective interest
method.
Debt is classified as a current liability unless the Company has an unconditional right to defer settlement for at
least 12 months after the end of the reporting period.
SUPPORTING INFORMATION
(millions)
6.0% $300 million Unsecured Senior Notes due April 19, 2022
Finance lease obligations (Note 24)
Less: current portion
2016
$ 295.7
0.2
(0.1)
$ 295.8
2015
$ 295.1
0.6
(0.5)
$ 295.2
On April 19, 2012, the Company issued through a private placement, $300 million 6.0% Unsecured Senior
Notes (the "Notes") due April 19, 2022. Interest is due on April 19 and October 19 of each year.
Prior to April 19, 2017, the Company may redeem the Notes in whole or in part at an amount which is the
greater of (i) the present value of future interest and principal payments based on Canada bond yield or (ii)
101% of the principal amount plus accrued and unpaid interest. After April 19, 2017, the Company may
redeem the Notes in whole or in part at any time at 103% of the principal amount declining rateably to 100% of
the principal amount on or after April 19, 2020.
The Notes contain certain restrictions on the payment of common share dividends in excess of $0.35 per share
per quarter. The Company was in compliance with these covenants at December 31, 2016. The Notes also
contain certain covenants that limit the Company's ability to incur additional indebtedness. Fees associated
with the issue of the debt are included in the carrying amount of debt and are amortized using the effective
interest method.
RUSSEL METALS INC.402016 ANNUAL REPORT
NOTE 14
PENSIONS AND BENEFITS
ACCOUNTING POLICIES
For defined benefit pension plans and other post-employment benefits, the net periodic pension and benefit
expense is actuarially determined on an annual basis by independent actuaries using the projected benefit
method, prorated on service and is charged to expense as services are rendered. The determination of a
benefit expense requires assumptions such as the discount rate to measure obligations, the expected
mortality, the expected rate of future compensation increases and the expected healthcare cost trend rate.
The past service costs arising from plan amendments is recognized immediately in net earnings. The asset or
liability recognized in the consolidated statement of financial position is the present value of the defined benefit
obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for
asset ceiling limits. The present value of the defined benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to maturity
approximating the terms of the related pension liability. All actuarial gains and losses that arise in calculating
the present value of the defined benefit obligation and the fair value of plan assets are recognized immediately
in the consolidated statement of other comprehensive income. Net interest on the defined benefit liability
(asset) represents the net defined benefit liability (asset), multiplied by the discount rate and is recorded in
employee expenses in the consolidated statement of earnings. The net interest expense (income) on the net
defined benefit liability (asset) is comprised of interest cost on the defined benefit obligation and interest
income on plan assets. Any defined benefit asset resulting from this calculation is limited to the total of
unrecognized net actuarial losses and the present value of any economic benefit in the form of refunds from
the plan or reduction in future contributions to the plan. The Company contributes to three multi-employer
pension plans which are accounted for as defined contribution plans.
The Company closes out actuarial gains and losses recognized in other comprehensive income into retained
earnings at the end of each reporting period.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company's determination of employee benefit expenses and obligations requires the use of assumptions
such as the discount rate to measure obligations, expected mortality, the expected rate of increase of future
compensation and the expected healthcare cost trend rate. Since the determination of the costs and
obligations associated with employee future benefits requires the use of various assumptions, there is
measurement uncertainty inherent in the actuarial valuation process. Actual results could differ from estimated
results.
SUPPORTING INFORMATION
The Company maintains a defined contribution pension plan ("DCPP") for most of its Canadian
a)
salaried employees. On December 31, 2013, the Company merged five of its defined benefit plans into the
DCPP, subject to regulatory approval. During 2016, regulatory approval was obtained which required an
additional contribution of $8 million to the merged plan. The Company maintains two additional defined benefit
pension plans in Canada for a total of three defined benefit plans. The Company also maintains executive
plans, post-retirement benefit plans and three additional defined contribution plans in Canada and a 401(k)
defined contribution plan in the United States.
The defined benefit pension plans are administered by a master trust, which is legally separate from the
Company and is monitored by a pension committee. The pension committee is responsible for policy setting.
The defined benefit pension plans expose the Company to actuarial risk, currency risk, interest rate risk and
market risk.
The merged plan and an additional plan had a valuation date of January 1, 2014. The other defined benefit
pension plan had a valuation date of January 1, 2015.
In addition, under three labour contracts, the Company participates in multi-employer pension plans
established for the benefit of certain employees covered by collective bargaining contracts in both Canada and
U.S. One of the multi-employer plans is a defined benefit plan; however, this is accounted for as a defined
contribution plan as the Company has insufficient information to apply defined benefit plan accounting.
RUSSEL METALS INC.412016 ANNUAL REPORT
The components of the Company's pension and benefit expense recorded in net earnings included the
following:
(millions)
Defined benefit pension plans
Current service cost
Net interest cost
Plan administration cost
Post-retirement benefits
Defined contribution plans
Pension and benefit expense
2016
2015
$ 3.7
0.6
0.1
$ 3.5
0.7
0.1
4.4
0.2
4.7
4.3
0.1
4.9
$ 9.3
$ 9.3
The components of the Company's pension and benefit changes recorded in other comprehensive income
included the following:
(millions)
Remeasurements on the net defined benefit liability
Actuarial gains due to actuarial experience
Actuarial (losses) gains due to financial assumption changes
Return on plan assets greater (less) than the discount rate
2016
2015
$ 0.5
(4.7)
5.3
$ 2.2
0.4
(1.4)
Remeasurement effect recognized in other comprehensive income
$ 1.1
$ 1.2
Cumulative actuarial losses relating to pensions and benefits
Balance of actuarial losses at January 1
Net actuarial gains recognized in the year
Balance of actuarial losses at December 31
$ (14.1)
1.1
$ (15.3)
1.2
$ (13.0)
$ (14.1)
There were no adjustments related to asset ceiling limits in other comprehensive income for the years ended
December 31, 2016 and 2015.
The actuarial determinations were based on the following assumptions:
Assumed discount rate - year end
Rate of increase in future compensation
Rate of increase in future government benefits
2016
3.75%
3.25%
3.00%
2015
4.00%
3.25%
3.00%
The discount rate is based on a review of current market interest rates of AA corporate bonds with a similar
duration as the expected future cash outflows for the pension payments. A 0.25% increase or decrease in the
discount rate would decrease or increase the defined benefit obligation by approximately $5.0 million as of
December 31, 2016 (2015: $4.6 million).
The health care cost trend rates used were 5% for dental and 6.5% graded out for medical, which is reduced
0.5% per year until 5%, and 5% thereafter. A 1% change in trend rates would not result in a significant
increase or decrease in either the present value of the defined benefit obligation or the net periodic cost.
The sensitivity analysis presented above may not be representative of the actual change in defined benefit
obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of
the assumptions may be correlated. Furthermore, in presenting the above sensitivity analysis, the present
value of the defined benefit obligation has been calculated using the projected benefit method at the end of the
reporting period, which is consistent with the defined benefit obligation liability calculation recognized in the
consolidated statement of financial position.
The mortality assumptions used to assess the defined benefit obligation are based on 2014 Private Sector
Canadian Pensioners' Mortality Table (CPM2014Priv) using improvement scale CPM-B.
RUSSEL METALS INC.422016 ANNUAL REPORT
Informal practices that give rise to constructive obligations are included in the measurement of the defined
benefit obligation.
b)
excluding those which are in the process of being wound up.
The following information pertains to the Company's defined benefit pension and other benefit plans,
(millions)
Reconciliation of present value of the
defined benefit obligation
Balance, beginning of the year
Current service costs
Participant contributions
Interest cost
Benefits paid
Actuarial losses (gains)
Pension Plans
2015
2016
Other Benefit Plans
2015
2016
$ 128.0
3.7
0.1
5.1
(5.6)
4.3
$ 127.0
3.5
0.1
5.0
(5.2)
(2.4)
$ 4.2
-
-
0.2
(0.2)
(0.1)
$ 4.6
-
-
0.1
(0.3)
(0.2)
Balance, end of the year
$ 135.6
$ 128.0
$ 4.1
$ 4.2
(millions)
Reconciliation of present value of the plan assets
Balance, beginning of the year
Interest income
Employer contributions
Employee contributions
Benefits paid
Plan administration costs
Return on plan assets (less) greater than discount rate
Pension Plans
2015
2016
Other Benefit Plans
2015
2016
$ 110.5
4.5
13.9
0.2
(5.6)
(0.1)
5.3
$ 105.5
4.3
7.3
0.1
(5.2)
(0.1)
(1.4)
$ -
-
0.2
-
(0.2)
-
-
$ -
-
0.3
-
(0.3)
-
-
Balance, end of the year
$ 128.7
$ 110.5
$ -
$ -
Defined benefit obligation, net
$ 6.9
$ 17.5
$ 4.1
$ 4.2
The fair values of the defined benefit pension plan assets at the end of the reporting period for each category,
are as follows:
(millions)
Cash and cash equivalents
Equities
Canadian equity
Global equity fund
Fixed income investments categorized by type of issuer
Government guaranteed
Provincials
Corporate
2016
2015
$ 2.5
$ 4.5
63.2
28.0
91.2
8.1
13.6
13.3
35.0
53.0
19.9
72.9
3.8
13.3
16.0
33.1
$ 128.7
$ 110.5
RUSSEL METALS INC.432016 ANNUAL REPORT
As at December 31, 2016, all three of the defined benefit pension plans in the above table had unfunded
obligations. The following table provides the defined benefit obligation for partially funded pension plans and
unfunded plans.
(millions)
Defined benefit obligation
Partially funded plans
Unfunded plans
Defined benefit obligation
Pension Plans
2015
2016
Other Benefit Plans
2015
2016
$ 6.9
-
$ 17.5
-
$ -
4.1
$ -
4.2
$ 6.9
$ 17.5
$ 4.1
$ 4.2
c)
As at December 31, 2016 approximately 74% (2015: 71%) of the fair value of all pension plan assets
was invested in equities, 20% (2015: 21%) in fixed income securities, and 6% (2015: 8%) in cash and cash
equivalents. The plan assets are not invested in derivatives or real estate assets. Management endeavours to
have an asset mix of approximately 20% - 80% in equities, 20% - 70% in fixed income securities and 0% -
30% in cash and cash equivalents.
d)
The weighted average duration of defined benefit obligations is 14.5 years (2015: 14.3 years) for
defined benefit pension plans, 9.6 years (2015: 9.9 years) for executive pension arrangements and 7.6 years
(2015: 7.9 years) for other post retirement benefit plans. The Company expects to make contributions of $5.0
million to its defined benefit pension plans and $0.4 million to its post retirement benefits medical plans in the
next financial year.
NOTE 15
SHAREHOLDERS' EQUITY
a)
At December 31, 2016 and 2015, the authorized share capital of the Company consisted of:
(i)
an unlimited number of common shares without nominal or par value;
(ii)
(iii)
an unlimited number of Class I preferred shares without nominal or par value, issuable in
series; and
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.
b)
The number of common shares issued and outstanding was as follows:
Balance, December 31, 2014
Share options exercised
Debentures converted
Balance, December 31, 2015
Share options exercised
Balance, December 31, 2016
Number
of Shares
61,674,228
27,400
932
61,702,560
32,925
Amount
(millions)
$ 531.2
0.5
-
$ 531.7
0.7
61,735,485
$ 532.4
RUSSEL METALS INC.442016 ANNUAL REPORT
The continuity of contributed surplus is as follows:
(millions)
Balance, December 31, 2014
Share-based compensation expense
Exercise of options
Balance, December 31, 2015
Share-based compensation expense
Exercise of options
Balance, December 31, 2016
Dividends paid and declared were as follows:
Dividends paid (millions)
Dividends per share
Quarterly dividend per share declared on
February 16, 2017 (February 16, 2016)
$ 14.1
1.2
(0.1)
15.2
0.9
(0.2)
$ 15.9
2016
2015
$ 93.8
$ 1.52
$ 93.8
$ 1.52
$ 0.38
$ 0.38
NOTE 16
SHARE-BASED COMPENSATION
ACCOUNTING POLICIES
The Company accounts for share-based compensation at fair value.
Compensation expense is recognized for share options on a graded vesting basis, where the fair value of each
tranche is determined at the grant date based on the Company's estimate of options that will eventually vest
and is recognized over its respective vesting period, except for employees who are eligible to retire during the
vesting period whose options are expensed immediately. At the end of each reporting period, the Company
revises its estimate of the number of options expected to vest. The impact of the revision of the original
estimate, if any, is recognized in net earnings such that the cumulative expense reflects the revised estimate
with a corresponding adjustment to contributed surplus.
Compensation expense for deferred share units is recognized when the units are issued and for changes in
the quoted market price from the issue date to the reporting date until the units are redeemed. Compensation
expense for restricted share units is recognized over the vesting period and for changes in the quoted market
price from the issue date to the reporting period date until the units mature.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of share options. The
inputs to this pricing model require significant judgements including share price volatility, expected dividends,
expected life of the options and the risk free interest rate.
SUPPORTING INFORMATION
Share Options
The Company has a shareholder approved share option plan, the purpose of which is to provide the
employees of the 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 4,498,909 and any options will be exercisable on a cumulative basis to an extent of 25% per year of total
options granted in years two to five after the date of grant. Other terms and conditions of the plan include a 10
year life and immediate vesting under certain change of control provisions. The consideration paid by
employees for the purchase of common shares is added to share capital. Commencing in 2014, employees
other than senior officers no longer receive share options.
RUSSEL METALS INC.452016 ANNUAL REPORT
The following is a continuity of options outstanding:
Balance, beginning of year
Granted
Exercised
Expired or forfeited
Balance, end of the year
Exercisable
Number of Options
2015
2016
Weighted Average
Exercise Price
2015
2016
2,226,728
375,000
(32,925)
(185,600)
2,019,307
303,371
(27,400)
(68,550)
$ 27.49
18.11
17.85
26.22
2,383,203
2,226,728
$ 26.25
$ 27.70
25.36
15.85
28.71
$ 27.49
1,624,626
1,553,379
$ 27.94
$ 27.63
The weighted average share price for the options exercised during the year was $26.36 (2015: $24.43)
The outstanding options had exercise price ranges as follows:
(number of options)
$ 29.00 - $ 33.81
$ 25.37 - $ 28.99
$ 16.58 - $ 25.36
Options outstanding
2016
550,772
1,012,537
819,894
2,383,203
2015
552,772
1,195,687
478,269
2,226,728
The options expire in the years 2017 to 2025 and have a weighted average remaining contractual life of 5.0
years (2015: 4.9 years)
The Black-Scholes option-pricing model assumptions used to compute compensation expense are as follows:
Dividend yield
Expected volatility
Expected life
Risk free rate of return
Weighted average fair value of options granted
2016
5%
26%
5 yrs
2.22%
$ 2.16
2015
5%
21%
5 yrs
2.00%
$ 2.67
Expected volatility is based on historical volatility over the last five years.
Deferred Share Units
The Company has a Deferred Share Unit ("DSU") Plan for non-executive directors. A DSU is a unit of
equivalent value to one common share based on market price, which is defined as the daily average of the
high and low board lot on the Toronto Stock Exchange for the last five trading days immediately prior to the
grant date. DSUs are granted quarterly to each non-executive director's account by dividing the quarterly
allocation by the market price. At the option of the individual director, they may elect to receive other board
fees in the form of DSUs. DSUs vest immediately and are redeemable for cash only when a non-executive
director leaves the Board.
At December 31, 2016, there were 207,650 DSUs outstanding (2015: 161,127). During 2016 and 2015, no
DSUs were redeemed. The liability and fair value of DSUs was $5.3 million at December 31, 2016 (2015: $2.6
million). Dividends declared on common shares accrue to units in the DSU plan in the form of additional
DSUs.
RUSSEL METALS INC.462016 ANNUAL REPORT
Restricted Share Units
The Company has a Restricted Share Unit ("RSU") Plan for eligible employees as designated by the Board of
Directors. Prior to 2014, RSUs were only issued to senior officers. Commencing in 2014 RSUs were issued to
other eligible employees in lieu of share options. The plan was established to provide medium-term
compensation. RSUs are awarded by the Board of Directors to eligible employees annually. RSUs vest one
third on the first and second anniversary after the grant date and the remaining one third on the expiry date.
RSUs expire on the earlier of: (i) December 5 of the third calendar year following the year in which the services
were provided to which such grant of RSU's relates; and (ii) the third anniversary of the grant date. The
Company is obligated to pay in cash an amount equal to the number of RSUs multiplied by the market price,
which is defined as the daily average of the high and low board lot on the Toronto Stock Exchange for the last
five trading days immediately prior to the expiry date. Continuity of RSUs outstanding is as follows:
(number of units)
Balance, beginning of the year
Granted
Paid out
Balance, end of the year
2016
344,115
36,616
(164,329)
216,402
2015
197,269
214,800
(67,954)
344,115
The RSU liability at December 31, 2016 was $4.7 million (2015: $3.7 million). The fair value of RSUs was $5.5
million at December 31, 2016 and 2015. Dividends declared on common shares accrue to units in the RSU
plan in the form of additional RSUs.
Employee Share Purchase Plan
The Company has an Employee Share Purchase Plan to provide employees with the opportunity to purchase
common shares. Employees may make contributions of between 1% and 5% of their base pay and the
Company will contribute an amount equal to one-third of the employee's contribution. Employees are eligible
to make contributions above the 5% of base pay threshold but the Company contributes only to a maximum of
one-third of 5% of base pay. The plan does not provide for a discount for employee purchases and is
administered by a trustee who purchases shares for the plan through the TSX. Dividends paid on the shares
are used to purchase additional shares.
Components of share-based compensation expense are as follows:
(millions)
Share options
DSU and RSUs
Employee Share Purchase Plan
2016
2015
$ 0.9
7.1
0.7
$ 1.2
0.2
0.9
$ 8.7
$ 2.3
NOTE 17
EARNINGS PER SHARE
ACCOUNTING POLICIES
Basic earnings per common share is calculated using the weighted average number of common shares
outstanding. Diluted earnings per share is calculated using the treasury share method.
SUPPORTING INFORMATION
The following table provides the numerator and denominator used to compute basic and diluted earnings per
share:
(millions)
2016
2015
Net income (loss) used in calculation of diluted earnings per share
$ 62.8
$ (87.6)
RUSSEL METALS INC.472016 ANNUAL REPORT
(number of shares)
Weighted average shares outstanding
Dilution impact of share options
Diluted weighted average shares outstanding
NOTE 18
EXPENSES
(millions)
Employee Expenses
Wages and salaries
Other employee related costs
Other Operating Expenses
Plant and other expenses
Delivery expenses
Repairs and maintenance
Selling expenses
Professional fees
Gain on sale of property, plant and equipment
Foreign exchange (gains) losses
NOTE 19
FINANCE EXPENSE
(millions)
Interest on 6.0% Unsecured Senior Notes
Interest on 7.75% Convertible Debentures
Other interest expense
Interest expense
Other finance (income) expense
Finance expense, net
2016
2015
61,704,990
335,693
61,696,592
-
62,040,683
61,696,592
2016
2015
$ 211.0
39.5
$ 250.5
$ 100.2
41.5
10.1
6.8
3.9
(1.5)
(1.1)
$ 159.9
2016
$ 18.7
-
3.0
21.7
-
$ 215.6
39.2
$ 254.8
$ 100.9
47.7
11.5
8.3
5.5
(1.9)
2.8
$ 174.8
2015
$ 18.6
20.3
1.7
40.6
(26.7)
$ 21.7
$ 13.9
Interest expense on long-term debt is comprised of the interest calculated on the face value of long-term debt,
issue costs and accretion of the carrying value of the long-term debt. Long-term debt interest expense is
charged to earnings using the effective interest method. Debt accretion and issue cost amortization for the
year ended December 31, 2016 was $0.7 million (2015: $9.6 million).
NOTE 20
INCOME TAXES
ACCOUNTING POLICIES
Income tax expense comprises current and deferred tax. Income tax is recognized in the consolidated
statement of earnings except to the extent it relates to items recognized directly in equity in which case the
related tax is recognized in equity.
Current income tax expense is based on the results for the period which is adjusted for items that are not
taxable or not deductible for tax. Current income tax is calculated using tax rates and laws that were enacted
or substantively enacted at the end of the reporting period.
Deferred tax is recognized, using the liability method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the consolidated statement of financial position. Deferred
tax is calculated using tax rates and laws that have been enacted or substantively enacted at the end of the
reporting period, and which are expected to apply when the related deferred income tax asset is realized or the
deferred income tax liability is settled.
RUSSEL METALS INC.482016 ANNUAL REPORT
Deferred tax liabilities
generally recognized for all taxable temporary differences;
recognized for taxable temporary differences arising on investments in subsidiaries, except where the
reversal of the temporary difference can be controlled and it is probable that the difference will not
reverse in the foreseeable future; and
not recognized on differences that arise from goodwill at acquisition.
Deferred tax assets
recognized to the extent it is probable that taxable income will be available against which the
deductible temporary differences and the carry forward of unused tax losses and credits can be
utilized; and
reviewed at the end of the reporting period and reduced to the extent that it is no longer probable that
sufficient taxable income will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are not recognized in respect of temporary differences that arise on initial
recognition of assets and liabilities acquired other than in a business combination.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company computes an income tax provision in each of the jurisdictions in which it operates. Actual
amounts of income tax expense are finalized upon filing and acceptance of the tax return by the relevant
authorities, which occurs subsequent to the issuance of the consolidated financial statements. Additionally,
the estimation of income taxes includes evaluating the recoverability of deferred tax assets based on an
assessment of the ability to use the underlying future tax deductions before they expire against future taxable
income. The assessment is based upon existing tax laws and estimates of future taxable income. To the
extent estimates differ from the final tax return, earnings would be affected in a subsequent period. In interim
periods, the income tax provision is based on an estimate of earnings for a full year by jurisdiction. The
estimated average annual effective income tax rates are reviewed at each reporting date, based on projections
of full year earnings. To the extent that forecasts differ from actual results, adjustments are recorded through
earnings in subsequent periods.
The Company is subject to taxation in numerous jurisdictions. There are many transactions and calculations
for which the ultimate tax determination is uncertain during the ordinary course of business. The Company
maintains provisions for uncertain tax positions that it believes appropriately reflect its risk with respect to tax
matters under active discussion, audit, dispute or appeal with tax authorities, or which are otherwise
considered to involve uncertainty. These provisions are made using the best estimate of the amount expected
to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of
these provisions at the end of the reporting period. It is possible that at some future date an additional liability
could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different
from the amounts that were initially recorded, such differences will affect the tax provision in the period in
which such determination is made.
SUPPORTING INFORMATION
a)
The components of the provision for income taxes are as follows:
(millions)
Current tax expense
Deferred tax expense (recovery)
2016
2015
$ 24.5
10.0
$ 1.7
(14.1)
$ 34.5
$ (12.4)
RUSSEL METALS INC.492016 ANNUAL REPORT
b)
The Company's effective income tax rate was derived as follows:
Applicable combined Canadian statutory rate
Rate difference of U.S. companies
Share-based compensation and non-deductible items
Change in contingent consideration
Write-down of goodwill and intangibles
Gain on sale of U.S. property
Withholding tax on funds repatriated to Canada
Alberta rate increase
Other
Average effective tax rate
2016
26.9%
2.1%
0.6%
-
-
3.5%
2.7%
-
(0.3%)
35.5%
2015
26.4%
2.1%
(0.6%)
6.5%
(24.6%)
-
-
(0.9%)
3.5%
12.4%
In 2016, the Canadian statutory rate increased by 0.5%. The combined Canadian statutory rate is the
aggregate of the federal income tax rate of 15.0% (2015: 15.0%) and the average provincial rates of 11.9%
(2015: 11.4%). The average effective tax rate was higher than the average Canadian corporate tax rate
principally due to differing tax rules applicable to certain of the Company's subsidiaries outside Canada,
withholding tax and non-operational income earned in a higher tax jurisdiction.
c)
Deferred income tax assets and liabilities were as follows:
Deferred Income Tax Assets
(millions)
Property
Plant and
Losses Equipment
Pension
And
Benefits
Goodwill
Item
And Charged
Intangibles To Equity
Other
Timing
Total
Balance December 31, 2014
Benefit (expense) to consolidated
statement of earnings (loss)
Reclass assets/liabilities and other
Business acquisition (Note 4)
Benefits to other comprehensive income
$ 1.0
$ (9.0) $ 7.0
$ 3.5 $ (2.3) $ 4.7 $ 4.9
0.8
0.2
-
-
0.4
(0.9)
-
-
(0.8)
-
-
(0.5)
4.8
(0.3)
0.1
-
2.3
-
-
-
4.7
0.4
(0.3)
-
12.2
(0.6)
(0.2)
(0.5)
Balance December 31, 2015
Benefit (expense) to consolidated
statement of earnings (loss)
Reclass assets/liabilities and other
$ 2.0
$ (9.5) $ 5.7
$ 8.1 $ - $ 9.5 $ 15.8
(0.7)
(0.1)
(1.9)
4.9
-
(5.4)
(1.7)
(0.9)
-
-
1.3
(5.4)
(3.0)
(6.9)
Balance December 31, 2016
$ 1.2
$ (6.5) $ 0.3
$ 5.5
$ - $ 5.4 $ 5.9
Deferred Income Tax Liabilities
(millions)
Balance December 31, 2014
(Benefit) expense to consolidated
statement of earnings (loss)
Reclass assets/liabilities and other
Balance December 31, 2015
(Benefit) expense to consolidated
statement of earnings (loss)
Reclass assets/liabilities and other
Benefits to other comprehensive income
Property
Plant and
Equipment
Pension
And
Benefits
Goodwill
Item
And Charged
Intangibles To Equity
Other
Timing
Total
$ 0.3 $ -
$ 16.5 $ - $ 0.2 $ 17.0
0.1
-
-
-
(1.7)
(0.9)
-
-
(0.3)
-
(1.9)
(0.9)
$ 0.4 $ -
$ 13.9 $ - $ (0.1) $ 14.2
2.7
4.7
-
3.0
(5.5)
0.3
(1.1)
(0.8)
-
-
-
-
2.4
(5.4)
-
7.0
(7.0)
0.3
Balance December 31, 2016
$ 7.8
$ (2.2)
$ 12.0
$ - $ (3.1) $ 14.5
Net deferred asset at December 31, 2015
Net deferred liability at December 31, 2016
$ 1.6
8.6
$
RUSSEL METALS INC.502016 ANNUAL REPORT
d)
At December 31, 2016, the Company had U.S. state tax losses carried forward which, at U.S. state tax
rates, have an estimated value of $1.2 million (2015: $1.8 million). The majority of the tax losses carried
forward will expire between 2029 and 2036, if not utilized. Deferred tax assets are recognized for tax loss
carry-forwards to the extent that the realization of the related tax benefit through future taxable profits is
probable. The ability to realize the tax benefits of these losses is dependent upon a number of factors,
including the probability of generating taxable income from operations in the future in the jurisdictions in which
the tax losses arose.
At December 31, 2016 and 2015, the Company had $6.3 million and $7 million of capital losses respectively
carried forward which may only be used to offset future capital gains. These losses have no expiry date. The
deferred tax asset not recognized in respect of these losses was $0.8 million (2015: $0.9 million).
e)
At December 31, 2016, the aggregate amount of temporary differences associated with undistributed
earnings of non-Canadian subsidiaries was $308 million. No liability has been recognized in respect of these
differences because the Company is in a position to control the timing of the reversal of the temporary
differences, and it is probable that such differences will not reverse in the foreseeable future.
NOTE 21
PROVISIONS AND OTHER NON-CURRENT LIABILITIES
ACCOUNTING POLICIES
Provisions represent liabilities to the Company for which the amount or timing is uncertain. Provisions are
recognized when the Company has a present legal or constructive obligation as a result of past events, it is
probable that an outflow of resources will be required to settle the obligation and the amount can be reliably
estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present
value of the expected expenditures to settle the obligation using a discount rate that reflects current market
assessments of the time value of money and the risks specific to the obligation. Any increase in the provision
due to the passage of time is recognized in other finance expense.
The Company recognizes liabilities for statutory, contractual, constructive or legal obligations associated with
the retirement of property, plant and equipment, when those obligations result from the acquisition,
construction, development or normal operation of the assets. The net present value of the estimated future
decommissioning and rehabilitation costs are capitalized to the related asset along with a corresponding
increase in the provision in the period incurred. Pre-tax discount rates that reflect the time value of money are
used to calculate the net present value.
The estimates of decommissioning costs could change as a result of changes in regulatory requirements and
assumptions regarding the amount and timing of the future expenditures. These changes are recorded directly
to the related asset or net earnings with a corresponding adjustment to the provision. The estimates are
reviewed annually for changes in regulatory requirements and changes in estimates. Changes in the net
present value are recognized in net earnings.
ACCOUNTING ESTIMATES AND JUDGEMENTS
The Company has recorded the liability for contingent consideration on its Apex Distribution ("Apex") and Apex
Monarch ("Monarch") acquisitions at fair value. The determination of fair value involves analysis including the
use of discounted cash flows of expected future earnings, expected future net assets and discount rates.
There is measurement uncertainty inherent in this analysis and actual results could differ from estimates.
The Company has recorded a provision for decommissioning liabilities. The determination of these liabilities
involved analysis to estimate expected cash outflows over a long period of time which is inherently uncertain.
RUSSEL METALS INC.512016 ANNUAL REPORT
SUPPORTING INFORMATION
(millions)
Provision for decommissioning liabilities
Deferred compensation and employee incentives
Product warranty provision (Note 25)
Less: current position
2016
$ 2.7
10.0
20.0
32.7
(24.6)
2015
$ 3.4
6.3
20.0
29.7
(20.9)
$ 8.1
$ 8.8
The liability for contingent consideration relating to Apex and Monarch will end on November 30, 2017
a)
and December 31, 2018, respectively. The Company's contingent consideration obligations for Apex and
Monarch are uncapped. The Company has estimated that it has no obligation at December 31, 2016 relating
to the contingent consideration (2015: $0.1 million).
b)
The following table presents the movement in the provision for decommissioning liabilities:
(millions)
Balance, beginning of the year
Charges
Utilization
Balance, end of the year
2016
2015
$ 3.4
-
(0.7)
$ 2.5
1.0
(0.1)
$ 2.7
$ 3.4
Deferred compensation includes the RSU and DSU liabilities. The RSU liabilities that will be paid in
c)
2017 amounting to $4.6 million were reclassified to current accrued liabilities.
NOTE 22
SEGMENTED INFORMATION
ACCOUNTING POLICIES
The Company's operating segments are organized around the markets it serves and are reported in a manner
consistent with the internal reporting provided to the chief operating decision-maker which is the Chief
Executive Officer.
SUPPORTING INFORMATION
For the purpose of segment reporting, operating segments are identified as a component of an entity:
that engages in business activities from which it may earn revenues and incur expenses;
whose operating results are regularly reviewed by the Company's Chief Executive Officer to make
decisions about resources to be allocated to the segment and assess its performance; and
for which discrete financial information is available.
Accordingly, the Company conducts business in Canada and the U.S. in three reportable segments.
Metals service centers
i)
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 aluminium. The Company
services all major geographic regions of Canada and certain regions in the Southeastern and
Midwestern regions in the United States.
Energy products
ii)
The Company's energy products operations distribute oil country tubular products, line pipe, tubes,
valves, flanges and fittings, primarily to the energy industry in Western Canada and the United States.
Steel distributors
iii)
The Company's steel distributors act as master distributors selling steel to customers in large volumes,
mainly on an "as is" basis. Steel distributors source their steel domestically and off shore.
RUSSEL METALS INC.522016 ANNUAL REPORT
The Company has segmented its operations on the basis of management reporting and geographic segments
in which it operates. The inter-segment sales from steel distributors to metals service centers were $42.1
million (2015: $54.8 million). These sales, which are at market rates, are eliminated in the following table.
a)
Results by business segment:
(millions)
Segment Revenues
Metals service centers
Energy products
Steel distributors
Other
Segment Operating Profits
Metals service centers
Energy products
Steel distributors
Corporate expenses
Impairment of goodwill and long lived assets
Gain on sale of properties
Product warranty provision
Other income (expense)
Earnings (loss) before interest and income taxes
Finance expense, net
(Provision for) recovery of income taxes
Net earnings (loss)
Capital Expenditures
Metals service centers
Energy products
Steel distributors
Depreciation Expense
Metals service centers
Energy products
Steel distributors
Other
2016
2015
$ 1,383.5
881.2
304.5
2,569.2
9.4
$ 1,481.1
1,227.1
398.4
3,106.6
5.0
$ 2,578.6
$ 3,111.6
$ 58.1
18.9
29.0
$ 41.9
33.0
(3.6)
106.0
(18.6)
-
27.7
-
3.9
119.0
(21.7)
(34.5)
71.3
(12.5)
(123.5)
-
(20.0)
(1.4)
(86.1)
(13.9)
12.4
$ 62.8
$ (87.6)
$ 13.0
2.8
0.9
$ 16.7
$ 23.6
4.3
0.8
0.1
$ 28.8
$ 33.2
3.8
1.3
$ 38.3
$ 22.7
4.6
0.7
0.1
$ 28.1
RUSSEL METALS INC.532016 ANNUAL REPORT
(millions)
Current Identifiable Assets
Metals service centers
Energy products
Steel distributors
Non-Current Identifiable Assets
Metals service centers
Energy products
Steel distributors
2016
2015
$ 408.9
459.4
116.9
985.2
241.8
75.5
7.3
$ 382.9
555.3
119.9
1,058.1
264.7
86.7
7.5
Total identifiable assets included in segments
1,309.8
1,417.0
Assets not included in segments
Cash and cash equivalents
Income tax assets
Deferred financing charges
Other assets
Corporate and other operating assets
Total assets
Liabilities
Metals service centers
Energy products
Steel distributors
Liabilities by segment
Liabilities not included in segments
Bank indebtedness
Income taxes liabilities
Long-term debt
Pension and benefits
Corporate and other liabilities
Total liabilities
b)
Results by geographic segment:
(millions)
Segment Revenues
Canada
United States
Segment Operating Profits (Loss)
Canada
United States
Identifiable Assets
Canada
United States
181.8
12.5
1.2
3.9
(0.7)
143.4
40.0
1.7
5.4
(0.5)
$ 1,508.5
$ 1,607.0
$ 151.5
111.9
12.9
276.3
$ 127.2
130.7
11.8
269.7
34.9
19.8
295.9
11.0
45.3
94.2
14.6
295.7
21.7
42.2
$ 683.2
$ 738.1
2016
2015
$ 1,781.6
787.6
$ 2,569.2
$ 81.7
24.3
$ 106.0
$ 950.3
359.5
$ 1,309.8
$ 2,152.8
953.8
$ 3,106.6
$ 101.5
(30.2)
$ 71.3
$ 1,021.0
396.0
$ 1,417.0
RUSSEL METALS INC.542016 ANNUAL REPORT
NOTE 23
RELATED PARTY TRANSACTIONS
During the years ended December 31, 2016 and 2015 the Company did not have any transactions with
subsidiaries outside the normal course of business. All subsidiaries are wholly owned and all transactions with
subsidiaries are recorded at fair value and have been eliminated upon consolidation.
At December 31, 2016, there were no loans or credit transactions outstanding with key management personnel
or directors. Key management personnel includes the Chief Executive Officer, Chief Operating Officer, Chief
Financial Officer and certain Vice Presidents. Compensation costs of key management personnel and
directors were as follows:
(millions)
Salaries and other benefits
Share based compensation cost
Post-employment benefits
2016
$ 4.6
2.2
0.5
$ 7.3
2015
$ 3.3
1.6
0.5
$ 5.4
NOTE 24
FINANCIAL INSTRUMENTS AND RELATED RISK MANAGEMENT
ACCOUNTING POLICIES
a) Fair Value Measurement
The Company measures certain financial and non-financial assets and liabilities at fair value at each statement
of financial position date. In addition, fair value measurements are disclosed for certain financial and non-
financial assets and liabilities.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In estimating the fair value of an asset or a
liability, the Company takes into account the characteristics of the asset or liability if market participants would
take those characteristics into account when pricing the asset or liability at the measurement date.
Assets and liabilities, for which fair value is measured or disclosed in the consolidated financial statements, are
classified using a three-level fair value hierarchy that reflects the significance and transparency of the inputs
used in making the fair value measurements. Each level is based on the following:
Level 1 Values based on unadjusted quoted prices in active markets that are accessible at the measurement
date for identical assets or liabilities.
Level 2 Values based on quoted prices in markets that are not active or model inputs that are observable
either directly or indirectly for substantially the full term of the asset or liability.
Level 3 Values based on prices or valuation techniques that require inputs which are both unobservable and
significant to the overall fair value measurement.
b) Financial Assets
Purchases and sales of financial assets are recognized on the settlement date, which is the date on which the
asset is delivered to or by the Company. Financial assets are derecognized when the rights to receive cash
flows from the instruments have expired or have transferred and the Company has transferred substantially all
risks and rewards of ownership. Financial assets are classified in the following categories at the time of initial
recognition based on the purpose for which the financial assets were acquired:
Financial assets at fair value through profit or loss
Classification
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is
classified in this category if acquired principally for the purpose of selling in the short-term or if so designated
by management. Assets in this category include forward exchange contracts and embedded derivatives in
inventory purchases.
Recognition and measurement
Financial assets carried at fair value are initially recognized, and subsequently carried, at fair value with
changes recognized in net earnings. Transaction costs are expensed.
RUSSEL METALS INC.552016 ANNUAL REPORT
Loans and receivables
Classification
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market. They are included in current assets, except for those with maturities greater than
12 months after the end of the reporting period which are classified as non-current assets. Assets in this
category include cash and cash equivalents and accounts receivable and are classified as current assets in
the consolidated statement of financial position.
Recognition and measurement
Loans and receivables are initially recognized at fair value plus transaction costs and subsequently carried at
amortized cost, less impairment.
c) Financial liabilities and equity instruments
Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the
substance of the contractual arrangement.
Other financial liabilities
Classification
Other financial liabilities include accounts payable and accrued liabilities, long-term debt and contingent
consideration.
Recognition and measurement
Short-term borrowings are recorded at the fair value of the proceeds received. Long-term debt is measured at
amortized cost using the effective interest method, with interest expense recognized in net earnings. Eligible
costs related to long-term debt financing are carried at amortized cost and amortized using the effective
interest method over the period of the related financing. Contingent consideration is measured at fair value at
the acquisition date and is subsequently re-measured at fair value, by applying the income approach using the
probability weighted expected return on net assets with changes in fair value recognized in net earnings.
d) Derivative financial instruments
Derivatives are initially recognized at fair value on the date a contract is entered into and are subsequently re-
measured at fair value. The method of recognizing the resulting gain or loss depends on whether the
derivative is designated as a hedging instrument and the nature of the item being hedged.
Embedded derivatives
An embedded derivative is a feature within a contract, where the cash flows associated with that feature
behave in a similar fashion to a stand-alone derivative. The Company has embedded foreign currency
derivatives in certain purchase contracts where the currency of the contract is different from the functional or
local currencies of the parties involved. These derivatives are accounted for as separate instruments and are
measured at fair value and included in accounts payable and accrued liabilities at the end of the reporting
period. Changes in their fair values are recognized within "Other operating expense" in the consolidated
statement of earnings.
Impairment of financial assets
e)
At each financial position date, the Company assesses whether there is objective evidence that a financial
asset or a group of financial assets is impaired. When impairment has occurred, the asset's carrying value is
reduced with the loss recognized in net earnings.
For financial assets carried at amortized cost, the amount of the impairment is the difference between the
asset's carrying amount and the present value of the estimated future cash flows discounted at the financial
asset's original effective interest rate.
In a subsequent period, if the impairment loss decreases and the decrease relates to an event occurring after
the impairment was recognized, the previously recognized impairment loss is reversed through net earnings.
On the date of impairment reversal, the carrying amount of the financial asset cannot exceed its amortized cost
had impairment not been recognized.
RUSSEL METALS INC.562016 ANNUAL REPORT
f) Leases
Leases are classified as finance or operating depending on the terms and conditions of the contracts. Leases
which transfer substantially all the risks and rewards of ownership are classified as finance leases. An asset
held under a finance lease is initially recognized at the inception of the lease at an amount equal to the lower
of its fair value and the present value of the minimum lease payments. The corresponding liability to the lessor
is included in the consolidated statement of financial position as a finance lease obligation. Subsequent to its
initial recognition, the costs are depreciated in accordance with the accounting policy of the applicable asset.
Obligations recorded under finance leases are reduced by lease payments, net of imputed interest. Interest
expense is recognized in net earnings.
Leases that do not meet the criteria for finance leases are classified as operating leases. Payments made
under operating leases are expensed on a straight-line basis over the term of the lease.
SUPPORTING INFORMATION
a)
Financial assets and liabilities
Financial assets and liabilities are as follows:
December 31, 2016 (millions)
Cash and cash equivalents
Accounts receivable
Financial assets
Bank indebtedness
Accounts payables and accrued liabilities
Current portion of long-term debt
Long-term debt
Total
December 31, 2015 (millions)
Cash and cash equivalents
Accounts receivable
Financial assets
Bank indebtedness
Accounts payables and accrued liabilities
Current portion long-term debt
Long-term debt
Total
Loans and
Receivables
$ 181.8
359.4
1.2
-
-
-
-
$ 542.4
Loans and
Receivables
$ 143.4
333.5
1.7
-
-
-
-
$ 478.6
Other
Financial
Liabilities
$ -
-
-
(34.9)
(313.5)
(0.1)
(295.8)
Total
$ 181.8
359.4
1.2
(34.9)
(313.5)
(0.1)
(295.8)
$ (644.3)
$ (101.9)
Other
Financial
Liabilities
$ -
-
-
(94.2)
(303.1)
(0.5)
(295.2)
Total
$ 143.4
333.5
1.7
(94.2)
(303.1)
(0.5)
(295.2)
$ (693.0)
$ (214.4)
For the year ended December 31, 2016, the fair value gain from derivative financial instruments on the
consolidated statement of earnings was $0.6 million (2015: $0.5 million) including embedded derivative and
forward contracts.
Fair Value
b)
The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities
approximate their carrying amounts because of the short-term maturity of these instruments.
The fair value measurements of contingent consideration obligations arising from business combinations were
determined by applying the income approach using the probability weighted expected return on assets and a
discount rate of 12.9% (2015: 13.4%). The calculation uses unobservable (level 3) inputs including (i) the
estimated amount and timing of projected cash flows; (ii) the probability of the achievement of the factors on
which the contingency is based; (iii) average net assets; and (iv) the risk-adjusted discount rate used to
present value the projected cash flows. Significant changes in any of these inputs in isolation can result in a
significantly higher or lower fair value measurement.
RUSSEL METALS INC.572016 ANNUAL REPORT
The fair values of long-term debt are set forth below.
Carrying Amounts
Amounts recorded in the consolidated statement of financial position are referred to as "carrying amounts".
The carrying amounts of primary debt are reflected in "Long-term debt" and "Current portion long-term debt".
Fair Value
The Company records its debt at amortized cost using the effective interest method. The fair value of long-
term debt as at December 31, 2016 and 2015 was estimated based on the last quoted trade price, where it
exists, or based on current rates available to the Company for similar debt with the same period to maturity.
The following summary reflects the fair value of the long-term debt:
December 31, 2016 (millions)
6.0% $300 million Unsecured Senior Notes due April 19, 2022
Finance lease obligations
Total
Current portion
Long-term portion
December 31, 2015 (millions)
6.0% $300 million Unsecured Senior Notes due April 19, 2022
Finance lease obligations
Total
Current portion
Long-term portion
Primary Debt Instrument
Carrying
Amount
Fair Value
Level 2
$ 295.7
0.2
$ 304.5
0.2
$ 295.9
$ 304.7
$ 0.1
$ 295.8
Primary Debt Instrument
Carrying
Amount
Fair Value
Level 2
$ 295.1
0.6
$ 288.0
0.6
$ 295.7
$ 288.6
$ 0.5
$ 295.2
Credit risk
c)
Credit risk is the risk of financial loss to the Company if the counterparty to a financial instrument fails to meet
its contractual obligation. Credit risk arises from cash and cash equivalents and derivative financial
instruments, as well as credit exposure to customers including accounts receivable.
The Company attempts to minimize credit exposure as follows:
Cash investments are placed with high-quality financial institutions with limited exposure to any one
institution. At December 31, 2016, nearly all cash and cash equivalents held were issued by
institutions that were R1 High by DBRS;
Counterparties to derivative contracts are members of the syndicated banking facility (Note 11);
Credit limits minimize exposure to any one customer; and
The customer base is geographically diverse and in different industries.
No allowance for credit losses on financial assets was required as of December 31, 2016 and 2015, other than
the allowance for doubtful accounts (Note 6). As at December 31, 2016, trade accounts receivable greater than
90 days represented less than 2% of trade accounts receivable (2015: 5%).
Interest rate risk
d)
Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate
because of changes in market rates of interest. The Company is not exposed to significant interest rate risk.
The Company's long-term debt is at fixed rates. The Company's bank borrowings, net of cash and cash
equivalents used to finance working capital, which is short-term in nature, is at floating interest rates.
RUSSEL METALS INC.582016 ANNUAL REPORT
Foreign exchange risk
e)
Foreign exchange risk is the risk that the fair value of the future cash flows of a financial instrument will
fluctuate because of changes in foreign exchange rates. 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, 2016, the Company had outstanding forward foreign exchange contracts in the amount of
US$13.9 million, maturing in 2017 (2015: US$10.2 million). A 1% change in foreign exchange rates would not
result in a significant increase or decrease in accounts payable or net earnings.
Liquidity risk
f)
Liquidity risk is the risk that the Company will not meet its financial obligations when due. Liquidity adequacy is
assessed in view of seasonal needs, growth requirements, capital expenditures, and the maturity profile of
indebtedness. Cash is managed by the centralized treasury function and is invested in money market
instruments or bank deposits, with durations ranging up to sixty days. A centralized treasury function ensures
that the Company maintains funding flexibility by assessing future cash flow expectations and by maintaining
its committed borrowing facilities.
As at December 31, 2016, the Company was contractually obligated to make payments under its financial
liabilities that come due during the following periods:
(millions)
2017
2018
2019
2020
2021
2022 and beyond
Total
Accounts
Payable
$ 313.5
-
-
-
-
-
$ 313.5
Long-Term
Debt Maturities
Long-Term
Debt Interest
$ -
-
-
-
-
300.0
$ 18.0
18.0
18.0
18.0
18.0
9.9
Operating
Lease
Obligations
$ 23.3
19.9
14.8
11.7
10.0
22.8
Total
$ 354.8
37.9
32.8
29.7
28.0
332.7
$ 300.0
$ 99.9
$ 102.5
$ 815.9
Operating lease expense for the year ended December 31, 2016 was $28.5 million (2015: $25.2 million).
At December 31, 2016, the Company was contractually obligated to repay its letters of credit under its bank
facilities at maturity (Note 11).
Capital management
g)
The Company manages capital in order to safeguard its ability to continue as a going concern, provide returns
to shareholders through its dividend policy and provide the ability to finance future growth. Capital includes
shareholders' equity, bank indebtedness and long-term debt, net of cash. The Company manages its capital
structure and may make adjustments to the amount of dividends paid to shareholders, purchase shares for
cancellation pursuant to issuer bids, issue new shares, issue new debt, repurchase existing debt and extend or
amend its banking facilities.
NOTE 25
CONTINGENCIES, COMMITMENTS AND GUARANTEES
Lawsuits and legal claims
a)
The Company recognizes contingent loss provisions for losses that are probable when management is able to
reasonably estimate the loss. When the estimated loss lies within a range, the Company records a contingent
loss provision based on its best estimate of the probable loss. If no particular amount within that range is a
better estimate than any other amount, the minimum amount is recorded. Estimates of losses may be
developed significantly before the ultimate loss is known, and are revalued each accounting period as
additional information becomes known. In instances where the Company is unable to develop a reasonable
loss estimate, no contingent loss provision is recorded at that time. A contingent loss provision is recorded
when a reasonable estimate can be made. Estimates are reviewed quarterly and revised when expectations
change. An outcome that deviates from the Company’s estimate may result in an additional expense or
income in a future accounting period.
RUSSEL METALS INC.592016 ANNUAL REPORT
The Company and certain of its subsidiaries have been named defendants in a number of legal actions.
Although the outcome of these legal actions cannot be determined, management intends to defend all such
legal actions and has recorded provisions, as required, based on its best estimate of the potential losses. In
the opinion of management, the resolution of these legal actions is not expected to have a material adverse
effect on the Company's financial position, cash flows or operations.
The Company and the manufacturer of certain energy products received a customer claim of approximately
$90 million relating to product that was distributed by the Company from 2010 to 2012. The customer alleged
that the product was defective and that the manufacturer did not meet the specifications for the goods.
Although primary responsibility for the allegedly defective product lies with the manufacturer, the Company has
been included in the claim. In 2015, the Company estimated the potential liability to be $20 million. The
Company and the customer are in the process of finalizing the settlement agreement and the current provision
is adequate to satisfy the obligation.
The Company has also entered into other agreements that provide indemnifications to counterparties in certain
transactions 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 except in the case of gross negligence by the counterparties.
Decommissioning liability
b)
The Company is incurring site cleanup and restoration costs related to properties not utilized in current
operations. Remedial actions are currently underway at two sites. Decommissioning liabilities have been
estimated using discounted cash flow valuation techniques for cleanup costs based on management's best
estimates of the amount required to settle the liability.
The Company has asset retirement obligations relating to the land lease for the Thunder Bay Terminal
operation whose lease term expires in 2031. The landlord has the option to retain the equipment or to require
the Company to remove it. In addition, the Company has end-of-lease obligations in certain service center
operations.
Business combinations and investments
c)
The Company has a contractual obligation to pay additional consideration for its acquisitions of Apex
Distribution and Monarch, based upon achievement of performance measures during the first five years of
ownership. As at December 31, 2016, the Company estimated that it has no further obligation relating to these
contracts.
RUSSEL METALS INC.602016 ANNUAL REPORT
CORPORATE HEAD OFFICE
6600 Financial Drive
Mississauga, Ontario
L5N 7J6
ANNUAL MEETING
The Annual Meeting of Shareholders will
be held in the Corporate Head office on
Wednesday, May 3, 2017 at 3:00 pm
DIRECTORY
BOARD OF DIRECTORS
OFFICERS
ALAIN BENEDETTI
Corporate Director
JAMES F. DINNING
Chair of the Board
BRIAN R. HEDGES
Chief Executive Officer
JOHN G. REID
President &
Chief Operating Officer
MARION E. BRITTON
Executive Vice President,
Chief Financial Officer &
Secretary
LESLEY M.S. COLEMAN
Vice President,
Controller &
Assistant Secretary
SHERRI L. MOOSER
Assistant Secretary
JOHN M. CLARK
President
Investment and Technical
Management Corp.
JAMES F. DINNING
Chair of the Board
JOHN A. HANNA
Corporate Director
BRIAN R. HEDGES
Chief Executive Officer
BARBARA S. JEREMIAH
Corporate Director
ALICE D. LABERGE
Corporate Director
LISE LACHAPELLE
Corporate Director
WILLIAM M. O’REILLY
Corporate Director
JOHN R. TULLOCH
Corporate Director
GLOSSARY
Adjusted EBIT - Earnings before deduction of interest and income taxes excluding gain on sale of property,
provision for product warranty and asset impairments
Adjusted EBITDA - Earnings before deduction of interest, income taxes, depreciation and amortization,
gain on sale of property, provision for product warranty and asset impairments
Book Value Per Share - Equity value divided by ending common shares outstanding
Debt as % of Capitalization - Total net interest bearing debt excluding cash on hand divided by common
shareholders’ equity plus interest bearing debt excluding cash on hand
Dividend Yield - The dividend per share divided by the year end common share price
Earnings Multiple - Period ending common share price divided by basic earnings per common share
EBIT - Earnings before deduction of interest and income taxes
Free Cash Flow - Cash from operating activities before change in working capital less capital expenditures
Interest Bearing Debt to EBITDA - Total interest bearing debt excluding cash on hand divided by EBITDA
Market Capitalization - Outstanding common shares times market price of a common share at December 31
Return on Capital Employed - Adjusted EBIT for period annualized over net assets employed
TRANSFER AGENT AND REGISTRAR
CIBC Mellon Trust Company
c/o Canadian Stock Transfer Company Inc.
P.O. Box 700, Station B
Montreal, Quebec, Canada H3B 3K3
T: 416.682.3860 F: 1.800.387.0825
inquiries@canstockta.com
www.canstockta.com
The Toronto Stock Exchange - RUS
6600 Financial Drive
Mississauga, Ontario
L5N 7J6
905-819-7777
1-800-268-0750
www.russelmetals.com