2017 ANNUAL REPORT
Seamless Transition
CONTINUITY
CULTURE
We believe that our entrepreneurial culture provides us with a
competitive advantage. We empower our general managers to run
their business units as if they were owners by utilizing their local
knowledge and their relationships to react quickly to changes in
the markets that we serve. This unique culture is fostered by our
performance-based compensation plans which allow us to attract and
retain the best people and align the goals of our people with
our shareholders.
PEOPLE
Our people have been and will continue to be what sets Russel Metals
apart. Succession planning and the development of our people are a
priority and imperative to maintaining our unique culture and profitability.
Management is focused on leaving a legacy of leadership in place. Initiatives
such as our Next Generation Conference and our Continuous Improvement
Initiatives in our Health & Safety programs will further enable us to have
a safe and seamless transition to our future leadership.
SHAREHOLDERS
Russel Metals is a dividend and
growth story. Providing
returns to our shareholders
remains a primary goal
of your leadership
team and the
dividend is a key
component of
this strategy.
We endeavour
to have our
disclosure
documents be
clear, concise
and easily
understood.
We believe
that this clarity
will aid our
shareholders in
understanding
our cyclical
business model
and thereby enhance
their decision making
process.
GROWTH
We will continue our disciplined
approach to growth
opportunities presented
that will expand our
product offerings
or geographic
coverage and that
add value to
shareholders
and enable
us to sustain
the dividend.
Our Color
Steels
acquisition,
for example,
was
immediately
accretive. The
expansion of
our U.S. Metals
Service Centers
and our Energy
Field Store footprint
through acqusitions
or greenfields will be a
primary growth strategy.
VALUE-ADDED
Expanding our value-added proposition
will continue to be a priority. The new state of
the art plate processing facility in Edmonton has allowed
us to enhance our processing capabilities, grow market share and reduce
costs. We continue to augment our processing capabilities across North
America with the addition of fiber lasers, tube lasers, and combination
machines that cut, drill and machine finished parts and have added
leveling capabilities, such as stretcher leveling, to our cut-to-length lines.
This value added approach will continue to grow our service center
market share.
TECHNOLOGY
We continue to challenge ourselves to
leverage technology to improve our productiv-
ity. Over the last several years, we implemented technology
which included bar-coding, electronic invoicing, receiving and pay-
ments, and real time inventory. Our ERP systems will continue to be
modernized which will allow us to benefit from technological advances
while maintaing our industry-leading enhancements.
TABLE OF CONT E N TS
Financial Highlights
Report to Shareholders
Tribute to Brian R. Hedges
Farewell
1
2
4
6
Management’s Responsibility for Financial Reporting
Management’s Discussion and Analysis
Independent Auditor’s Report
Consolidated Financial Statements
8
9
24
25
FINANCIAL HIGHLIGHTS
OPERATING RESULTS (millions)
Revenues
Net earnings
EBIT
EBIT as a % of revenue
EBITDA
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 EBIT
Firm value as a multiple of EBITDA
Interest bearing debt/EBITDA
Debt as a % of capitalization
Market capitalization as a % of book value
Return on capital employed
Return on equity
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
<---------------------------------------------Years Ended------------------------------------------->
2015
2013
2016
2014
2017
$3,296.0
123.8
206.4
6.3%
240.6
7.3%
$2.00
$445.8
819.9
17.2
(347.4)
935.5
246.5
90.5
1,272.5
(0.8)
(30.0)
(12.0)
(24.4)
$1,205.3
$82.0
296.5
378.5
1,805.3
$2,183.8
$826.8
$13.36
$180.4
$35.7
$34.2
14.6
10.6
9.1
1.6
31%
218%
17%
15%
$2,578.6
62.8
119.0
4.6%
154.1
6.0%
$1.02
$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
14.5
11.2
1.9
26%
191%
12%
8%
$3,111.6
(87.6)
(86.1)
(2.8%)
(51.0)
(1.6%)
($1.42)
$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
nm
nm
nm
25%
114%
(8%)
(10%)
$3,869.3
123.6
217.0
5.6%
251.8
6.5%
$2.01
$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
9.4
8.1
1.8
32%
166%
16%
13%
$3,187.8
83.3
146.0
4.6%
179.6
5.6%
$1.37
$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
15.4
12.6
2.6
34%
217%
12%
9%
61,890,197
61,788,013
5.2%
$1.52
52%
$29.78
$23.67
$29.17
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
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 METALS12017 ANNUAL REPORT REPORT TO SHAREHOLDERS
Our 2017 strong earnings reflected positive trends in all three of our business segments. Our 2017 earnings of
$2.00 per share were comparable to 2014 and achieved with revenues that were $573 million lower. These
improved earnings validate our improved operating efficiencies, value-added growth initiatives and our strategic
acquisition of Apex which diversified our mix in our energy products segment. Our energy products segment
significantly outperformed all of our major public competitors and our service centers and steel distributors
segments continued to maintain industry-leading results.
In 2017 we continued to both grow our market share and invest in the future by expanding our processing
capabilities in North America. We completed the $26 million acquisition of Color Steels, a complementary
eastern Canadian niche operation that expanded our product offerings through painted flat rolled steel. We
invested $36 million in capital expenditures, much of which was focused on value-added processing. To
highlight a few, during 2017 Edmonton added a new beam yard along with the associated value-added
processing equipment to allow them to target new markets; Saskatoon added a new state-of-the-art fiber laser
to add capacity to their existing robust processing capabilities; JMS continued grow market share through
value-added processing with an additional tube laser; and Quebec broadened their value-added offering with a
new combination plasma and machining table to augment their capabilities.
We continued to emphasize shareholders returns through dividends totaling $94 million for the year.
MANAGEMENT
We welcome the team from Color Steels, a well-managed operation that was immediately accretive to earnings.
In our metals service centers Joe Mangialardi, our Regional General Manager - Ontario, retired after 39 years
of service. We thank Joe for his tremendous service over his long career and welcome his internal successor
Tony Defina to his new role. The Ontario Region will be well served as Tony brings more than 25 years of
commercial and operations experience to the region. In our energy product operations, Mike Harris of Pioneer
Pipe has decided to step back from his current role and play an oversight and mentoring role in advance of his
retirement in 2018. Reynold Wilden, who has more than 31 years of commercial and operational experience at
Pioneer, has assumed the role of President.
BOARD OF DIRECTORS
We thank two of our directors, Lise Lachapelle and John Hanna, who are not standing for re-election. Lise
joined our Board in 1996 and brought remarkable wisdom along with a unique perspective to our Board. Lise
always had a view to represent our shareholders to the best of her considerable abilities. John joined our
Board in 2012. With his distribution background, John brought an insight into the distribution industry to our
Board, Health & Safety and Audit Committees.
We welcome our newest Board member, Annie Thabet. Annie brings more than 35 years of business
experience and an in-depth knowledge of the Quebec marketplace to our Board.
THE FUTURE
At the end of 2017, commodity prices were stronger than they’ve been for several years. Demand was also
steady. As we move forward in 2018, we are buoyed by the positive trends in both demand and pricing in our
markets. We believe, in light of the 232 tariffs, that steel prices will remain near current levels which should
result in increased margins in our steel distributors and metals service centers segments. We will continue to
increase our value-added processing capabilities in our metal service centers with the addition of state of the art
equipment in several of our operations.
RUSSEL METALS22017 ANNUAL REPORT Jim Dinning
Chair of the Board
Brian Hedges
Chief Executive Officer
John Reid
President & COO
In 2017 our energy operations benefited from stronger oil prices, higher rig counts and tighter inventory levels in
the industry. In 2018 we expect an increase in project activity in line pipe, rig count volumes in Canada similar
to 2017 and rig count volumes consistent to slightly increased in the United States. Inventory management will
continue to be a priority for the energy products management team.
Our cost reduction programs enhanced our productivity and had a positive impact on earnings. In 2018 we will
continue to benefit from these productivity gains and expect that demand levels will remain steady.
We believe there will be acquisition opportunities in the service center and energy segments in 2018. With our
well-capitalized balance sheet we are positioned to take advantage of these opportunities.
Brian R. Hedges
Chief Executive Officer
James F. Dinning
Chair of the Board
John G. Reid
President and COO
RUSSEL METALS32017 ANNUAL REPORT A TRIBUTE TO
BRIAN R. HEDGES
We celebrate Brian's retirement with mixed emotions as we reflect on the indelible impact of Brian's 24 years of
leadership; including nine as CEO. We are thrilled for Brian to move to the next chapter of his life; yet
professionally we will miss his active leadership in the business.
When we look back on Brian's tenure with us, it can be best summed up in the phrase, "doing the right thing".
In 1997, Brian, then our CFO, and our CEO Bud Siegel emerged
as the key leadership team following a proxy battle. They were
charged with restructuring a struggling business, which required
divesting non-core assets and strengthening our Canadian service
center brand.
through major Canadian
acquisitions in the early 2000's and a significant U.S. acquisition in
2007 established our U.S. Service Center presence. Doing the
right thing meant focusing our Company on what we do well;
ensuring that we had sufficient operating capital and dealing with
under-performing assets.
Growth ensued
More importantly Brian was an unwavering sponsor of our cultural
transformation as we
flattened our organization structure,
empowered the operators to concentrate on the success of their
business units and moved the corporate group to a supportive role
in
re-designed our
reward pay-for-performance and
compensation plans
excellence at all levels, not just the executives, thereby fostering
an entrepreneurial environment with a keen focus on managing
working capital.
this new decentralized culture.
We
to
In 2009 Brian became CEO at a time when even the longest
serving and savviest CEO's were challenged. His primary concern
was maintaining the corporate culture during the economic
downturn that affected all businesses. The downturn was
particularly severe in our industry with an unprecedented drop in
demand and steel prices. Doing the right thing meant leading by
example by reducing executive pay and empowering our
operators to adjust their own operations to the economics of their
local markets. Our theme in his first year was "resilience" as the
Company put plans in place to minimize the disruption for our
customers, suppliers, employees and shareholders.
By the end of 2009, the business environment had improved and
in 2010 and 2011 we returned to profitability. Brian, with the
support of our Board, remained focused on both shareholders and
employees as we increased the dividend and ensured that our
that
pay-for-performance
performed well. Brian also emphasized shareholder value by
stepping away from acquisition opportunities that were not
accretive. Our growth was focused on moving further up the value
chain by adding processing equipment, implementing bar coding
and other technology, and expanding our existing operations.
rewarded operations
incentives
RUSSEL METALS42017 ANNUAL REPORT In 2012, Brian led the acquisition of industry leader Apex Distribution and related companies, our largest
acquisition to date. Apex added a new supply channel to our energy portfolio providing our shareholders with a
more stable income stream. Brian's capital markets experience led us to a Canadian first: our issue of high
yield debt instrument through a bought deal. Doing the right thing also meant spearheading a new pension plan
vehicle, a Defined Contribution Pension Plan, to support our employees in their retirement planning goals.
During 2013 and 2014 we continued to grow our Apex field store presence in Canada and the U.S. In early
2015, Brian's leadership would again be put to the test with yet another economic headwind as North American
energy and steel markets tumbled.
Doing the right thing meant supporting our operations by encouraging them to adjust their businesses according
to the activity levels in their respective markets and actively managing corporate costs. Our variable
compensation plans, designed years before, allowed us to reduce costs to match the lower economic activity.
During a time when cutting the dividend was a popular trend among energy-related companies, Brian worked
with the support of the Board to emphasize our commitment to shareholders by maintaining our dividend
through the downturn. Our countercyclical cash flows supported the dividend and his message was clear: we
should reward shareholders who maintained their position.
Much of his last two years have been devoted to the development of our leadership team. Brian focused on
mentoring management in the areas where he excels: capital markets, shareholder value and promoting our
entrepreneurial culture. The acquisitions that Brian had quarterbacked were now led by our management team
with Brian coaching from the sidelines; a nod to his football past.
Brian's tenure as CFO and CEO has served our shareholders and employees well. When he became CFO, our
market capitalization was $338 million and shareholders' equity was $314 million. Today, our market
capitalization is almost $1.8 billion, shareholders' equity is $830 million and shareholders have received
dividends totaling $1.1 billion over the last 24 years; a solid base for the future.
For those of us who have had the privilege of working with Brian during his journey, we thank him for his
counsel, friendship, and leadership.
John G. Reid
President and COO
James F. Dinning
Chair of the Board
RUSSEL METALS52017 ANNUAL REPORT FAREWELL
After nine years as Chief Executive Officer, it is time to step aside and let the next generation take the helm.
My years at Russel have been the highlight of my career: leading and working with our excellent team,
challenged with maintaining and growing your world-class metals distribution business passed on by my
predecessor, Bud Siegel. My successor, John Reid, with the full support of our Board of Directors, will be your
new Chief Executive Officer. With John's appointment, we have a third generation of consistent leadership that
will build on our prior successes.
Our Annual Report theme when I was appointed CEO is still relevant today - Great Company, Great Balance
Sheet, and Easily Understood. I'm proud of our continued market leadership when measured by Return on Net
Assets, Return on Equity and Shareholder Returns through our industry-leading dividend. Our shareholder
base has been very stable during my tenure. I believe that is because we remain focused on shareholder
returns and constantly and clearly communicate our direction and thinking. Our proactive business decisions,
such as the Apex acquisition, were crucial in our remaining a top quartile performer. Just as important are the
numerous "no" decisions we made because they did not add shareholder value. Since 2008, we have returned
$726 million to shareholders through dividends. In the same period we invested $653 million in acquisitions
and capital expenditures.
In the last nine years, despite the stresses of two major economic downturns, we continued to improve and
grow our businesses through acquisitions, greenfields and organic growth. During this time our dedicated
employees embraced change and remain our most important intangible asset. Our decentralized culture, which
is the backbone of our performance, has been embraced by our colleagues. Our regional management teams
foster strong relationships with employees, customers and suppliers. This results in business decisions made
in the local areas by leaders and managers who are best qualified to make these decisions. Our corporate
infrastructure has remained lean, in a supportive role, allowing our operations to remain focused on buying and
selling steel.
We take pride in our strong governance, ethical standards and our focus on being the best possible partner for
our employees, customers, suppliers and shareholders. This is achieved by consistently applying our values
and not letting them be compromised by short term profit motives. I would like to thank our Board of Directors
for their guidance to ensure we have integrity in all aspects of our business and reporting activities. In addition,
as a shareholder, I fully support their most important decision - the selection of my partner for nine years, John
Reid, as our new CEO.
The past 23 years have produced great memories and I'll begin by thanking my family for their love, support
and understanding throughout my career. Without their sacrifices this journey would not have been possible or
as enjoyable.
Next I thank my mentor, Bud Siegel, for sharing his wealth of industry knowledge, unique perspective, and
keeping me focused during our frequent discussions; which continue today. I'd like to extend my thanks to
Prem Watsa for his support in the early years as a major shareholder and for his continued counsel. Tony
Griffiths and Jim Dinning have been insightful and supportive Chairmen and have provided guidance on how to
handle new situations that crop up in a company of our size. Bill O'Reilly has filled numerous company roles in
the last twenty-four years; he has been a valuable partner since my first interview for the CFO position and
provided grounding and perspective when needed.
The heart of our company is our colleagues who buy, sell and ship the steel, pipe, valves, fittings, flanges and
other metals that we sell. Without their dedication to outstanding service there would not be a successful
business. I have had the pleasure of working with a great group and would like to thank those operators who
go back a long way - Michel Vaillancourt in Quebec, Bruce Robb in Western Canada, Joe Mangialardi in
Ontario, Derek Currah at Comco, Mike Harris at Pioneer, Glenn Peel at Sunbelt and Doug Thompson at Wirth.
Their partners, the regional controllers, have also made major contributions to our success.
RUSSEL METALS62017 ANNUAL REPORT Running a decentralized company puts considerable stress on the corporate office but I have had the luxury of
the support of the strongest corporate staff in the industry led by Maureen Kelly our VP Information Systems,
Marion Britton our Chief Financial Officer, Lesley Coleman our VP Controller, David Halcrow our VP
Purchasing, and Rick Greaves our VP Credit. During a long career we all have special people we turn to for
every day assistance and I would like to thank several that have always been there for me - Hanan Eskandar,
Cheri Saxon, Sherri McKelvey, and Rose Sequeira in corporate, Wayne McCormick, Shelly MacIvor, and
Shaun Wright in information systems and Beverley Downer in human resources; all long time employees of the
company.
To all of our stakeholders, thank you for all the encouragement and support that you have provided over my 24
years of service. I look forward to continuing my service as a member of your Board.
Brian R. Hedges
Chief Executive Officer
RUSSEL METALS72017 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, 2017, 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 14, 2018
B. R. Hedges
Chief Executive Officer
M. E. Britton
Executive Vice President and
Chief Financial Officer
RUSSEL METALS82017 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2017
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, 2017, 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 14, 2018.
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 METALS92017 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 2017 of $124 million were almost double our net earnings of $63 million in 2016. Basic
earnings per share was $2.00 for 2017 compared to $1.02 for 2016. The earnings per share in 2016 included a
gain of $0.27 per share on the sale of properties. Higher demand and steel prices led to increased revenues
and operating profits in all of our segments.
SUMMARIZED FINANCIAL INFORMATION
The following tables disclose selected information related to revenues, earnings and common shares over the
last three years.
2017
(in millions, except
per share data and volumes)
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
Year
Ended
Dec. 31
Revenues
Earnings before interest, finance expense and taxes
Net earnings
$ 803.5
47.9
29.6
$ 816.5
54.1
32.5
$ 850.9
57.5
33.7
$ 825.1
46.9
28.0
$ 3,296.0
206.4
123.8
Basic earnings per common share
$ 0.48
$ 0.52
$ 0.55
$ 0.45
$
2.00
Diluted earnings per common share
$ 0.48
$ 0.52
$ 0.55
$ 0.45
$ 2.00
Total assets
Non-current financial liabilities
Dividends paid
Market price of common shares
High
Low
$ 1,611.4
$ 296.0
$ 0.38
$ 1,665.4
$ 296.1
$ 0.38
$ 1,796.7
$ 296.3
$ 0.38
$ 1,759.1
$ 296.5
$ 0.38
$ 1,759.1
$ 296.5
$ 1.52
$ 29.78
$ 25.13
$ 28.65
$ 23.67
$ 28.47
$ 24.61
$
$
29.51
27.16
$ 29.78
$ 23.67
Shares outstanding end of quarter
Average shares outstanding
Number of common shares traded on the TSX
61,792,194 61,792,194 61,792,194 61,890,197 61,890,197
61,754,827 61,733,614 61,779,875 61,812,162 61,788,013
9,812,965 50,514,518
17,146,636 12,951,578 10,603,339
RUSSEL METALS102017 ANNUAL REPORT 2016
(in millions, except
per share data and volumes)
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
Year
Ended
Dec. 31
Revenues
Earnings before interest, finance expense and taxes
Net earnings
$ 662.1
16.6
7.8
$ 623.7
30.0
16.4
$ 639.2
27.6
15.9
$ 653.6
44.8
22.7
$ 2,578.6
119.0
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 on the TSX
61,702,560 61,703,560 61,703,560 61,735,485 61,735,485
61,702,560 61,702,736 61,703,560 61,711,054 61,704,990
9,655,118 52,713,741
7,357,465
19,655,847 16,045,311
2015
(in millions, except
per share data and volumes)
Revenues
Earnings (loss) before interest,
finance expense and taxes
Net earnings (loss)
Quarters Ended
Mar. 31
June 30
Sept. 30
Dec. 31
Year
Ended
Dec. 31
$ 903.9
$ 761.3
$ 773.4
$ 673.0
$ 3,111.6
36.6
18.5
31.1
16.4
19.0
12.8
(172.8)
(135.3)
(86.1)
(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 on the TSX
61,701,628 61,701,628 61,701,628 61,702,560 61,702,560
61,678,145 61,701,628 61,701,628 61,702,226 61,696,592
17,543,301 15,792,944 15,319,931 18,350,285 67,006,461
RUSSEL METALS112017 ANNUAL REPORT RESULTS OF OPERATIONS
The following table provides earnings before interest, other finance expense 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
Gain on sale of properties
Other
2017
2016
$ 1,635.2
1,270.2
380.1
10.5
$ 1,383.5
881.2
304.5
9.4
$ 3,296.0
$ 2,578.6
$ 80.0
106.8
34.2
(19.2)
-
4.6
$ 58.1
18.9
29.0
(18.6)
27.7
3.9
2017
change as
a % of 2016
18%
44%
25%
28%
38%
465%
18%
(3%)
Earnings before interest, finance expense and income taxes
$ 206.4
$ 119.0
73%
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
20.7%
19.5%
17.5%
20.1%
4.9%
8.4%
9.0%
6.3%
21.6%
15.5%
18.5%
19.5%
4.2%
2.1%
9.5%
4.6%
Results of our U.S. operations for the year ended December 31, 2017 were converted at $1.2981 per US$1
compared to $1.3256 per US$1 for the year ended December 31, 2016. The decline of the U.S. dollar in 2017
versus 2016 decreased revenues, expenses and profits for our U.S. operations when translated to Canadian
dollars. Our U.S. operations represented approximately 30% of our total revenues. The exchange rate used to
translate the balance sheet at December 31, 2017 was $1.2545 per US$1 versus $1.3427 per US$1 at
December 31, 2016.
ANNUAL FINANCIAL HIGHLIGHTS
(in millions, except per share amounts)
Revenues
Earnings before interest, finance expense and income taxes
Net earnings (loss)
Basic earnings (loss) per share
2017
$ 3,296
206
124
2.00
2016
$ 2,579
119
63
1.02
2015
$ 3,112
(86)
(88)
(1.42)
RUSSEL METALS122017 ANNUAL REPORT Description of operations
METALS SERVICE CENTERS
a)
We provide processing and distribution services to a broad base of approximately 46,000 end users through a
network of 51 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, Color Steels, 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 2017 and 2016 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. Steel prices at the beginning of 2017 were significantly higher than most of
2016 and the price environment was more stable than the two prior years. Steel price increases were
announced in late 2017 and in the first quarter of 2018 resulting in increased selling prices in the 2018 first
quarter.
In April 2017, the U.S. Department of Commerce self-initiated an investigation under section 232 of the Trade
Expansion Act of 1962 to determine whether imports of foreign-made steel were harming U.S. national security.
Trade sanctions from both the U.S. Department of Commerce and the Canadian International Trade Tribunal
have been awaiting the results of the U.S. section 232 investigation. On January 11, 2018, the U.S.
Department of Commerce presented the executive branch with their preliminary report, which has not been
made public. The executive branch has 90 days to decide whether it will take action.
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 the fourth quarter of 2017, the Canadian International Trade
Tribunal initiated an expiry review on carbon steel welded pipe from various countries. The U.S. Department of
Commerce announced an affirmative final determination of countervailing duties of cold drawn mechanical
tubing from China and India.
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 products 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 operations, have
operations in all regions of Canada and are affected by general regional economic conditions. Our large market
share and diverse customer base of approximately 29,000 Canadian customers means that our results tend to
mirror the performance of the regional economies of Canada. In 2017 we acquired Color Steels, which
expanded our Canadian service center product line into pre-painted flat rolled product. Our U.S. operations,
which have approximately 17,000 customers, are impacted by the local economic conditions in the regions that
they serve.
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.
RUSSEL METALS132017 ANNUAL REPORT Metals service centers segment results -- 2017 compared to 2016
c)
Revenues for 2017 increased 18% to $1.6 billion compared to 2016 revenues of $1.4 billion due to stronger
activity and the acquisition of Color Steels. Tons shipped in the metals service centers segment in 2017,
excluding Color Steels, increased 6% over tons shipped in 2016. Alberta and Ontario experienced the most
significant increases. The return of activity related to oil and gas in Alberta and increased value-added
processing led to stronger activity in those regions. The average selling price of metal for 2017 was
approximately 11% higher than the average selling price for 2016.
Gross margin as a percentage of revenues was 20.7% which was lower than 2016 gross margins of 21.6%.
Rising inventory costs throughout 2016 and 2017 resulted in a lower gross margin as a percentage of revenues
in 2017.
Our average revenue per invoice for 2017 was approximately $1,846 compared to $1,603 for 2016, reflecting
larger order sizes and price increases. We handled approximately 3,514 transactions per day in 2017
compared to 3,405 per day in 2016.
Operating expenses as a percentage of revenues improved for 2017 at 16% compared to 17% in 2016.
Operating expense dollars were 7% higher than 2016 to support the increased tons shipped in 2017.
Metals service centers operating profits for 2017 were $80 million compared to $58 million for 2016 mainly
related to higher steel prices, stronger demand and increased value-added processing.
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 48 Canadian and 20 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 2017 and 2016 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 stabilized in 2016 and increased slightly in 2017. Rig activity in both Canada and
the U.S. recovered in 2017 to the strongest level since 2014, benefiting our energy products segment.
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
have reduced imports of these products. In the first half of 2017, the U.S. Department of Commerce completed
an administrative review of OCTG from South Korea. In January 2018, U.S. pipe mills announced a trade
petition on imported large diameter pipe from six countries including Canada and the Canadian International
Trade Tribunal initiated an expiry review on certain seamless casing from China. The U.S. section 232
investigation, referred to under metal service centers, may have an effect on pipe prices the extent of which is
unknown. Prices of valves and fittings are not as sensitive to steel price fluctuations because they are highly
engineered products.
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. Drilling related to oil and natural gas in Western Canada historically peaks during
the period from October to March.
RUSSEL METALS142017 ANNUAL REPORT Energy products segment results -- 2017 compared to 2016
c)
Revenues in our energy products segment increased 44% to $1.3 billion for 2017, compared to $0.9 billion for
2016 due to higher activity at all operations in the segment. Improved selling prices and increased demand in
response to higher drilling activity led to increased revenues.
Gross margin as a percentage of revenue was 19.5% for 2017 compared to 15.5% in 2016. The reduction of
excess inventory in the industry, product shortages and stronger demand resulted in stronger margins.
Operating expenses as a percentage of revenues improved to 11% compared to 13% in 2016. Operating
expense dollars increased 20% which was a result of higher volumes and variable compensation offset by
continued operating efficiencies.
Stronger demand and higher selling prices generated higher segment operating profits of $107 million for 2017
compared to $19 million for 2016.
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 2017 and 2016 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 and pipe from specified countries. New duties on imports from additional
countries were levied by the U.S. Department of Commerce in 2017 and early in 2018. We continue to monitor
the section 232 investigation discussed in more detail under the metals service center section.
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.
Our Canadian operations source product outside of Canada that is priced in U.S. dollars and may be subject to
movements in the Canadian dollar.
Steel distributors segment results -- 2017 compared to 2016
c)
Steel distributors revenues increased 25% to $380 million for 2017 compared to $305 million in 2016, due to
increased volumes.
Gross margin as a percentage of revenues was 17.5% for 2017 compared to 18.5% for 2016.
Operating expenses as a percentage of revenue were 9% for 2017 and 2016. Operating expenses increased
17% mainly related to increases in volume and variable compensation.
RUSSEL METALS152017 ANNUAL REPORT Steel distributors operating income was $34 million compared to $29 million in 2016 due to increased volumes.
CORPORATE EXPENSES -- 2017 COMPARED TO 2016
Corporate expenses were $19 million in 2017 and 2016.
CONSOLIDATED RESULTS -- 2017 COMPARED TO 2016
Operating profits more than doubled to $206 million in 2017 compared to $91 million in 2016 due to higher
revenues and stronger demand in all segments.
GAIN ON SALE OF PROPERTIES
In December 2016 we closed the sale of our 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. In December 2017, we merged two of our Quebec locations and sold
the excess property for a small gain.
INTEREST EXPENSE AND INCOME
Net interest expense was $24 million for 2017 compared to $22 million for 2016 as higher revenues resulted in
higher debt levels to support increased working capital.
OTHER FINANCE EXPENSE AND INCOME
We recorded finance expense of $3.3 million in 2017 related to the fair value of the contingent consideration on
our Apex Distribution acquisition. Their improved 2017 earnings resulted in this final payment under the
agreement, which ended in 2017.
INCOME TAXES
We recorded a provision for income taxes of $55 million in 2017 compared to a provision of $35 million for
2016. Our effective income tax rate for 2017 was 30.9% compared to 35.5% for 2016. The U.S. Tax Reform,
which passed in December 2017, did not result in a significant change in the provision for income taxes as net
timing differences were negligible at December 31, 2017. In 2018, the U.S. Tax Reform will have a positive
effect on net earnings as a result of the reduction of the U.S. federal tax rate from 35% to 21%. Our U.S.
combined federal and state statutory rate should approximate our combined Canadian statutory rate.
NET EARNINGS
Net earnings for 2017 were $124 million compared to $63 million in 2016. Basic earnings per share for 2017
was $2.00 per share compared to $1.02 per share in 2016 as all segments experienced improved results.
SHARES OUTSTANDING AND DIVIDENDS
The weighted average number of common shares outstanding for 2017 was 61,788,013 compared to
61,704,990 for 2016 as a result of the exercise of options. Common shares outstanding at December 31, 2017
and February 14, 2018 were 61,890,197.
We paid common share dividends of $94 million or $1.52 per share in 2017 and 2016.
We have outstanding $300 million principal amount 6% 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. At the
current dividend rate, there is sufficient room to continue to pay the dividend to the maturity of the Senior Notes.
RUSSEL METALS162017 ANNUAL REPORT 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. In addition, if our excess borrowing base were to be insufficient 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 EBITDA:
(millions)
Net earnings
Provision for income taxes
Interest and finance expense, net
Earnings before interest, finance expense and income taxes (EBIT)
Depreciation and amortization
2017
$ 123.8
55.4
27.2
206.4
34.2
2016
$ 62.8
34.5
21.7
119.0
35.1
Earnings before interest, income taxes, depreciation and amortization (EBITDA)
$ 240.6
$ 154.1
We believe that 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 EBITDA are significant in assessing our operating
results and liquidity. Therefore, EBITDA should not be considered in isolation or as an alternative to cash from
operating activities or other combined income or cash flow data prepared in accordance with GAAP.
CAPITAL EXPENDITURES
Capital expenditures were $36 million in 2017 compared to $17 million in 2016. The increase in expenditures
included the expansion of our Edmonton facility to include a structural yard, the purchase of a previously leased
facility in Wisconsin, the merger of two of our Quebec facilities and continued investment in value-added
processing equipment. The property changes are expected to reduce costs long-term, and the investment in
processing equipment is expected to increase gross margins at our metals service centers. Depreciation
expense was $28 million in 2017 and $29 million in 2016.
LIQUIDITY
At December 31, 2017, we had net debt, defined as cash less bank indebtedness, of $82 million compared to
net cash of $147 million at December 31, 2016. We generated cash of $216 million from operations during
2017 due to strong earnings and $251 million of cash was utilized for working capital to support higher
revenues. We utilized cash of $36 million for capital expenditures, $94 million for dividends to shareholders and
$26 million for the Color Steels acquisition.
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 and the increased
business activity in 2017 utilized $294 million in cash to support increases in these balances.
Total assets were $1.8 billion at December 31, 2017 compared to $1.5 billion at December 31, 2016. At
December 31, 2017 current assets excluding cash represented 79% of our total assets excluding cash versus
75% at December 31, 2016.
Inventory purchases utilized cash of $208 million in 2017. Inventories were higher in all segments, particularly
energy products, during 2017 due to increased demand and steel prices. Inventories represented 47% of our
total assets at December 31, 2017 compared to 41% at December 31, 2016.
RUSSEL METALS172017 ANNUAL REPORT 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
2017
$ 302
414
104
$ 820
Sept. 30
2017
$ 306
345
125
June 30
2017
$ 282
314
120
Mar. 31
2017
$ 280
267
81
Dec. 31
2016
$ 252
288
76
$ 776
$ 716
$ 628
$ 616
Dec. 31
2017
Sept. 30
2017
June 30
2017
Mar. 31
2017
Dec. 31
2016
4.5
2.3
3.2
3.2
4.4
3.1
2.6
3.5
4.6
3.1
2.7
3.6
4.3
4.2
3.0
4.1
4.2
2.9
3.5
3.5
At December 31, 2017, our metals service centers had higher inventory tons at higher average prices
compared to December 31, 2016. Tons increased to support stronger activity levels.
During 2017 inventory levels increased in our energy products operations to support the stronger activity in the
oil and gas sector in 2017 and which is expected to continue into the first quarter of 2018.
Inventory levels at our steel distributors increased to support higher demand.
Accounts receivable utilized cash of $86 million in 2017 reflecting higher revenues. Accounts receivable
represented 27% of our total assets excluding cash at December 31, 2017 and 2016.
During 2017, we made income tax payments less recoveries of $34 million compared to $3 million for 2016, due
to increased earnings.
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
2017
2016
$ 216.1
(35.7)
$ 94.1
(16.7)
$ 180.4
$ 77.4
We believe that free cash flow may be useful in assessing our ability to pay dividends, interest, 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% $300 million Unsecured Senior Notes due April 19, 2022
2017
2016
$ 297
$ 296
RUSSEL METALS182017 ANNUAL REPORT CASH AND BANK CREDIT FACILITY
(millions)
Bank loans
Cash net of outstanding cheques
Net (debt) cash
Letters of credit
Facility
Borrowings and letters of credit
Letters of credit
Facility availability
Available line based on borrowing base
2017
$ (223)
141
(82)
(34)
2016
$ (43)
190
147
(39)
$ (116)
$ 108
$ 350
50
$ 400
$ 400
$ 350
50
$ 400
$ 400
At December 31, 2017, we had a credit facility with a syndicate of Canadian and U.S. banks totaling $400
million expiring September 21, 2019. The facility provides $50 million for letters of credit and $350 million which
can be utilized for borrowings or additional letters of credit. 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. On February 6, 2018, we amended and extended this facility to
increase total borrowings and letters of credit from $400 million to $450 million expiring September 21, 2021.
As of December 31, 2017, we were entitled to borrow and issue letters of credit totaling $400 million under this
facility. At December 31, 2017, we had $223 million in borrowings and $34 million of letters of credit
outstanding. At December 31, 2016 we had $43 million in borrowings and letters of credit of $39 million.
At December 31, 2017, we were in compliance with all of our financial covenants.
With our cash, cash equivalents and our bank facility we have access to approximately $264 million of cash
based on our December 31, 2017 balances. The use of our bank facilities has been predominantly to fund
working capital requirements, acquisitions and trade letters of credit for inventory purchases.
CONTRACTUAL OBLIGATIONS
As at December 31, 2017, we were contractually obligated to make payments as per the following table:
Contractual Obligations
(millions)
Bank indebtedness
Accounts payable
Long-term debt
Long-term debt interest
Operating leases
Total
Payments due in
2018
$ 208
366
-
18
23
2019
and 2020
2021
and 2022
2023 and
thereafter
$
-
-
-
36
35
$
-
-
300
28
22
$
-
-
-
-
22
Total
$ 208
366
300
82
102
$ 615
$
71
$
350
$ 22
$ 1,058
As part of the purchase consideration for Apex Monarch we agreed to pay additional cash consideration during
the five years ending 2018, based on earnings before interest and taxes and return on net assets. We do not
forecast any additional payment related to this earnout.
RUSSEL METALS192017 ANNUAL REPORT We provide defined contribution pension plans for a majority of our Canadian and U.S. employees; however, we
have obligations related to multiple defined benefit pension plans in Canada, as disclosed in Note 14 of our
2017 consolidated financial statements. During 2017, we contributed $5 million to these plans. We expect to
contribute approximately $6 million to these plans during 2018. 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 $11
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, which are not
material, 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.
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, 2017 was approximately $1 million lower than our reserve at December 31, 2016.
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 reserve level at December 31, 2017 was $19 million lower than the level at December
31, 2016 due to a stronger price environment and the sale of slow moving product which utilized a portion of the
reserves as intended.
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. Goodwill is tested for impairment on an
annual basis which resulted in no impairment for the years ended December 31, 2017 and 2016.
RUSSEL METALS202017 ANNUAL REPORT
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.
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.
During 2017 we settled and paid an energy products customer claim relating to product that was distributed
from 2010 to 2012. We had previously provided for this claim.
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 $138 million in plan assets at December 31, 2017, which is approximately $10 million
higher than December 31, 2016. The discount rate used on the employee benefit plan obligation for December
31, 2017 was 3.25%, which is 50 basis points lower than the discount rate at December 31, 2016.
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.
RUSSEL METALS212017 ANNUAL REPORT
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, 2017. 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.
VISION AND STRATEGY
The metals and energy product distribution business is a mature, cyclical industry. We believe we enhance
profitability by operating with the lowest possible net assets at all times. This reduces borrowings and
minimizes interest expense in all periods of the economic cycle and creates returns on net assets that are more
stable. 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
average profits and that we will generate earnings over the cycle in the top quartile of the industry.
Growth from selective acquisitions is also part of our strategy. We focus on investment opportunities in metals
and energy distribution 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. In addition, we will continue to invest in value-added processing that allows for growth and will
further stabilize our returns. We completed the acquisition of Color Steels in 2017 which provided a new
product line to our Canadian service center operations and we continue to review opportunities for additional
acquisitions.
We believe that the steel pricing cycle will continue to be highly volatile, and that our decentralized
management structure and philosophy allows the fastest reaction to changes that affect the industry and will be
the most successful. We will continue to invest in our business systems to enable faster reaction times to ever
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 cyclical nature of the steel industry, modest capacity utilization rates for North
American steel producers and import availability.
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 and made us one of the largest energy services companies in Canada.
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 METALS222017 ANNUAL REPORT
FOURTH QUARTER RESULTS
The following table provides earnings 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
Gain on sale of properties
Other
Quarters Ended December 31
2017
2016
2017
change as
a % of 2016
27%
24%
32%
26%
$ 418.4
299.9
104.4
2.4
$ 329.5
241.7
79.3
3.1
$ 825.1
$ 653.6
$ 15.7
27.6
7.5
(4.8)
-
0.9
$ 7.2
5.3
7.6
(4.6)
27.7
1.6
Earnings before interest, finance expense and income taxes
$ 46.9
$ 44.8
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
19.3%
21.3%
14.9%
19.7%
3.8%
9.2%
7.1%
5.7%
20.6%
13.8%
16.1%
17.9%
2.2%
2.2%
9.6%
6.9%
Revenues in the fourth quarter of 2017 were 26% higher than the same quarter in 2016. Operating income was
$47 million compared to $17 million in 2016.
Metals service centers revenues were 27% higher than the same quarter in 2016 as a result of increased
activity, higher selling prices and the Color Steels acquisition. Same store tons shipped in the fourth quarter of
2017 for metals service centers were 13% higher than the fourth quarter of 2016 and same store selling prices
were 9% higher than the fourth quarter of 2016. Gross margin as a percentage of revenues decreased to
19.3% for the fourth quarter of 2017 from 20.6% for the fourth quarter of 2016.
The operating profits in our energy products segment of $28 million for the fourth quarter of 2017 were
approximately five times higher compared to the same quarter last year. Stronger oil and gas prices led to
higher demand in all of our energy operations.
Our steel distributors reported 2017 operating income which approximated that of the same quarter last year as
higher 2017 revenues were offset by lower margins.
Earnings per share for the fourth quarter of 2017 was $0.45 compared $0.37 for the fourth quarter of 2016. The
fourth quarter of 2016 included earnings per share of $0.24 from the gain on sale of properties net of
withholding taxes related to the repatriation of cash to Canada.
OUTLOOK
We believe that the strength in the energy markets will continue into the first quarter of 2018 and that demand
will increase modestly in metals service centers and steel distributors. We expect that steel price increases will
contribute positively to our results. The U.S. tax reform reduces our effective tax rate and is expected to have a
positive impact on our net earnings.
RUSSEL METALS232017 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, 2017 and December 31, 2016, and the
consolidated statements of earnings, consolidated statements of comprehensive income, 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, 2017 and December 31, 2016, and its financial performance
and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
February 14, 2018
Toronto, Ontario
RUSSEL METALS242017 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
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)
Gain on sale of properties (Note 8)
Earnings before interest, finance expense and provision for income taxes
Interest expense (Note 19)
Other finance expense (Note 19)
Earnings before provision for income taxes
Provision for income taxes (Note 20)
Net earnings for the year
Basic earnings per common share (Note 17)
Diluted earnings per common share (Note 17)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31
(in millions of Canadian dollars)
Net earnings for the year
Other comprehensive income
Items that may be reclassified to earnings
Unrealized foreign exchange losses on translation of foreign operations
Items that may not be reclassified to earnings
Actuarial (losses) gains on pension and similar obligations,
net of taxes of $0.4 million (2016: $0.3 million)
Other comprehensive loss
Total comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
2017
2016
$ 3,296.0
2,632.7
274.9
182.0
-
206.4
23.9
3.3
179.2
55.4
$ 2,578.6
2,076.9
250.5
159.9
(27.7)
119.0
21.7
-
97.3
34.5
$ 123.8
$ 62.8
$ 2.00
$ 1.02
$ 2.00
$ 1.01
2017
2016
$ 123.8
$ 62.8
(31.4)
(14.8)
(1.3)
(32.7)
0.8
(14.0)
$ 91.1
$ 48.8
RUSSEL METALS252017 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)
Prepaids and other
Income taxes receivable
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
2017
2016
$ 125.8
446.2
819.9
17.2
4.5
$ 181.8
359.4
615.8
8.5
6.6
1,413.6
1,172.1
246.8
4.7
3.5
90.5
239.7
5.9
5.1
85.7
$ 1,759.1
$ 1,508.5
$ 207.7
365.7
21.6
0.1
$ 34.9
313.5
5.3
0.1
595.1
296.5
12.0
17.7
11.0
932.3
536.6
190.5
16.0
83.7
826.8
353.8
295.8
11.0
14.5
8.1
683.2
532.4
161.9
15.9
115.1
825.3
Total Liabilities and Shareholders' Equity
$ 1,759.1
$ 1,508.5
The accompanying notes are an integral part of these consolidated financial statements.
ON BEHALF OF THE BOARD,
J. Clark
Director
A. Laberge
Director
RUSSEL METALS262017 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOW
For the years ended December 31
(in millions of Canadian dollars)
Operating activities
Net earnings for the year
Depreciation and amortization
Provision for income taxes
Interest expense
Gain on sale of property, plant and equipment
Share-based compensation
Difference between pension expense and amount funded
Debt accretion, amortization and other
Change in fair value of contingent consideration
Interest paid
2017
2016
$ 123.8
34.2
55.4
23.9
(1.9)
0.7
(0.7)
0.7
3.3
(23.3)
$ 62.8
35.1
34.5
21.7
(29.2)
0.9
(9.7)
0.7
-
(22.7)
Cash from operating activities before non-cash working capital
216.1
94.1
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 (used in) 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
Cash from (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 (used in) from investing activities
Effect of exchange rates on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of the year
(86.2)
(208.0)
52.1
(8.6)
(250.7)
(33.8)
(68.4)
172.8
3.6
(93.9)
-
(0.1)
82.4
(35.7)
3.7
(25.6)
-
-
(57.6)
(12.4)
(56.0)
181.8
(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
Cash and cash equivalents, end of the year
$ 125.8
$ 181.8
The accompanying notes are an integral part of these consolidated financial statements.
RUSSEL METALS272017 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in millions of Canadian dollars)
Common
Shares
Retained
Earnings
Accumulated
Other
Contributed Comprehensive
Income
Surplus
Total
Balance, January 1, 2017
Payment of dividends
Net income for the year
Other comprehensive loss for the year
Recognition of share-based compensation
Share options exercised
Transfer of net actuarial losses on defined benefit plans
$ 532.4
-
-
-
-
4.2
-
$ 161.9
(93.9)
123.8
-
-
-
(1.3)
$ 15.9
-
-
-
0.7
(0.6)
-
$ 115.1
-
-
(32.7)
-
-
1.3
$ 825.3
(93.9)
123.8
(32.7)
0.7
3.6
-
Balance, December 31, 2017
$ 536.6
$ 190.5
$ 16.0
$ 83.7
$ 826.8
(in millions of Canadian dollars)
Balance, January 1, 2016
Payment of dividends
Net income for the year
Other comprehensive loss for the year
Recognition of share-based compensation
Share options exercised
Transfer of net actuarial gains on defined benefit plans
Common
Shares
Retained
Earnings
$ 531.7
-
-
-
-
0.7
-
$ 192.1
(93.8)
62.8
-
-
-
0.8
Accumulated
Other
Contributed Comprehensive
Income
Surplus
Total
$ 15.2
-
-
-
0.9
(0.2)
-
$ 129.9
-
-
(14.0)
-
-
(0.8)
$ 868.9
(93.8)
62.8
(14.0)
0.9
0.5
-
Balance, December 31, 2016
$ 532.4
$ 161.9
$ 15.9
$ 115.1
$ 825.3
The accompanying notes are an integral part of these consolidated financial statements.
RUSSEL METALS282017 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 ("TSX"), 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. 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 14,
2018.
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 METALS292017 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 closing rate in effect at the statement of financial position date, which was
$1.2545 per US$1 at December 31, 2017 (December 31, 2016: 1.3427 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, 2017, the average U.S. dollar Bank of Canada closing
exchange rate was $1.2981 per US$1 (2016: $1.3256 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 METALS302017 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 the Company on January 1, 2018. The
adoption of this standard affects our allowance for doubtful accounts but will not 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. The Company has not early adopted IFRS 15 and has elected to adopt the
standard on January 1, 2018 using the modified retrospective approach. It provides a single model in order to
represent 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 completed its implementation plan. The Company has determined that there are no required
changes to its information systems in order to implement the standard.
The Company has elected to adopt the standard using the modified retrospective approach and will apply the
new standard to all new contracts initiated after January 1, 2018. The Company does not have any obligations
remaining for contracts entered into prior to January 1, 2018. The Company has concluded that the
application of IFRS 15 will not 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 Company has certain arrangements with its customers with elements of variable consideration included,
which may affect quarterly revenues but are not expected to affect annual revenues. The standard will result
in increased disclosure on sources of revenues by product.
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 lease 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. The
Company also recognises a financial liability representing its obligation to make future lease payments. The
current lease payment will be charged to earnings on a declining basis and a portion representing financing
cost will be charged to interest.
RUSSEL METALS312017 ANNUAL REPORT
The Company's implementation team has developed an implementation plan, developed a lease database and
evaluated alternative information systems to manage the lease database. In early 2018, the Company expects
to select a lease management system and populate the system with the necessary data. The Company has
significant leased assets and expects that the implementation of IFRS 16 will have a material effect on its
statement of financial position and statement of earnings disclosure.
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 models, 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
2017 Acquisition
On September 1, 2017, the Company completed its acquisition of all of the outstanding common shares of
Color Steels Inc. ("Color Steels"), a metals service center with locations in Thornhill, Ontario and Laval,
Quebec. The following is a summary of the net assets acquired:
(millions)
Net working capital
Property, plant and equipment
Deferred income tax liability
Intangibles
Goodwill
Net identifiable assets acquired
Consideration:
Cash
$ 10.9
4.5
(1.6)
1.9
9.9
$ 25.6
$ 25.6
Accounts receivable of $6.3 million, which were included in net working capital, represented gross contractual
accounts receivable of which none is considered uncollectible at the time of acquisition. Any accounts
receivable which are not collected will result in a reduction of the consideration.
RUSSEL METALS322017 ANNUAL REPORT
Intangibles are comprised of customer relationships which will be amortized over a period of 15 years.
The amount of goodwill, none of which is deductible for tax purposes, represents the growth potential of the
new product line, processing and distribution of pre-finished metals and value added services of cut-to-length
and slitting.
The allocations described above are preliminary and subject to change following the final settlement of the
various holdbacks which may impact net working capital. Color Steels was consolidated into the Company's
operating results effective September 1, 2017 and is reported under the metals service centers segment.
The consolidated statements of earnings of the Company for the year ended December 31, 2017 includes the
incremental revenues of $16.6 million attributed to the business acquired.
If the acquisition had taken place at the beginning of the fiscal year 2017, management estimated that the
acquired business would have provided revenues of $46.3 million and earnings before interest, finance
expense and provision for income taxes of $3.7 million.
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 complemented 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.
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
2017
$ 18.1
107.7
$ 125.8
2016
$ 20.2
161.6
$ 181.8
RUSSEL METALS332017 ANNUAL REPORT
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.
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
2017
$ 437.1
9.1
$ 446.2
2016
$ 352.0
7.4
$ 359.4
2017
2016
$ 4.7
0.2
(1.4)
0.1
$ 3.6
$ 5.9
1.3
(2.9)
0.4
$ 4.7
At December 31, 2017 the allowance for doubtful accounts was less than 1.0% (2016: 2.0%), of accounts
receivable. An increase in the allowance of 1% of accounts receivable would decrease pre-tax earnings by
approximately $4.5 million for the year ended December 31, 2017 (2016: $3.6 million).
As at December 31, 2017 (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
$ 230.4
-
$ 157.2
(0.1)
$ 41.0
(0.3)
$ 12.1
(3.2)
$ 440.7
(3.6)
Total net trade receivables
$ 230.4
$ 157.1
$ 40.7
$ 8.9
$ 437.1
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
RUSSEL METALS342017 ANNUAL REPORT
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.
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
(millions)
Inventory expensed in cost of materials
Inventory impairment charge, net of reversals
2017
$ 2,632.7
3.6
2016
$ 2,076.9
11.0
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 METALS352017 ANNUAL REPORT
SUPPORTING INFORMATION
Cost (millions)
Balance, December 31, 2015
Business acquisition (Note 4)
Additions
Disposals
Foreign exchange
Balance, December 31, 2016
Business acquisition (Note 4)
Additions
Disposals
Foreign exchange
Land and
Buildings
Machinery
and Equipment
Leasehold
Improvements
$ 261.8
2.6
3.1
(26.9)
(1.6)
$ 239.0
-
8.3
(1.8)
(2.1)
$ 345.5
0.6
13.3
(11.4)
(2.5)
$ 345.5
4.5
26.5
(9.1)
(5.6)
$ 27.0
-
0.3
(0.4)
(0.1)
$ 26.8
-
0.9
-
(0.3)
Total
$ 634.3
3.2
16.7
(38.7)
(4.2)
$ 611.3
4.5
35.7
(10.9)
(8.0)
Balance, December 31, 2017
$ 243.4
$ 361.8
$ 27.4
$ 632.6
Accumulated depreciation and amortization
(millions)
Land and
Buildings
Machinery
and Equipment
Leasehold
Improvements
Balance, December 31, 2015
Depreciation and amortization
Disposals
Foreign exchange
Balance, December 31, 2016
Depreciation and amortization
Disposals
Foreign exchange
$ 107.4
8.1
(11.5)
(0.7)
$ 103.3
7.4
(1.1)
(1.7)
$ 237.7
20.1
(10.2)
(0.8)
$ 246.8
19.6
(8.0)
(2.4)
$ 21.4
0.6
(0.4)
(0.1)
$ 21.5
0.6
-
(0.2)
Total
$ 366.5
28.8
(22.1)
(1.6)
$ 371.6
27.6
(9.1)
(4.3)
Balance, December 31, 2017
$ 107.9
$ 256.0
$ 21.9
$ 385.8
Net Book Value (millions)
December 31, 2016
December 31, 2017
All items of property, plant and equipment are recorded and held at cost.
Land, included in land and buildings, was $43.4 million (2016: $43.2 million).
(millions)
Depreciation - cost of materials
Depreciation - other operating expenses
$ 239.7
$ 246.8
2017
$ 7.7
19.9
$ 27.6
2016
$ 8.1
20.7
$ 28.8
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.
No asset impairments were identified during 2017 and 2016.
RUSSEL METALS362017 ANNUAL REPORT
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
2017
$ 0.5
-
3.0
$ 3.5
2016
$ 1.2
0.7
3.2
$ 5.1
Amortization of deferred financing charges was $0.7 million (2016: $0.5 million).
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 METALS372017 ANNUAL REPORT
SUPPORTING INFORMATION
(millions)
Goodwill
Intangibles
Goodwill
a)
The continuity of goodwill is as follows:
Goodwill (millions)
Balance, beginning of the year
Business acquisition (Note 4)
Foreign exchange
Balance, end of the year
2017
2016
$ 36.3
54.2
$ 27.2
58.5
$ 90.5
$ 85.7
2017
2016
$ 27.2
9.9
(0.8)
$ 27.6
-
(0.4)
$ 36.3
$ 27.2
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)
2017
2016
Metals service centers
U.S.
Southeast
Canadian
Alberta
Color Steels
Atlantic / Ontario
$ 13.1
$ 13.9
11.0
9.9
2.3
11.0
-
2.3
$ 36.3
$ 27.2
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 2018, 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 2017, the pre-tax weighted average cost of capital used was 12.7% (2016: 14.6%). To monitor potential
impairment exposure, the Company performs a sensitivity analysis. For 2017 and 2016 a 1% increase in the
respective discount rate would not trigger a goodwill impairment.
The Company performed goodwill impairment tests to determine recoverable amounts during the fourth
quarter of 2017 and 2016. The recoverable amounts are determined based on a value in use calculation.
In 2017 and 2016, the estimated recoverable amount of all units exceeded their carrying values. As a result,
no impairment was recorded.
RUSSEL METALS382017 ANNUAL REPORT
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)
Foreign exchange
Metals
Service Centers
$ 17.9
1.9
(0.3)
Energy
Products
$ 70.7
-
-
Total
2017
Total
2016
$ 88.6
1.9
(0.3)
$ 88.8
-
(0.2)
Balance, end of the year
$ 19.5
$ 70.7
$ 90.2
$ 88.6
Accumulated amortization (millions)
Balance, beginning of the year
Amortization
Metals
Service Centers
Energy
Products
Total
2017
Total
2016
$ (9.5)
(1.2)
$ (20.6)
(4.7)
$ (30.1)
(5.9)
$ (24.4)
(5.7)
Balance, end of the year
$ (10.7)
$ (25.3)
$ (36.0)
$ (30.1)
Carrying amount
December 31, 2016
December 31, 2017
$ 58.5
$ 54.2
The carrying amount of intangible assets as at December 31, 2017 relates to customer relationships arising
from the acquisition of JMS Metals Services, Norton Metal Products, Alberta Industrial Metals, Apex
Distribution, Apex Western Fiberglass, Color Steels and other entities. The remaining amortization period for
customer relationships is 7 to 15 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.
The Company was in compliance with the financial covenants at December 31, 2017. At December 31, 2017,
the Company had borrowings of $223.0 million (2016: $43.0 million) and letters of credit of $33.7 million (2016:
$38.9 million) under this facility.
On February 6, 2018, the Company increased the maximum available under its credit facility to $450 million
and extended the term to September 21, 2021.
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.
RUSSEL METALS392017 ANNUAL REPORT
SUPPORTING INFORMATION
(millions)
Trade accounts payable and accrued expenses
Accrued interest
2017
$ 362.2
3.5
$ 365.7
2016
$ 309.9
3.6
$ 313.5
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% $300 million Unsecured Senior Notes due April 19, 2022
Finance lease obligations (Note 24)
Less: current portion
2017
$ 296.5
0.1
(0.1)
$ 296.5
2016
$ 295.7
0.2
(0.1)
$ 295.8
On April 19, 2012, the Company issued through a private placement, $300 million 6% Unsecured Senior Notes
(the "Notes") due April 19, 2022. Interest is due on April 19 and October 19 of each year.
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, 2017. 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.
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.
RUSSEL METALS402017 ANNUAL REPORT
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 as the defined benefits were closed for new employees over 20 years ago. 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 plans. On January 1, 2017, the Company merged its Thunder Bay Terminals Plan, a defined benefit
plan into the DCPP, subject to regulatory approval. The Company maintains one other defined benefit plan.
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 plans had a valuation date of January 1, 2017 and the remaining plan had 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 METALS412017 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
2017
2016
$ 3.8
0.2
0.2
$ 3.7
0.6
0.1
4.2
0.1
5.0
4.4
0.2
4.7
$ 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 due to financial assumption changes
Return on plan assets greater than the discount rate
Remeasurement effect recognized in other comprehensive income
Cumulative actuarial losses relating to pensions and benefits
Balance of actuarial losses at January 1
Net actuarial (losses) gains recognized in the year
Balance of actuarial losses at December 31
2017
2016
$ 1.3
(9.7)
6.7
$ 0.5
(4.7)
5.3
$ (1.7)
$ 1.1
$ (13.0)
(1.7)
$ (14.1)
1.1
$ (14.7)
$ (13.0)
There were no adjustments related to asset ceiling limits in other comprehensive income for the years ended
December 31, 2017 and 2016.
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
2017
3.25%
3.00%
2.75%
2016
3.75%
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 $5.4 million as of
December 31, 2017 (2016: $5.0 million).
The mortality assumptions used to assess the defined benefit obligation are based on 2014 Private Sector
Canadian Pensioners' Mortality Table (CPM2014Priv).
Informal practices that give rise to constructive obligations are included in the measurement of the defined
benefit obligation.
The Company has obligations included under other benefit plans for dental and medical costs for a group of
retired employees. The health care cost trend rates used were 5% for dental and medical. 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.
RUSSEL METALS422017 ANNUAL REPORT
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.
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
2016
2017
Other Benefit Plans
2016
2017
$ 135.6
3.8
0.1
5.0
(6.5)
8.4
$ 128.0
3.7
0.1
5.1
(5.6)
4.3
$ 4.1
-
-
0.1
(0.2)
(0.1)
$ 4.2
-
-
0.2
(0.2)
(0.1)
Balance, end of the year
$ 146.4
$ 135.6
$ 3.9
$ 4.1
(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 greater than discount rate
Pension Plans
2016
2017
Other Benefit Plans
2016
2017
$ 128.7
4.8
4.7
0.1
(6.5)
(0.2)
6.7
$ 110.5
4.5
13.9
0.2
(5.6)
(0.1)
5.3
$ -
-
0.2
-
(0.2)
-
-
$ -
-
0.2
-
(0.2)
-
-
Balance, end of the year
$ 138.3
$ 128.7
$ -
$ -
Defined benefit obligation, net
$ 8.1
$ 6.9
$ 3.9
$ 4.1
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
2017
2016
$ 3.7
$ 2.5
66.0
34.1
100.1
9.7
12.6
12.2
34.5
63.2
28.0
91.2
8.1
13.6
13.3
35.0
$ 138.3
$ 128.7
RUSSEL METALS432017 ANNUAL REPORT
The following table provides the defined benefit obligation for plans with surplus, partially funded pension plans
and unfunded plans.
(millions)
Defined benefit obligation
Plans with surplus
Partially funded plans
Unfunded plans
Defined benefit obligation
Pension Plans
2016
2017
Other Benefit Plans
2016
2017
$ (1.5)
9.6
-
$ -
6.9
-
$ -
-
3.9
$ -
-
4.1
$ 8.1
$ 6.9
$ 3.9
$ 4.1
c)
As at December 31, 2017 approximately 73% (2016: 74%) of the fair value of all pension plan assets
was invested in equities, 25% (2016: 20%) in fixed income securities, and 2% (2016: 6%) 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 15.3 years (2016: 14.5 years) for
defined benefit pension plans, 9.6 years (2016: 9.6 years) for executive pension arrangements and 7.6 years
(2016: 7.6 years) for other post retirement benefit plans. The Company expects to make contributions of $6.1
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, 2017 and 2016, 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, 2015
Share options exercised
Balance, December 31, 2016
Share options exercised
Balance, December 31, 2017
The continuity of contributed surplus is as follows:
(millions)
Balance, December 31, 2015
Share-based compensation expense
Exercise of options
Balance, December 31, 2016
Share-based compensation expense
Exercise of options
Balance, December 31, 2017
Number
of Shares
61,702,560
32,925
61,735,485
154,712
Amount
(millions)
$ 531.7
0.7
$ 532.4
4.2
61,890,197
$ 536.6
$ 15.2
0.9
(0.2)
15.9
0.7
(0.6)
$ 16.0
RUSSEL METALS442017 ANNUAL REPORT
Dividends paid and declared were as follows:
Dividends paid (millions)
Dividends per share
Quarterly dividend per share declared on
February 14, 2018 (February 16, 2017)
2017
2016
$ 93.9
$ 1.52
$ 93.8
$ 1.52
$ 0.38
$ 0.38
NOTE 16
SHARE-BASED COMPENSATION
ACCOUNTING POLICIES
The Company accounts for Share Options and Share Appreciation Rights ("SAR") at fair value. The Company
utilizes the Black-Sholes option pricing model to estimate the fair value of SARs and share options on the grant
date.
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.
Changes in the fair value of outstanding SARs are calculated at each reporting period as well as at settlement
date. The fair value of the award is recorded over the award vesting period.
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. From 2014, employees other than
senior officers no longer receive share options.
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
2016
2017
2,383,203
141,773
(154,712)
(428,545)
2,226,728
375,000
(32,925)
(185,600)
1,941,719
2,383,203
Weighted Average
Exercise Price
2016
2017
$ 26.25
28.99
23.27
33.32
$ 25.13
$ 27.49
18.11
17.85
26.22
$ 26.25
1,329,718
1,624,626
$ 26.04
$ 27.94
RUSSEL METALS452017 ANNUAL REPORT
The weighted average share price for the options exercised during the year was $28.61 (2016: $26.36)
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
2017
149,172
1,037,262
755,285
1,941,719
2016
550,772
1,012,537
819,894
2,383,203
The options expire in the years 2018 to 2027 and have a weighted average remaining contractual life of 5.4
years (2016: 5.0 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
2017
5%
26%
5 yrs
2.25%
$ 4.14
2016
5%
26%
5 yrs
2.22%
$ 2.16
Expected volatility is based on historical volatility over the last five years.
Share Appreciation Rights
On February 16, 2017, the Board of Directors approved a Share Appreciation Rights Plan. Under this plan the
Company may award SARs to officers and full-time employees as determined by the Board of Directors. The
SARS are cash settled and vest over a period of four years in the amount of one quarter each year and expire
in ten years from their grant date.
At December 31, 2017, there were 63,291 SARs outstanding at an exercise price of $28.99.
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, 2017, there were 250,021 DSUs outstanding (2016: 207,650). During 2017 and 2016, no
DSUs were redeemed. The liability and fair value of DSUs was $7.3 million at December 31, 2017 (2016: $5.3
million). Dividends declared on common shares accrue to units in the DSU plan in the form of additional
DSUs.
RUSSEL METALS462017 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
2017
2016
216,402
77,601
(219,858)
74,145
344,115
36,616
(164,329)
216,402
The RSU liability at December 31, 2017 was $1.3 million (2016: $4.7 million). The fair value of RSUs was $2.2
million at December 31, 2017 (2016: $5.5 million). 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
2017
2016
$ 0.6
4.6
0.7
$ 0.9
7.1
0.7
$ 5.9
$ 8.7
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)
Net income used in calculation of diluted earnings per share
(number of shares)
Weighted average shares outstanding
Dilution impact of share options
Diluted weighted average shares outstanding
2017
2016
$ 123.8
$ 62.8
2017
2016
61,788,013
145,076
61,704,990
335,693
61,933,089
62,040,683
RUSSEL METALS472017 ANNUAL REPORT
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
NOTE 19
FINANCE EXPENSE
(millions)
Interest on 6% Unsecured Senior Notes
Other interest expense
Interest expense
Other finance expense (Note 21)
2017
2016
$ 235.8
39.1
$ 274.9
$ 108.5
49.3
11.4
11.7
3.5
(1.9)
(0.5)
$ 182.0
2017
$ 18.7
5.2
23.9
$ 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
$ 3.3
$ -
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, 2017 and 2016 was $0.7 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 METALS482017 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
Statutory rate adjustment
2017
2016
$ 52.2
3.3
(0.1)
$ 24.5
10.0
-
$ 55.4
$ 34.5
RUSSEL METALS492017 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
Statutory tax rate change - U.S. tax reform
Gain on sale of properties
Withholding tax on funds repatriated to Canada
Other
Average effective tax rate
2017
26.9%
3.2%
0.3%
0.5%
(0.1%)
-
-
0.1%
30.9%
2016
26.9%
2.1%
0.6%
-
-
3.5%
2.7%
(0.3%)
35.5%
The combined Canadian statutory rate is the aggregate of the federal income tax rate of 15.0% (2016: 15.0%)
and the average provincial rates of 11.9% (2016: 11.9%). The 2017 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 and contingent consideration which is not tax deductible. The 2016
average effective tax rate was higher due to differing tax rules outside Canada, withholding tax and non-
operational income earned in a higher tax jurisdiction.
The U.S. tax reform, which reduced the U.S. Federal statutory tax rate from 35% to 21% has an immaterial
impact on 2017 as the net timing differences were negligible. Our future U.S. earnings will benefit from this
lower rate as the U.S. statutory rate including state tax will approximate our combined Canadian statutory rate.
c)
Deferred income tax assets and liabilities were as follows:
Deferred Income Tax Assets
(millions)
Balance December 31, 2015
Benefit (expense) to consolidated
statement of earnings
Reclass assets/liabilities and other
Balance December 31, 2016
Benefit (expense) to consolidated
statement of earnings
Reclass assets/liabilities and other
Property
Plant and
Losses Equipment
Pension
And
Benefits
Goodwill
And
Intangibles
Other
Timing
Total
$ 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)
$ 1.2 $ (6.5)
$ 0.3
$ 5.5 $ 5.4 $ 5.9
-
(1.2)
(0.1)
7.4
-
-
(0.2)
(2.3)
(0.4)
(4.4)
(0.7)
(0.5)
Balance December 31, 2017
$ - $ 0.8
$ 0.3
$ 3.0 $ 0.6 $ 4.7
Deferred Income Tax Liabilities
(millions)
Balance December 31, 2015
(Benefit) expense to consolidated
statement of earnings
Reclass assets/liabilities and other
Benefits to other comprehensive income
Balance December 31, 2016
(Benefit) expense to consolidated
statement of earnings
Reclass assets/liabilities and other
Benefits to other comprehensive income
Business acquisition (Note 4)
Property
Plant and
Losses Equipment
Pension
And
Benefits
Goodwill
And
Intangibles
Other
Timing
Total
$ -
$ 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
$ -
$ 7.8
$ (2.2) $ 12.0 $ (3.1) $ 14.5
0.1
(1.2)
-
-
(1.1)
7.2
-
1.1
-
-
(0.4)
-
0.6
(2.2)
-
0.5
2.9
(4.3)
-
-
2.5
(0.5)
(0.4)
1.6
Balance December 31, 2017
$ (1.1) $ 15.0
$ (2.6) $ 10.9 $ (4.5) $ 17.7
Net deferred liability at December 31, 2016
Net deferred liability at December 31, 2017
$ 8.6
$ 13.0
RUSSEL METALS502017 ANNUAL REPORT
d)
At December 31, 2017, the Company had U.S. state tax losses carried forward which, at U.S. state tax
rates, have an estimated value of $1.1 million (2016: $1.2 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, 2017 and 2016, the Company had $5.9 million and $6.3 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 (2016: $0.8 million).
e)
At December 31, 2017, the aggregate amount of temporary differences associated with undistributed
earnings of non-Canadian subsidiaries was $323.9 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 and Apex
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 METALS512017 ANNUAL REPORT
SUPPORTING INFORMATION
(millions)
Provision for decommissioning liabilities
Deferred compensation and employee incentives
Contingent consideration
Product warranty provision (Note 25)
Less: current position
2017
$ 2.4
8.6
3.3
-
14.3
(3.3)
2016
$ 2.7
10.0
-
20.0
32.7
(24.6)
$ 11.0
$ 8.1
a)
The liability for contingent consideration relating to Apex Distribution ended on November 30, 2017
and the liability for Apex Monarch will end on December 31, 2018. The Company provided $3.3 million of
contingent consideration in 2017 related to Apex Distribution. The Company's contingent consideration
obligations for Monarch is uncapped although the current estimate is nil.
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
2017
2016
$ 2.7
-
(0.3)
$ 3.4
-
(0.7)
$ 2.4
$ 2.7
c)
Deferred compensation includes the RSU and DSU 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 METALS522017 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 $49.3
million (2016: $42.1 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
Gain on sale of properties
Other income
Earnings before interest and income taxes
Interest and finance expense
Provision for income taxes
Net earnings
Capital Expenditures
Metals service centers
Energy products
Steel distributors
Other
Depreciation Expense
Metals service centers
Energy products
Steel distributors
Other
2017
2016
$ 1,635.2
1,270.2
380.1
3,285.5
10.5
$ 1,383.5
881.2
304.5
2,569.2
9.4
$ 3,296.0
$ 2,578.6
$ 80.0
106.8
34.2
$ 58.1
18.9
29.0
221.0
(19.2)
-
4.6
206.4
(27.2)
(55.4)
106.0
(18.6)
27.7
3.9
119.0
(21.7)
(34.5)
$ 123.8
$ 62.8
$ 29.8
4.8
0.8
0.3
$ 35.7
$ 22.5
4.1
1.0
-
$ 27.6
$ 13.0
2.8
0.9
-
$ 16.7
$ 23.6
4.3
0.8
0.1
$ 28.8
RUSSEL METALS532017 ANNUAL REPORT
(millions)
Current Identifiable Assets
Metals service centers
Energy products
Steel distributors
Non-Current Identifiable Assets
Metals service centers
Energy products
Steel distributors
2017
2016
$ 503.3
632.4
152.5
1,288.2
259.4
70.1
6.7
$ 408.9
459.4
116.9
985.2
241.8
75.5
7.3
Total identifiable assets included in segments
1,624.4
1,309.8
Assets not included in segments
Cash and cash equivalents
Income tax assets
Financial and 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
Canada
United States
Identifiable Assets
Canada
United States
125.8
9.2
3.5
(3.8)
181.8
12.5
5.1
(0.7)
$ 1,759.1
$ 1,508.5
$ 181.3
142.5
23.6
347.4
$ 151.5
111.9
12.9
276.3
207.7
39.3
296.6
12.0
29.3
34.9
19.8
295.9
11.0
45.3
$ 932.3
$ 683.2
2017
2016
$ 2,299.3
986.2
$ 3,285.5
$ 160.5
60.5
$ 221.0
$ 1,201.3
423.1
$ 1,624.4
$ 1,781.6
787.6
$ 2,569.2
$ 81.7
24.3
$ 106.0
$ 950.3
359.5
$ 1,309.8
RUSSEL METALS542017 ANNUAL REPORT
NOTE 23
RELATED PARTY TRANSACTIONS
During the years ended December 31, 2017 and 2016 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, 2017, 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
2017
$ 7.1
4.5
0.5
$ 12.1
2016
$ 4.6
2.2
0.5
$ 7.3
NOTE 24
FINANCIAL INSTRUMENTS AND RELATED RISK MANAGEMENT
Fair value measurement
ACCOUNTING POLICIES
a)
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.
Financial assets
b)
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 METALS552017 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.
Financial liabilities and equity instruments
c)
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 bank indebtedness, 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.
Derivative financial instruments
d)
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 METALS562017 ANNUAL REPORT
Leases
f)
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, 2017 (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, 2016 (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
$ 125.8
446.2
0.5
-
-
-
-
$ 572.5
Loans and
Receivables
$ 181.8
359.4
1.2
-
-
-
-
$ 542.4
Other
Financial
Liabilities
$ -
-
-
(207.7)
(365.7)
(0.1)
(296.5)
Total
$ 125.8
446.2
0.5
(207.7)
(365.7)
(0.1)
(296.5)
$ (870.0)
$ (297.5)
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)
For the year ended December 31, 2017, the fair value loss from derivative financial instruments on the
consolidated statement of earnings was $0.4 million (2016: gain of $0.6 million) including embedded derivative
and forward contracts.
Fair value
b)
The fair value of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and
accrued liabilities approximate their carrying amounts because of the short-term maturity of these instruments.
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".
RUSSEL METALS572017 ANNUAL REPORT
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, 2017 and 2016 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 long-term debt:
December 31, 2017 (millions)
6% $300 million Unsecured Senior Notes due April 19, 2022
Finance lease obligations
Total
Current portion
Long-term portion
December 31, 2016 (millions)
6% $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
$ 296.5
0.1
$ 308.6
0.1
$ 296.6
$ 308.7
$ 0.1
$ 296.5
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
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, 2017, nearly all cash and cash equivalents were held in 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, 2017 and 2016, other than
the allowance for doubtful accounts (Note 6). As at December 31, 2017, trade accounts receivable greater than
90 days represented less than 3% of trade accounts receivable (2016: 2%).
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.
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, 2017, the Company had outstanding forward foreign exchange contracts in the amount of
US$22.8 million, maturing in 2018 (2016: US$13.9 million maturing in 2017). A 1% change in foreign
exchange rates would not result in a significant increase or decrease in accounts payable or net earnings.
RUSSEL METALS582017 ANNUAL REPORT
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, 2017, the Company was contractually obligated to make payments under its financial
liabilities that come due during the following periods:
(millions)
2018
2019
2020
2021
2022
2023 and beyond
Total
Accounts
Payable
$ 365.7
-
-
-
-
-
$ 365.7
Long-Term
Debt Maturities
Long-Term
Debt Interest
$ -
-
-
-
300.0
-
$ 18.0
18.0
18.0
18.0
9.9
-
Operating
Lease
Obligations
$ 23.2
18.9
16.0
13.4
8.8
21.7
Total
$ 406.9
36.9
34.0
31.4
318.7
21.7
$ 300.0
$ 81.9
$ 102.0
$ 849.6
Operating lease expense for the year ended December 31, 2017 was $26.5 million (2016: $28.5 million).
At December 31, 2017, the Company was contractually obligated to repay its bank borrowings and letters of
credit under its bank facilities (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 METALS592017 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.
During 2017 the Company settled and paid an energy products customer claim relating to product that was
distributed from 2010 to 2012. The Company had previously provided for this claim.
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 acquisition of Apex Monarch,
based upon achievement of performance measures during the first five years of ownership which expires
December 31, 2018. The Company's current estimate is $nil.
RUSSEL METALS602017 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 2, 2018 at 10:00 am
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. COLEMAN
Vice President,
Controller &
Assistant Secretary
SHERRI L. MCKELVEY
Assistant Secretary
Edmonton
Processing Facility
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
ANNIE THABET
Corporate Director &
Partner at Celtis Capital
JOHN R. TULLOCH
Corporate Director
GLOSSARY
Book Value Per Share - Shareholders’ equity divided common shares outstanding at December 31
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 - Dividend per share divided by common share price at December 31
Earnings Multiple - Common share price at December 31 divided by basic earnings per common share
EBIT - Earnings before deduction of interest and income taxes
EBITDA - Earnings before deduction of interest, income taxes, depreciation and amortization
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 - EBIT over net assets employed
TRANSFER AGENT AND REGISTRAR
AST TRUST COMPANY (CANADA)
1 Toronto Street, Suite 1200
Toronto, Ontario, Canada M5C 2V6
T: 416.682.3860 F: 1.888.249.6189
inquiries@astfinancial.com
www.astfinancial.com
The Toronto Stock Exchange - RUS
NINE YEARS
6600 Financial Drive
Mississauga, Ontario
L5N 7J6
905-819-7777
1-800-268-0750
www.russelmetals.com