Russel Metals
Annual Report 2018

Plain-text annual report

Russel metals 2018 ANNUAL REPORT A YEAR IN REVIEW ACQUISITIONS On April 16, 2018, we acquired the operating assets and facilities of DuBose Steel to expand our U.S. service center operations and capabilities. DuBose is a full line structural steel service center operation with value-added processing capabilities serving customers along the east coast of the United States from its facility in Roseboro, North Carolina. We expanded our Ontario service center operations with the addition of Pemco Steel fabrication, located in Pembroke, Ontario. APEX GROUP in the center A discussion of keeping service incomplete without a nod to our would be Apex operations. Apex’s emphasis on service excellence has led to stellar results during 2018 for our Canadian and U.S. operations. Apex has been, and continues to be, the preemient oil field service store operation in Western Canada. U.S. LINE PIPE During 2018, the culmination of hard work by our Pioneer Pipe team provided in the opportunity for us to participate significant The team line pipe projects. put together a project plan that minimized risks inherent in projects of this size while still servicing the needs of our customers. JMS LASER PROCESSING CENTER In 2016, we acquired operating assets of Fab South Inc. which enabled us to add a BLM Tube Laser to our value-added processing capabilities in Tennessee. During 2018, we expanded our processing capabilities with the addition of two 10 kw Bystronic Fiber Lasers and a BLM Fiber Tube Laser to our Jackson, Tennessee JMS Laser Processing Center of Excellence. WESTERN CANADIAN LASERS Our value-added initiative has led to the addition of processing equipment in several of our service center operations. We added Fiber Lasers in several of our Western Canadian facilities including; Winnipeg South - Trumpf 5030 Fiber Laser, Russel Metals Processing in Saskatoon - Trumpf 3060 Fiber Laser, Calgary - Trumpf 3030 Fiber Laser and Prince George B.C. - CyLaser 6 kw Fiber Laser System. EDMONTON STRUCTURAL In 2015, we completed our new plate processing facility in Nisku near Edmonton Alberta. During 2018, we continued the consolidation of our Edmonton Service Center operations on our Nisku property with the completion of a new 60,000 square foot outside crane way, two overhead cranes, a production cutting saw shack and a beam drill line. TABLE OF CONT EN TS Financial Highlights A Message from our President & CEO Management’s Responsibility for Financial Reporting 1 2 4 Management’s Discussion and Analysis Independent Auditor’s Report Consolidated Financial Statements 5 22 24 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-----------------------------------------------> 2016 2017 2015 2014 2018 $4,165.0 219.0 330.9 7.9% 366.6 8.8% $3.53 $566.4 1,052.5 14.1 (470.6) 1,162.4 268.0 86.2 1,516.6 0.7 (32.3) (5.8) (26.5) $1,452.7 $4.2 443.6 447.8 1,324.7 $1,772.5 $1,004.9 $16.18 $300.1 $41.3 $35.7 6.0 5.4 4.8 1.2 31% 132% 23% 22% $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 1.2 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) nm (51.0) nm ($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% 62,106,895 62,028,991 7.1% $1.52 31% $32.65 $19.72 $21.33 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 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 METALS12018 ANNUAL REPORTA MESSAGE FROM OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER Reflecting on a strong 2018 and looking to the future, managing change remains our focus. During 2018 we faced and managed change in the political arena, erratic trade policy, disruption of traditional distribution channels, world steel price dynamics and on a more micro-level evolution of our Russel Metals team. Our decentralized management approach remained consistent as we emphasized servicing our local customer base and growing our business to support our industry-leading dividend. OPERATIONS Our metals service centers advanced our strategic objective of expanding our value- added processing capabilities and enabled our customers to grow their businesses with us as a valued business partner. Our team members are to be commended as they masterfully navigated the winds of change created by hastily implemented international trade policy and worked closely with our customers to optimize procurement solutions. Our acquisition of North Carolina-based DuBose Steel expanded our U.S. footprint to new markets on the U.S. east coast and we extended our Ontario operations into Pembroke, Ontario. I would like to take this opportunity to welcome the entire DuBose Steel and Pemco Steel teams to Russel Metals. In the energy products segment, our field stores expanded their North American footprint and added new products thereby allowing us to better serve our customer needs. Pioneer Pipe, our U.S. line pipe operation, evolved their business to encompass management of large project procurement and logistics during a time when product was scarce and tariffs added another level of complexity. Our steel distributor operations brought their international knowledge and expertise to our customer base and our own metals service center operations. Our knowledgeable traders successfully navigated the rapidly evolving shift in historic trade lanes and enabled customers to maintain continued supply and remain price competitive. MANAGEMENT Internally, we implemented our long-planned succession transition in several areas. In 2018, several long-term Russel employees who worked tirelessly to support our unique decentralized culture and our emphasis on shareholder returns, retired. In our last annual report, we honoured Brian Hedges, who served our shareholders for 23 years in the roles of CEO and CFO. Brian's straight forward no-nonsense approach to business and focus on shareholders left an indelible mark on our Company and the industry. In May 2018, Brian was elected to our Board of Directors and will continue to offer his insight to the Board and management alike. Rick Greaves, our Vice President of Credit, retired after 42 years in 2018. Rick's unique customer centric approach to both external and internal customers, proved invaluable as he led us to industry-leading credit metrics in support of our growth initiatives. Rick developed a truly superb credit team. David Sanderson, President of Color Steels, embarked on his planned retirement as he handed the leadership baton to his successor Grant Nixon. We would like to thank David for his leadership and professional demeanor evident throughout the leadership transition. Sharon Lee who served as our Director of Safety for 11 years, also retired in 2018. Sharon successfully trained her successors to ensure the continued emphasis on the safety improvements initiated during her tenure. We were fortunate to enjoy the numerous contributions made by all these individuals and their selfless approach to investing time with their successors speaks volumes to the quality of their leadership. Please join me in wishing all of them all the best in their well- deserved retirements. RUSSEL METALS22018 ANNUAL REPORT GOVERNANCE Personally, I want to thank our Chair, Jim Dinning, and the Board of Directors for the support, leadership, mentorship and encouragement that they provided to our team throughout 2018. They do a tremendous job of serving the shareholders as they balance the evolving board governance requirements while maintaining a pragmatic disciplined approach to the role of the board. I would also like to thank our executive team for their efforts in ensuring smooth succession transitions. It is an absolute pleasure to be part of the best team in the industry. Looking to the future, we will embrace the opportunities that continued business change will inevitably provide, knowing that we have the best people in the industry focused on keeping service in the center. John G. Reid President and Chief Executive Officer RUSSEL METALS32018 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, 2018, 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 7, 2019 J. G. Reid President and Chief Executive Officer M. E. Britton Executive Vice President and Chief Financial Officer RUSSEL METALS42018 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2018 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, 2018, 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 7, 2019. 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 METALS52018 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 2018 of $219 million were almost $100 million higher than our net earnings of $124 million in 2017. Basic earnings per share was $3.53 for 2018 compared to $2.00 for 2017. Improved demand in all operating segments, compared to 2017, and an elevated steel price environment effectively managed by our operations led to significantly higher operating earnings. UPDATE ON TARIFFS AND CANADIAN SAFEGUARDS Trade actions by government authorities have increased steel prices which has benefited producers and distributors; however, these actions have created significant uncertainty in the industry. The following is a summary of the major actions by government authorities. 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. On March 8, 2018, the U.S. President signed executive orders to implement import tariffs of 25% on steel and 10% on aluminum. These tariffs were implemented on March 23, 2018. Canada and Mexico were initially excluded from the tariffs; however, the exclusion was lifted and the tariffs were implemented on material from Canada and Mexico on June 1, 2018. Canada subsequently implemented retaliatory tariffs on steel and aluminum products from the U.S. effective July 1, 2018. On September 30, 2018, the U.S., Canada and Mexico reached an agreement to replace the NAFTA trade agreement but the agreement did not eliminate the steel and aluminum tariffs. The new agreement has yet to be ratified by the three countries. In October 2018, in response to concerns that the U.S. tariffs would cause an increase in foreign steel into the Canadian market, the Department of Finance announced provisional safeguards on seven steel product categories in the form of tariff rate quotas with a 25% surtax imposed on such goods above the specified quota. Formal hearings were conducted in early January 2019 and a final decision on tariffs is scheduled to be announced in April 2019. More details on these and other trade actions can be found in the sections that follow. We expect further developments on trade actions in 2019. RUSSEL METALS62018 ANNUAL REPORT SUMMARIZED FINANCIAL INFORMATION The following tables disclose selected information related to revenues, earnings and common shares over the last three years. 2018 (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 $ 931.3 60.6 38.5 $ 978.2 97.3 66.1 $ 1,140.1 101.6 68.2 $ 1,115.4 71.4 46.2 $ 4,165.0 330.9 219.0 Basic earnings per common share $ 0.62 $ 1.07 $ 1.10 $ 0.74 $ 3.53 Diluted earnings per common share $ 0.62 $ 1.06 $ 1.09 $ 0.74 $ 3.52 Total assets Non-current financial liabilities Dividends paid Market price of common shares High Low $ 1,924.2 $ 442.6 $ 0.38 $ 2,057.8 $ 443.0 $ 0.38 $ 2,140.9 $ 443.3 $ 0.38 $ 2,127.3 $ 443.6 $ 0.38 $ 2,127.3 $ 443.6 $ 1.52 $ 32.65 $ 27.08 $ 31.33 $ 26.24 $ 30.99 $ 26.20 $ 28.20 $ 19.72 $ 32.65 $ 19.72 Shares outstanding end of quarter Average shares outstanding Number of common shares traded on the TSX 61,965,644 62,077,045 62,090,045 62,106,895 62,106,895 61,921,421 62,012,928 62,081,187 62,097,921 62,028,991 8,981,225 10,136,481 14,371,151 49,516,725 16,027,868 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 METALS72018 ANNUAL REPORT 2016 (in millions, except per share data and volumes) Revenues Earnings before interest, finance expense and taxes Net earnings Basic earnings per common share Diluted earnings per common share Total assets Non-current financial liabilities Dividends paid Market price of common shares High Low Quarters Ended Mar. 31 June 30 Sept. 30 Dec. 31 Year Ended Dec. 31 $ 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 $ 0.13 $ 0.27 $ 0.26 $ 0.37 $ 1.02 $ 0.13 $ 0.27 $ 0.26 $ 0.36 $ 1.01 $ 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 RUSSEL METALS82018 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) 2018 2017 Segment Revenues Metals service centers Energy products Steel distributors Other Segment Operating Profits Metals service centers Energy products Steel distributors Corporate expenses Asset impairment Other $ 2,100.8 1,597.5 456.5 10.2 $ 4,165.0 $ 169.4 133.6 47.2 (20.4) (3.3) 4.4 $ 1,635.2 1,270.2 380.1 10.5 $ 3,296.0 $ 80.0 106.8 34.2 (19.2) - 4.6 variance as a % of 2017 28% 26% 20% 26% 112% 25% 38% (6%) Earnings before interest, finance expense and income taxes $ 330.9 $ 206.4 60% 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 23.3% 18.6% 19.1% 21.2% 8.1% 8.4% 10.3% 7.9% 20.7% 19.5% 17.5% 20.1% 4.9% 8.4% 9.0% 6.3% Results of our U.S. operations for the year ended December 31, 2018 were converted at $1.2961 per US$1 compared to $1.2981 per US$1 for the year ended December 31, 2017. Our U.S. operations represented approximately 35% of our total revenues. The exchange rate used to translate the balance sheet at December 31, 2018 was $1.3642 per US$1 versus $1.2545 per US$1 at December 31, 2017. ANNUAL FINANCIAL HIGHLIGHTS (in millions, except per share amounts) Revenues Earnings before interest, finance expense and income taxes Net earnings Basic earnings per share 2018 $ 4,165 331 219 3.53 2017 $ 3,296 206 124 2.00 2016 $ 2,579 119 63 1.02 RUSSEL METALS92018 ANNUAL REPORT Description of operations METALS SERVICE CENTERS a) We provide processing and distribution services to a broad base of approximately 35,000 end users through a network of 49 Canadian locations and 16 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, Pemco Steel, 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, DuBose Steel, 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 2018 and 2017 is found in the section that follows. Steel prices fluctuate significantly throughout the steel cycle. Steel prices are influenced by overall international demand, domestic demand, trade sanctions, iron ore prices, scrap steel prices and product availability. Volatile metal prices cause fluctuations in our operating results. U.S. coil product prices continued to soften in the fourth quarter of 2018 and U.S. long products and plate pricing remained steady. Due to tariffs on material moving between Canada and the U.S., product prices in Canada for coil, structural tubing and hot rolled plate were not based on the currency adjusted U.S. pricing as had been the historical practice of the mills. Canadian coil and structural tubing prices were lower than the equivalent U.S. price whereas plate prices were higher. In April 2017, the U.S. Department of Commerce self-initiated an investigation under section 232 of the Trade Expansion Act of 1962 which resulted in import tariffs of 25% on steel and 10% on aluminum. In response to these tariffs, Canada implemented retaliatory tariffs on steel and aluminum from the U.S. effective July 1, 2018. On September 30, 2018, the Canadian, U.S. and Mexican governments reached an agreement to replace NAFTA but the agreement did not eliminate the steel and aluminum tariffs. Supply side management, practiced by steel producers in North America, and international supply and demand, which impact steel imports, have historically affected product availability. Trade sanctions on specific products have been initiated either by steel mills or by North American government agencies. On December 21, 2018, the Canadian Border Services Agency ("CBSA") made a final determination of dumping and subsidization of cold rolled steel in coils or cut lengths from China, South Korea and Vietnam. On October 18, 2018, the CBSA issued a preliminary determination of dumping of carbon steel welded pipe from Pakistan, the Philippines, Turkey and Vietnam. During the fourth quarter of 2018 the CBSA initiated an expiry review on the alleged dumping of hollow structural sections from South Korea and Turkey. On January 22, 2019, the CBSA announced final dumping duties on corrosion resistant steel from China, Taiwan, Chinese Taipei, India and South Korea. On October 22, 2018, the Canadian Department of Finance announced provisional surcharges of 25% on seven steel product categories. Material imported into Canada from sources other than the U.S., Israel, Chile, Mexico and a number of developing countries are subject to provisional surcharges once the import volumes exceed an allowable quota. These surcharges are in place for 200 days from October 25, 2018. The Canadian International Trade Tribunal has initiated an inquiry to determine whether final safeguards are warranted, the results of which are scheduled to be announced on April 3, 2019. 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 several sectors of the North American economy including the following: natural resources, oil and gas, manufacturing and construction. RUSSEL METALS102018 ANNUAL REPORT 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 market share and diverse customer base of approximately 21,000 Canadian customers mean 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. In April 2018, we acquired DuBose Steel which expanded our geographic presence in the Southeastern United States. Our U.S. operations, which have approximately 14,000 customers, are also 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 in U.S. dollars. Movement in the Canadian dollar has a short-term impact on inventory prices. Metals service centers segment results -- 2018 compared to 2017 c) Revenues for 2018 increased 28% to $2.1 billion compared to 2017 revenues of $1.6 billion due to higher steel prices, increased demand and the acquisition of DuBose Steel and Color Steels. The average selling price was 20% higher than 2017. Same store tons shipped in 2018 were approximately 2% higher than tons shipped in 2017. Gross margin as a percentage of revenues of 23.3% was higher than the 2017 gross margin of 20.7%. The gross margin as a percentage of revenues in 2018 improved due to increased value-added processing, higher domestic steel prices and strong inventory management. Our average revenue per invoice for 2018 was approximately $2,422 compared to $1,846 for 2017, reflecting increased value-added processing and steel prices. We handled approximately 3,274 transactions per day in 2018 compared to 3,514 per day in 2017. Operating expenses as a percentage of revenues were consistent with 2017. Operating expense dollars were 24% higher than 2017 related to variable compensation, increased tons shipped and the DuBose Steel and Color Steels acquisitions offset by economies of scale. Operating profits for our metals service centers were $169 million in 2018 compared to $80 million for 2017 mainly related to increased value-added processing, higher steel prices and stronger demand. 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 21 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 2018 and 2017 is found in the section that follows. The price of oil and natural gas, and the Western Canadian select discount can impact rig counts and drilling activities, which affects demand for our products. Oil and natural gas prices increased in 2018 until the 2018 fourth quarter when they declined. Rig activity in the U.S. increased throughout 2018 which benefited our U.S. operations in our energy products segment. In Canada, rig activity in 2018 was slightly lower than 2017. RUSSEL METALS112018 ANNUAL REPORT Prices for pipe products are influenced by overall demand, trade sanctions, product availability and metal prices. Trade sanctions are initiated either by steel mills or by government agencies in North America. Both the Canadian and U.S. governments have imposed duties on certain Chinese pipe, which remain in effect and have reduced imports of these products. In 2018, U.S. pipe mills announced a trade petition on imported large diameter pipe from six countries including Canada and in August 2018, anti-dumping duties were imposed. The U.S. section 232 investigation and the resulting tariffs and retaliatory tariffs referred to above under "Update on Tariffs and Canadian Safeguards", have resulted in increased pipe prices. The Canadian provisional surcharges on seven product categories including energy tubular products from countries other than the U.S., Israel, Chile and Mexico may increase pipe prices. Valves and fittings prices 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. Energy products segment results -- 2018 compared to 2017 c) Revenues in our energy products segment increased 26% to $1.6 billion for 2018, compared to $1.3 billion for 2017 due to higher activity in our oil field service stores and large projects in our U.S. line pipe operation. Gross margin as a percentage of revenues was 18.6% for 2018 compared to 19.5% in 2017 mainly due to mix. Our large line pipe project revenues generated lower margins as a percentage of revenues but increased gross margin dollars. Lower Canadian rig activity led to price pressure and muted margins for our operations serving that market. Operating expenses as a percentage of revenues improved to 10% compared to 11% in 2017. Operating expenses were 16% higher in 2018 than 2017 due to costs associated with higher volumes and increased variable compensation. This segment generated an operating profit of $134 million for 2018 compared to $107 million for 2017 mainly due to higher demand. 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 offshore. 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 2018 and 2017 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. The imposition of steel tariffs under the section 232 investigation, discussed in more detail under "Update on Tariffs and Canadian Safeguards", has led to higher prices and shifted supply channels for steel distributor customers. Certain products purchased by our Canadian steel distributors operation may be subject to the Canadian provisional safeguards that went into effect October 25, 2018 depending on time of arrival. RUSSEL METALS122018 ANNUAL REPORT Demand for steel that is sourced offshore 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 -- 2018 compared to 2017 c) Steel distributors revenues increased 20% to $457 million for 2018 compared to $380 million in 2017, due to increased steel prices and volumes. Disruption in traditional trade sources had a positive impact on our steel distributor operations as we were able to source scarce product for our customers. Gross margin as a percentage of revenues was 19.1% for 2018 compared to 17.5% for 2017 due to improved steel prices. Operating expenses as a percentage of revenues were consistent for 2018 and 2017. Operating expenses increased 24% mainly related to variable compensation offset by realized economies of scale. Steel distributors operating income was $47 million compared to $34 million in 2017 due to increased volumes and steel prices. CORPORATE EXPENSES -- 2018 COMPARED TO 2017 Corporate expenses were $20 million in 2018 compared to $19 million in 2017 due to higher variable compensation related to stronger earnings partially offset by lower stock-based compensation. LOSS ON ASSET IMPAIRMENT During the quarter ended March 31, 2018, we recorded an asset impairment charge of $3.3 million relating to costs associated with our ERP modernization project, as we decided to move in another direction to meet the needs of the business. CONSOLIDATED RESULTS -- 2018 COMPARED TO 2017 Operating profits improved to $331 million in 2018 compared to $206 million in 2017 due to increase value- added processing, higher steel prices and stronger demand. INTEREST EXPENSE AND INCOME Net interest expense was $32 million for 2018 compared to $24 million for 2017 as higher revenues resulted in higher debt levels to support increased working capital. OTHER FINANCE EXPENSE We recorded finance expense of $1.2 million in 2018 related to the fair value of the contingent consideration on our Apex Distribution acquisition. This reflected the final payment under the agreement. INCOME TAXES We recorded a provision for income taxes of $79 million for 2018 compared to a provision of $55 million for 2017. Our effective income tax rate for 2018 was 26.5% compared to 30.9% for 2017. U.S. tax reform resulted in a reduction in 2018 income tax rates for our U.S. operations and the effect on our earnings was magnified by the improved profitability of our U.S. operations. NET EARNINGS Net earnings for 2018 were $219 million compared to $124 million in 2017. Basic earnings per share for 2018 was $3.53 per share compared to $2.00 per share in 2017 as all segments experienced improved results. SHARES OUTSTANDING AND DIVIDENDS The weighted average number of common shares outstanding for 2018 was 62,028,991 compared to 61,788,013 for 2017 as a result of the exercise of options. Common shares outstanding at December 31, 2018 and February 7, 2019 were 62,106,895. RUSSEL METALS132018 ANNUAL REPORT We paid common share dividends of $94 million or $1.52 per share in 2018 and 2017. During the 2018 first quarter, we issued $150 million 6% Senior Notes due March 16, 2026. The indenture for these Senior Notes has restrictions related to the payment of quarterly dividends in excess of $0.38 per share, which is our current dividend rate. We have $300 million of 6% Senior Notes due April 19, 2022. The indenture for these 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 these 2022 Senior Notes which can be redeemed at par on or after April 19, 2020. 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 alternative 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 2018 $ 219.0 79.1 32.8 330.9 35.7 2017 $ 123.8 55.4 27.2 206.4 34.2 Earnings before interest, income taxes, depreciation and amortization (EBITDA) $ 366.6 $ 240.6 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 $41 million in 2018 compared to $36 million in 2017. The increase in expenditures was due to the continued investment in value-added processing equipment. Depreciation expense was $29 million in 2018 and $28 million in 2017. We expect capital expenditures to be higher than depreciation in 2019 as we will continue to invest in value-added processing equipment. LIQUIDITY At December 31, 2018, we had net debt, defined as cash less bank indebtedness, of $4 million compared to net debt of $82 million at December 31, 2017. We generated cash of $341 million from operations during 2018 due to strong earnings and $176 million of cash was utilized for working capital to support higher revenues. We invested cash of $41 million for capital expenditures and $37 million for the DuBose Steel acquisition and rewarded shareholders with $94 million in dividends. Proceeds on the Senior Notes issued in 2018 of $146 million were used to reduce bank indebtedness. 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 fluctuate throughout each cycle. Accounts receivable and inventory comprise our largest liquidity risks and the increased business activity in 2018 utilized $296 million in cash to support increases in these balances. Total assets were $2.1 billion at December 31, 2018 compared to $1.8 billion at December 31, 2017. At December 31, 2018, current assets excluding cash represented 80% of our total assets excluding cash versus 79% at December 31, 2017. RUSSEL METALS142018 ANNUAL REPORT Inventory purchases utilized cash of $196 million in 2018. Inventories were higher in all segments due to higher steel prices and tons to support increased demand. Inventories represented 49% of our total assets at December 31, 2018 compared to 47% at December 31, 2017. 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 2018 $ 427 475 150 $ 1,052 Sept. 30 2018 $ 394 468 168 June 30 2018 $ 392 499 118 Mar. 31 2018 $ 338 435 97 Dec. 31 2017 $ 302 414 104 $ 1,030 $ 1,009 $ 870 $ 820 Dec. 31 2018 Sept. 30 2018 June 30 2018 Mar. 31 2018 Dec. 31 2017 3.9 3.0 3.6 3.4 4.3 3.3 2.2 3.5 4.3 2.0 2.3 2.9 4.2 2.8 3.0 3.4 4.5 2.3 3.2 3.2 At December 31, 2018, our metals service centers had increased inventory tons to support stronger demand and higher inventory cost per ton compared to December 31, 2017. During 2018 inventory levels increased in our energy products operations due to increased activity in the sector and higher inventory costs but inventory turns improved. Inventory levels at our steel distributors were higher due to increased demand and higher cost per ton. Accounts receivable utilized cash of $101 million in 2018 reflecting higher revenues. Accounts receivable represented 28% of our total assets excluding cash at December 31, 2018 compared to 27% in 2017. During 2018, we made income tax payments of $78 million compared to $34 million for 2017 due to higher 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 2018 2017 $ 341.4 (41.3) $ 216.1 (35.7) $ 300.1 $ 180.4 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 On March 16, 2018, we issued $150 million 6% Senior Notes for net proceeds of $146 million. As at December 31 (millions) Long-term debt 6% $300 million Unsecured Senior Notes due April 19, 2022 6% $150 million Unsecured Senior Notes due March 16, 2026 2018 2017 $ 297 147 $ 444 $ 297 - $ 297 RUSSEL METALS152018 ANNUAL REPORT CASH AND BANK CREDIT FACILITY (millions) Bank loans Cash net of outstanding cheques Net debt Letters of credit Facility Borrowings and letters of credit Letters of credit Facility availability Available line based on borrowing base 2018 $ (148) 144 (4) (76) 2017 $ (223) 141 (82) (34) $ (80) $ (116) $ 500 50 $ 550 $ 550 $ 350 50 $ 400 $ 400 On February 6, 2018, we increased and extended our credit facility to $450 million expiring September 21, 2021. The facility with a syndicate of Canadian and U.S. banks provides $50 million for letters of credit and $400 million which can be utilized for borrowings or additional letters of credit. On August 31, 2018, we amended our credit facility to increase availability by $100 million for borrowings or additional letters of credit for a period of one year for a total availability of $550 million. On August 30, 2019, this increase will expire and the availability will revert back to $450 million unless extended. 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 $550 million. As of December 31, 2018, we were entitled to borrow and issue letters of credit totaling $550 million under this facility. At December 31, 2018, we had $148 million in borrowings and $76 million of letters of credit outstanding. At December 31, 2017 we had $223 million in borrowings and letters of credit of $34 million. At December 31, 2018, we were in compliance with all of our financial covenants. With our cash, cash equivalents and our bank facility we have access to approximately $459 million of cash based on our December 31, 2018 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, 2018, we were contractually obligated to make payments as per the following table: Contractual Obligations (millions) Bank loans Accounts payable Long-term debt Long-term debt interest Operating leases Total Payments due in 2019 $ 148 495 - 27 31 2020 and 2021 2022 and 2023 2024 and thereafter $ - - - 54 47 $ - - 300 28 27 $ - - 150 23 33 Total $ 148 495 450 132 138 $ 701 $ 101 $ 355 $ 206 $ 1,363 In addition to the bank loans noted in the above table we are obligated to pay $76 million in letters of credit when they mature in 2019. RUSSEL METALS162018 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 15 of our 2018 consolidated financial statements. During 2018, we contributed $5 million to these plans. We expect to contribute approximately $5 million to these plans during 2019. 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. On January 1, 2019, we will adopt the new lease accounting standard IFRS 16 and a majority of our leases that were previously off-balance sheet will be recorded on the balance sheet. 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, 2018 was approximately $1 million higher than our reserve at December 31, 2017. 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, 2018 was consistent with the level at December 31, 2017. 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, 2018 and 2017. RUSSEL METALS172018 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. 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 $135 million in plan assets at December 31, 2018, which is approximately $3 million lower than December 31, 2017. The discount rate used on the employee benefit plan obligation for December 31, 2018 was 3.75%, which is 50 basis points higher than the discount rate at December 31, 2017. 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 METALS182018 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, 2018. 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 striving to operate 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. On April 16, 2018, we completed the acquisition of the operating assets and facilities of DuBose Steel which adds a new geographic area to our U.S. service center operations. 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 allow 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 historically high import levels. The tariffs implemented under the section 232 investigation have supported higher steel prices and North American production. Future changes to country or product exemptions may impact steel prices and product availability. We are one of the largest energy services companies in Canada. Approximately 40% of our revenues are dependent on the oil and gas industry whose activity fluctuates with oil and gas prices. Our oil field store operations provide a more stable stream of earnings as their products are used in maintenance and repair as well as new drilling activity. 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 METALS192018 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 Other Quarters Ended December 31 2018 2017 variance as a % of 2017 $ 524.3 431.7 156.8 2.6 $ 418.4 299.9 104.4 2.4 $ 1,115.4 $ 825.1 $ 28.3 32.5 10.8 (1.6) 1.4 $ 15.7 27.6 7.5 (4.8) 0.9 25% 44% 50% 35% 80% 18% 44% Earnings before interest, finance expense and income taxes $ 71.4 $ 46.9 52% 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 20.9% 17.8% 13.3% 18.8% 5.4% 7.5% 6.9% 6.4% 19.3% 21.3% 14.9% 19.7% 3.8% 9.2% 7.1% 5.7% RUSSEL METALS202018 ANNUAL REPORT Revenues in the fourth quarter of 2018 were 35% higher than the same quarter in 2017. Operating income was $71 million compared to $47 million in 2017. Metals service centers revenues were 25% higher than the same quarter in 2017 as a result of increased activity, higher selling prices and the DuBose Steel acquisition. Same store tons shipped in the fourth quarter of 2018 for metals service centers were 5% lower than the fourth quarter of 2017 and same store selling prices were 28% higher than the fourth quarter of 2017. Gross margin as a percentage of revenues increased to 20.9% for the fourth quarter of 2018 from 19.3% for the fourth quarter of 2017 but were lower than the 2018 annual margins of 23.3% due to the rise of the average cost of inventory during the year. Revenues at our energy products segment were 44% higher than 2017 due to the large line pipe project sales. The operating profits in our energy products segment of $33 million for the fourth quarter of 2018 were 18% higher compared to the same quarter last year due to the project sales. Our steel distributors reported 2018 operating income was 44% higher than the same quarter last year due to a 50% increase in revenues. Corporate expenses were lower than 2017 due to lower stock-based compensation as a result of the lower share price. Earnings per share for the fourth quarter of 2018 was $0.74 compared $0.45 for the fourth quarter of 2017. OUTLOOK We expect pricing pressure in the current quarter and stable demand levels in metals service centers and steel distributors. The energy products segment should experience a modest reduction in demand due to reduced capital spending and completion of the large line pipe projects. RUSSEL METALS212018 ANNUAL REPORT INDEPENDENT AUDITOR’S REPORT To the Shareholders and the Board of Directors of Russel Metals Inc. Opinion We have audited the consolidated financial statements of Russel Metals Inc. (the "Company"), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the "financial statements"). In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards ("IFRS"). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards ("Canadian GAAS"). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other Information Management is responsible for the other information. The other information comprises:  Management's Discussion and Analysis  The information, other than the financial statements and our auditor's report thereon, in the Annual Report. Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management's Discussion and Analysis prior to the date of this auditor's report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. The Annual Report is expected to be made available to us after the date of the auditor's report. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance. Responsibility of Management and those Charged with Governance for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company's financial reporting process. RUSSEL METALS222018 ANNUAL REPORT Auditor's Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit 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 Company's internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.   Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.   Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor's report is Stacey Nagle. Chartered Professional Accountants Licensed Public Accountants Toronto, Ontario February 7, 2019 RUSSEL METALS232018 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 8) Employee expenses (Note 19) Other operating expenses (Note 19) Asset impairment (Note 9) Earnings before interest, finance expense and provision for income taxes Interest expense (Note 20) Other finance expense (Note 20) Earnings before provision for income taxes Provision for income taxes (Note 21) Net earnings for the year Basic earnings per common share (Note 18) Diluted earnings per common share (Note 18) 2018 2017 $ 4,165.0 3,280.4 335.1 215.3 3.3 330.9 31.6 1.2 298.1 79.1 $ 3,296.0 2,632.7 274.9 182.0 - 206.4 23.9 3.3 179.2 55.4 $ 219.0 $ 123.8 $ 3.53 $ 2.00 $ 3.52 $ 2.00 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31 (in millions of Canadian dollars) Net earnings for the year Other comprehensive income (loss) Items that may be reclassified to earnings Unrealized foreign exchange gains (losses) on translation of foreign operations Items that may not be reclassified to earnings Actuarial gains (losses) on pension and similar obligations, net of taxes of $1.2 million (2017: $0.4 million) Other comprehensive income (loss) Total comprehensive income The accompanying notes are an integral part of these consolidated financial statements. 2018 2017 $ 219.0 $ 123.8 44.8 (31.4) 3.4 48.2 (1.3) (32.7) $ 267.2 $ 91.1 RUSSEL METALS242018 ANNUAL REPORT CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31 (in millions of Canadian dollars) ASSETS Current Cash and cash equivalents (Note 6) Accounts receivable (Note 7) Inventories (Note 8) Prepaids and other Income taxes receivable Property, Plant and Equipment (Note 9) Deferred Income Tax Assets (Note 21) Financial and Other Assets (Note 10) Goodwill and Intangibles (Note 11) LIABILITIES AND SHAREHOLDERS' EQUITY Current Bank indebtedness (Note 12) Accounts payable and accrued liabilities (Note 13) Income taxes payable Current portion long-term debt (Note 14) Long-Term Debt (Note 14) Pensions and Benefits (Note 15) Deferred Income Tax Liabilities (Note 21) Provisions and Other Non-Current Liabilities (Note 22) Shareholders' Equity (Note 16) Common shares Retained earnings Contributed surplus Accumulated other comprehensive income Total Shareholders' Equity 2018 2017 $ 124.3 567.5 1,052.5 14.1 5.2 $ 125.8 446.2 819.9 17.2 4.5 1,763.6 1,413.6 268.9 4.2 4.4 86.2 246.8 4.7 3.5 90.5 $ 2,127.3 $ 1,759.1 $ 128.5 494.7 21.5 - $ 207.7 365.7 21.6 0.1 644.7 443.6 5.8 20.1 8.2 1,122.4 542.1 318.6 15.7 128.5 1,004.9 595.1 296.5 12.0 17.7 11.0 932.3 536.6 190.5 16.0 83.7 826.8 Total Liabilities and Shareholders' Equity $ 2,127.3 $ 1,759.1 The accompanying notes are an integral part of these consolidated financial statements. ON BEHALF OF THE BOARD, J. Clark Director A. Benedetti Director RUSSEL METALS252018 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 Loss (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 2018 2017 $ 219.0 35.7 79.1 31.6 2.8 0.5 (1.6) 1.0 1.2 (27.9) $ 123.8 34.2 55.4 23.9 (1.9) 0.7 (0.7) 0.7 3.3 (23.3) Cash from operating activities before non-cash working capital 341.4 216.1 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 from (used in) operating activities Financing activities (Decrease) increase in bank indebtedness Issue of common shares Dividends on common shares Issuance of long-term debt Repayment of long-term debt Deferred financing costs Cash (used in) from financing activities Investing activities Purchase of property, plant and equipment Proceeds on sale of property, plant and equipment Purchase of business Payment of contingent consideration Cash used in investing activities Effect of exchange rates on cash and cash equivalents Decrease in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year The accompanying notes are an integral part of these consolidated financial statements. (101.0) (195.5) 117.7 3.2 (175.6) (77.9) 87.9 (79.3) 4.7 (94.3) 146.0 - (1.1) (24.0) (41.3) 2.4 (36.8) (4.5) (80.2) 14.8 (1.5) 125.8 (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 $ 124.3 $ 125.8 RUSSEL METALS262018 ANNUAL REPORT CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (in millions of Canadian dollars) Balance, January 1, 2018 Payment of dividends Net income for the year Other comprehensive income for the year Recognition of share-based compensation Share options exercised Transfer of net actuarial gains on defined benefit plans Common Shares Retained Earnings $ 536.6 - - - - 5.5 - $ 190.5 (94.3) 219.0 - - - 3.4 Accumulated Other Contributed Comprehensive Income Surplus Total $ 16.0 - - - 0.5 (0.8) - $ 83.7 $ 826.8 (94.3) 219.0 48.2 0.5 4.7 - - - 48.2 - - (3.4) Balance, December 31, 2018 $ 542.1 $ 318.6 $ 15.7 $ 128.5 $ 1,004.9 (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 The accompanying notes are an integral part of these consolidated financial statements. RUSSEL METALS272018 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 offshore. 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 7, 2019. 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 METALS282018 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 from contracts with customers c) Revenue is recognized at an amount that reflects the expected consideration receivable in exchange for transferring goods or services to a customer applying the following steps: Identify the contract with a customer Identify the performance obligation 1. 2. 3. Determine the transaction price 4. Allocate the transaction price to the performance obligation in the contract 5. Recognize revenue when (or as) the entity satisfies a performance obligation The Company generates revenue primarily from the delivery of metal and metal products to customers. The primary contracts to provide goods and services to customers are purchase orders which provide the Company's performance obligations and transaction price. The primary performance obligation in the Company's contracts is to provide metal products to customers in accordance with their specifications. These specifications could require the Company to cut, bend and provide other metal processing prior to delivery. The Company's performance obligation is satisfied upon transfer of control of product to the customers, which occurs when it has been packed and loaded for delivery. Credit terms for customers are short-term in nature. 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 $1.3642 per US$1 at December 31, 2018 (December 31, 2017: 1.2545 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, 2018, the average U.S. dollar Bank of Canada closing exchange rate was $1.2961 per US$1 (2017: $1.2981 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. RUSSEL METALS292018 ANNUAL REPORT 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. 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 CHANGE IN ACCOUNTING POLICIES IFRS 15 Revenue from Contracts with Customers The Company adopted IFRS 15 Revenue from Contracts with Customers ("IFRS 15"), with a date of initial application of January 1, 2018, using the modified retrospective approach. IFRS 15 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 applied 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 adoption of IFRS 15 did not have a material effect on the financial statements as the Company does not have long-term service contracts, multiple element arrangements or complex revenue transactions. The Company has certain arrangements with its customers with elements of variable consideration included, which were not material in the year ended 2018. Implementation of the standard resulted in increased disclosure on sources of revenues by product. (Note 23c) IFRS 9 Financial Instruments The Company adopted IFRS 9, Financial Instruments which replaces IAS 39, Financial Instruments: Recognition and Measurement on January 1, 2018. This standard establishes principles for the financial reporting of financial assets and financial liabilities that presents relevant and useful information to users of financial statements for the assessment of the amounts, timing and uncertainty of an entity's future cash flows. The adoption of this standard has changed the Company's estimation for allowance for doubtful accounts but does not have a material impact on the Company's financial position or results of operations. NOTE 4 FUTURE ACCOUNTING CHANGES IFRS 16 Leases In January 2016, the IASB issued IFRS 16, Leases ("IFRS 16"), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the lessee and the lessor. Effective January 1, 2019, the Company will adopt IFRS 16 using the modified retrospective approach under which the cumulative effect of initial application will be recognized in retained earnings at January 1, 2019. The expected impact of this change in accounting policy is noted below. For contracts entered into before January 1, 2019, the Company determined whether the arrangement contained a lease under IAS 17 and IFRIC 4. Prior to the adoption of IFRS 16, these leases were classified as operating or finance leases based on an assessment of whether the lease transferred significantly all the risks and rewards of ownership of the underlying asset. The Company leases warehouse locations, field stores, office space, land, equipment, trucks and other vehicles. On transition, the Company will elect to apply the practical expedient to grandfather the determination of which contract is or contains a lease and will apply IFRS 16 to those contracts that were previously identified as leases. Upon transition to the new standard, lease liabilities will be measured at the present value of the remaining lease payments discounted by the Company's incremental borrowing rate as at January 1, 2019. Right-of-use assets and lease liabilities will be recognized on the statement of financial position with the cumulative difference recognized in retained earnings. RUSSEL METALS302018 ANNUAL REPORT At transition, lease liabilities of approximately $110 - $120 million will be recognized in the statement of financial position. The Company is finalizing its assessment of the transitional right-of-use assets with any difference between the lease liability and the right-of-use asset recognized as a reduction of retained earnings For contracts entered into subsequent to January 1, 2019 at inception of the contract, the Company will assess whether a contract is, or contains, a lease by evaluating if the contract conveys the right to control the use of an identified asset. For contracts that contain a lease, the Company will recognize a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset will be initially measured at cost, which will comprise the initial amount of the lease liability adjusted by any initial direct costs, and costs to dismantle and remove the underlying asset less any lease incentives. The right-of-use asset will be subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the underlying asset or the end of the lease term. Under IFRS 16, right-of-use assets will be tested for impairment in accordance with IAS 36 Impairment of assets. This will replace the previous requirement to recognize a provision for onerous lease contacts. The lease liability will initially be measured at the present value of lease payments to be paid subsequent to the commencement date of the lease, discounted either at the interest rate implicit in the lease or the Company's incremental borrowing rate. The lease payments measured in the initial lease liability will include payments for an optional renewal period, if any, if the Company is reasonably certain that it will exercise a renewal extension option. The liability will be measured at amortized cost using the effective interest method and will be remeasured when there is a change in either the future lease payments or assessment of whether an extension or other option will be exercised. The lease liability will be subsequently adjusted for interest and lease payments. Interest expenses will be included in the consolidated statement of earnings. The Company will elect not to recognize right-of-use assets and lease liabilities for leases with a lease term of less than 12 months and low value assets and will continue to recognize the lease payments associated with these leases as an expense on a straight-line basis over the lease term, as permitted by IFRS 16. NOTE 5 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 are 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. RUSSEL METALS312018 ANNUAL REPORT SUPPORTING INFORMATION 2018 Acquisition On April 16, 2018, the Company completed its acquisition of certain operating assets and facilities of DuBose Steel, a general line service center operation with value-added processing capabilities located in Roseboro, North Carolina. The following summarizes the preliminary allocation of the consideration for this acquisition: (millions) Inventory Accounts receivable Prepaid and other Property, plant and equipment Accounts payable and accrued liabilities Net identifiable assets acquired Consideration: Cash $ 15.4 10.1 0.9 10.2 (0.1) $ 36.5 $ 36.5 The preliminary allocation is subject to change following the final settlement of the holdbacks which may result in an adjustment to working capital. Accounts receivable of $10.1 million represented gross contractual accounts receivable of which none was considered uncollectible at the time of acquisition. All accounts receivable have subsequently been collected. This acquisition adds another geographic region and value-added processing capabilities to the Company’s existing U.S. metals service centers segment. There was no goodwill included in the assets acquired. The consolidated statements of earnings for the year ended December 31, 2018 includes supplementary revenues of $63.6 million and earnings before interest, finance expense and provision for income taxes of $1.9 million attributable to the business acquired. If the acquisition had taken place at the beginning of the 2018 fiscal year, management estimates that the acquired business would have provided revenues of $70.4 million and earnings before interest, finance expense and provision for income taxes of $2.3 million. 2017 Acquisition On September 1, 2017, the Company completed its acquisition of all of the outstanding common shares of Color Steels Inc. ("Color Steels"). 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 Intangibles are comprised of customer relationships which are amortized over a period of 15 years. 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 including cut-to-length and slitting. The consolidated statements of earnings of the Company for the year ended December 31, 2017 includes incremental revenues of $16.6 million attributed to the business acquired. RUSSEL METALS322018 ANNUAL REPORT 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. NOTE 6 CASH AND CASH EQUIVALENTS ACCOUNTING POLICIES Cash includes demand deposits and cash equivalents includes 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 2018 $ 12.6 111.7 $ 124.3 2017 $ 18.1 107.7 $ 125.8 NOTE 7 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 2018 $ 556.6 10.9 $ 567.5 2017 $ 437.1 9.1 $ 446.2 2018 2017 $ 3.6 3.2 (2.1) 0.2 $ 4.9 $ 4.7 0.2 (1.4) 0.1 $ 3.6 RUSSEL METALS332018 ANNUAL REPORT At December 31, 2018 and 2017, the allowance for doubtful accounts was less than 1.0% of accounts receivable. An increase in the allowance of 1% of accounts receivable would decrease pre-tax earnings by approximately $5.6 million for the year ended December 31, 2018 (2017: $4.4 million). As at December 31, 2018 (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 $ 291.7 - $ 179.9 (0.1) $ 61.4 (0.2) $ 28.5 (4.6) $ 561.5 (4.9) Total net trade receivables $ 291.7 $ 179.8 $ 61.2 $ 23.9 $ 556.6 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 NOTE 8 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 2018 $ 3,280.4 4.3 2017 $ 2,632.7 3.6 RUSSEL METALS342018 ANNUAL REPORT NOTE 9 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 an estimated useful life that is significantly different 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. SUPPORTING INFORMATION Cost (millions) Balance, December 31, 2016 Business acquisition (Note 5) Additions Disposals Foreign exchange Balance, December 31, 2017 Business acquisition (Note 5) Additions Asset impairment Disposals Foreign exchange Land and Buildings Machinery and Equipment Leasehold Improvements $ 239.0 - 8.3 (1.8) (2.1) $ 243.4 8.5 3.7 - (0.3) 3.8 $ 345.5 4.5 26.5 (9.1) (5.6) $ 361.8 1.7 36.4 (3.3) (11.7) 8.1 $ 26.8 - 0.9 - (0.3) $ 27.4 - 1.2 - (7.7) 0.3 Total $ 611.3 4.5 35.7 (10.9) (8.0) $ 632.6 10.2 41.3 (3.3) (19.7) 12.2 Balance, December 31, 2018 $ 259.1 $ 393.0 $ 21.2 $ 673.3 Accumulated depreciation and amortization (millions) Land and Buildings Machinery and Equipment Leasehold Improvements Balance, December 31, 2016 Depreciation and amortization Disposals Foreign exchange Balance, December 31, 2017 Depreciation and amortization Disposals Foreign exchange $ 103.3 7.4 (1.1) (1.7) $ 107.9 8.1 (0.3) 1.5 $ 246.8 19.6 (8.0) (2.4) $ 256.0 20.6 (10.7) 5.0 $ 21.5 0.6 - (0.2) $ 21.9 0.6 (6.8) 0.6 Total $ 371.6 27.6 (9.1) (4.3) $ 385.8 29.3 (17.8) 7.1 Balance, December 31, 2018 $ 117.2 $ 270.9 $ 16.3 $ 404.4 RUSSEL METALS352018 ANNUAL REPORT Net Book Value (millions) December 31, 2017 December 31, 2018 $ 246.8 $ 268.9 All items of property, plant and equipment are recorded and held at cost. At December 31, 2018, land, included in land and buildings, was $44.4 million (2017: $43.4 million). (millions) Depreciation - cost of materials Depreciation - other operating expenses 2018 $ 7.5 21.8 $ 29.3 2017 $ 7.7 19.9 $ 27.6 Impairment of Assets The Company reviews the carrying value of long-lived assets for impairment whenever there are events or changes in circumstances that indicate that the carrying amount may not be recoverable. During the first quarter of 2018, the Company recorded an asset impairment charge of $3.3 million relating to the costs associated with its ERP modernization project, as the Company decided to move in another direction to meet the needs of the business. NOTE 10 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 Other 2018 $ 3.3 1.1 $ 4.4 2017 $ 0.5 3.0 $ 3.5 For the year ended December 31, 2018, amortization of deferred financing charges was $0.5 million (2017: $0.7 million). NOTE 11 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 or 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. RUSSEL METALS362018 ANNUAL REPORT 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 the fair value 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. SUPPORTING INFORMATION (millions) Goodwill Intangibles Goodwill a) The continuity of goodwill is as follows: Goodwill (millions) Balance, beginning of the year Business acquisition (Note 5) Foreign exchange Balance, end of the year 2018 2017 $ 37.4 48.8 $ 36.3 54.2 $ 86.2 $ 90.5 2018 2017 $ 36.3 - 1.1 $ 27.2 9.9 (0.8) $ 37.4 $ 36.3 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) 2018 2017 Metals service centers U.S. Southeast Canadian Alberta Ontario Atlantic $ 14.2 $ 13.1 11.0 10.2 2.0 11.0 10.2 2.0 $ 37.4 $ 36.3 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. Expected growth in future earnings subsequent to 2019, of 2% in line with expected inflation and discount rates. The assumptions are based on historical data, industry cyclicality and expected market developments. RUSSEL METALS372018 ANNUAL REPORT 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 groups of CGUs. 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 2018, the pre-tax weighted average cost of capital used was 13.9% (2017: 12.7%). To monitor potential impairment exposure, the Company performs a sensitivity analysis. For 2018 and 2017 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 2018 and 2017. The recoverable amounts are determined based on a value in use calculation. In 2018 and 2017, the estimated recoverable amount of all units exceeded their carrying values. As a result, no impairment was recorded. Intangibles c) The continuity of intangibles within the metals service centers and energy products segments is as follows: Cost (millions) Balance, beginning of the year Business acquisitions Foreign exchange Balance, end of the year Metals Service Centers $ 19.5 0.3 0.3 $ 20.1 Energy Products $ 70.7 - - Total 2018 $ 90.2 0.3 0.3 Total 2017 $ 88.6 1.9 (0.3) $ 70.7 $ 90.8 $ 90.2 Accumulated amortization (millions) Balance, beginning of the year Amortization Balance, end of the year Metals Service Centers Energy Products Total 2018 Total 2017 $ (10.7) (1.3) $ (12.0) $ (25.3) (4.7) $ (36.0) (6.0) $ (30.1) (5.9) $ (30.0) $ (42.0) $ (36.0) Carrying amount December 31, 2017 December 31, 2018 $ 54.2 $ 48.8 The carrying amount of intangible assets as at December 31, 2018 relates to customer relationships arising from the acquisition of Alberta Industrial Metals, Apex Distribution, Apex Western Fiberglass, Color Steels, JMS Metals Services, Norton Metals Products and other entities. The remaining amortization period for customer relationships is 6 to 14 years. NOTE 12 REVOLVING CREDIT FACILITY The Company increased and extended its credit agreement in February 2018 to provide $450 million for borrowings and letters of credit with an expiry of September 21, 2021. The syndicated facility consists of availability of $400 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. On August 31, 2018, the Company increased its credit available for borrowings and letters of credit by $100 million under the same terms as the credit agreement. The additional credit availability will expire on August 30, 2019 at which time the availability will revert to $450 million. 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 $550 million. The obligations of the Company under this agreement are secured by a pledge of trade accounts receivable and inventories. RUSSEL METALS382018 ANNUAL REPORT The Company was in compliance with the financial covenants at December 31, 2018. At December 31, 2018, the Company had borrowings of $148.0 million (2017: $223.0 million) and letters of credit of $76.1 million (2017: $33.7 million) under this facility. NOTE 13 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ACCOUNTING POLICIES Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business. Trade payables are classified as current liabilities if payment is due within one year or less. Trade payables are recognized initially at fair value and subsequently measured at amortized cost. SUPPORTING INFORMATION (millions) Trade accounts payable and accrued expenses Accrued interest 2018 $ 488.6 6.1 $ 494.7 2017 $ 362.2 3.5 $ 365.7 NOTE 14 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 Senior Notes due April 19, 2022 6% $150 million Senior Notes due March 16, 2026 Finance lease obligations (Note 25) Less: current portion 2018 $ 297.2 146.4 - - $ 443.6 2017 $ 296.5 - 0.1 (0.1) $ 296.5 a) On March 16, 2018, the Company issued, through a private placement, $150 million 6% Unsecured Senior Notes due March 16, 2026 for net proceeds of $146.0 million. Interest is due semi-annually on March 16 and September 16 of each year. The Company may redeem up to 40% of these notes prior to March 16, 2021 with the net proceeds of certain equity offerings at the redemption price of 106% of their principal amount, plus accrued and unpaid interest. Prior to March 16, 2021 the Company may redeem these notes in whole or in part at an amount equal to 100% of the principal amount plus the applicable premium which is the greater of the called principal of these notes and the excess of (i) the discounted value of the remaining scheduled payments over (ii) the called principal of these notes. The Company may also redeem the notes in whole or in part at any time after March 16, 2021 at 104.5% of the principal amount declining rateably to 100% of the principal amount on or after March 16, 2024. The $150 million Senior Notes contain certain covenants that limit the Company's ability to incur additional indebtedness. These notes also contain certain restrictions on the payment of common share dividends in excess of $0.38 per share per quarter. The Company was in compliance with these financial covenants at December 31, 2018. b) On April 19, 2012, the Company issued, through a private placement, $300 million 6% Unsecured Senior Notes due April 19, 2022 for net proceeds of $293 million. Interest is due on April 19 and October 19 of each year. RUSSEL METALS392018 ANNUAL REPORT The Company may redeem these notes in whole or in part at any time at 102% of the principal amount declining rateably to 100% of the principal amount on or after April 19, 2020. These notes contain certain restrictions on the payment of common share dividends in excess of $0.35 per share per quarter. These notes also contain certain covenants that limit the Company's ability to incur additional indebtedness. The Company was in compliance with these covenants at December 31, 2018. NOTE 15 PENSIONS AND BENEFITS ACCOUNTING POLICIES For defined benefit pension plans and other post-employment benefits, the net periodic pension and benefit expense is actuarially determined on an annual basis by independent actuaries using the projected benefit method, prorated on service and is charged to expense as services are rendered. The determination of a benefit expense requires assumptions such as the discount rate to measure obligations, the expected mortality, the expected rate of future compensation increases and the expected healthcare cost trend rate. The past service costs arising from plan amendments is recognized immediately in net earnings. The asset or liability recognized in the consolidated statement of financial position is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for asset ceiling limits. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to maturity approximating the terms of the related pension liability. All actuarial gains and losses that arise in calculating the present value of the defined benefit obligation and the fair value of plan assets are recognized immediately in the consolidated statement of other comprehensive income. Net interest on the defined benefit liability (asset) represents the net defined benefit liability (asset), multiplied by the discount rate and is recorded in employee expenses in the consolidated statement of earnings. The net interest expense (income) on the net defined benefit liability (asset) is comprised of interest cost on the defined benefit obligation and interest income on plan assets. Any defined benefit asset resulting from this calculation is limited to the total of unrecognized net actuarial losses and the present value of any economic benefit in the form of refunds from the plan or reduction in future contributions to the plan. The Company contributes to three multi-employer pension plans which are accounted for as defined contribution plans. The Company closes out actuarial gains and losses recognized in other comprehensive income into retained earnings at the end of each reporting period. ACCOUNTING ESTIMATES AND JUDGEMENTS The Company's determination of employee benefit expenses and obligations requires the use of assumptions such as the discount rate to measure obligations, expected mortality, the expected rate of increase of future compensation and the expected healthcare cost trend rate. Since the determination of the costs and obligations associated with employee future benefits requires the use of various assumptions, there is measurement uncertainty inherent in the actuarial valuation process. Actual results could differ from estimated results. SUPPORTING INFORMATION a) The Company maintains a defined contribution pension plan ("DCPP") for most of its Canadian 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. On January 1, 2017, the Company merged its Thunder Bay Terminals Plan, a defined benefit plan into the DCPP. 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 plan (including the Thunder Bay Terminals Plan) had a valuation date of January 1, 2017 and the remaining plan had valuation date of January 1, 2018. RUSSEL METALS402018 ANNUAL REPORT 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. 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 2018 2017 $ 3.6 0.2 0.2 $ 3.8 0.2 0.2 4.0 0.1 5.4 4.2 0.1 5.0 $ 9.5 $ 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 gains (losses) due to financial assumption changes Actuarial loss due to demographic assumption changes Return on plan assets (less) 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 gains (losses) recognized in the year Balance of actuarial losses at December 31 2018 2017 $ 2.4 10.2 (1.4) (6.6) $ 4.6 $ 1.3 (9.7) - 6.7 $ (1.7) $ (14.7) 4.6 $ (13.0) (1.7) $ (10.1) $ (14.7) There were no adjustments related to asset ceiling limits in other comprehensive income for the years ended December 31, 2018 and 2017. 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 2018 3.75% 3.00% 3.00% 2017 3.25% 3.00% 2.75% 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 $4.9 million as of December 31, 2018 (2017: $5.4 million). The mortality assumptions used to assess the defined benefit obligation are based on the 2017 Mortality Improvement Scale (MI-2017). Informal practices that give rise to constructive obligations are included in the measurement of the defined benefit obligation. RUSSEL METALS412018 ANNUAL REPORT 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 5.5% for 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. 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 gains Pension Plans 2017 2018 Other Benefit Plans 2017 2018 $ 146.4 3.6 0.1 4.7 (6.5) (10.4) $ 135.6 3.8 0.1 5.0 (6.5) 8.4 $ 3.9 - - 0.1 (0.3) (0.8) $ 4.1 - - 0.1 (0.2) (0.1) Balance, end of the year $ 137.9 $ 146.4 $ 2.9 $ 3.9 (millions) Reconciliation of present value of the plan assets Balance, beginning of the year Interest income Employer contributions Employee contributions Benefits paid Plan administration costs Return on plan assets (less) greater than discount rate Balance, end of the year Defined benefit obligation, net Pension Plans 2017 2018 Other Benefit Plans 2017 2018 $ 138.3 4.5 5.4 0.1 (6.5) (0.2) (6.6) $ 128.7 4.8 4.7 0.1 (6.5) (0.2) 6.7 $ - - 0.3 - (0.3) - - $ - - 0.2 - (0.2) - - $ 135.0 $ 138.3 $ - $ - $ 2.9 $ 8.1 $ 2.9 $ 3.9 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 2018 2017 $ 2.4 $ 3.7 60.7 37.1 97.8 10.9 11.8 12.1 34.8 66.0 34.1 100.1 9.7 12.6 12.2 34.5 $ 135.0 $ 138.3 RUSSEL METALS422018 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 2017 2018 Other Benefit Plans 2017 2018 $ (3.1) 6.0 - $ (1.5) 9.6 - $ 2.9 $ 8.1 $ - - 2.9 $ 2.9 $ - - 3.9 $ 3.9 c) As at December 31, 2018 and 2017 approximately 73% of the fair value of all pension plan assets was invested in equities, 25% in fixed income securities, and 2% 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 15.1 years (2017: 15.3 years) for defined benefit pension plans, 9.7 years (2017: 9.6 years) for executive pension arrangements and 7.1 years (2017: 7.6 years) for other post retirement benefit plans. The Company expects to make contributions of $4.6 million to its defined benefit pension plans and $0.3 million to its post retirement benefits medical plans in the next financial year. NOTE 16 SHAREHOLDERS' EQUITY a) At December 31, 2018 and 2017, 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, 2016 Share options exercised Balance, December 31, 2017 Share options exercised Balance, December 31, 2018 The continuity of contributed surplus was as follows: (millions) Balance, December 31, 2016 Share-based compensation expense Exercise of options Balance, December 31, 2017 Share-based compensation expense Exercise of options Balance, December 31, 2018 Number of Shares 61,735,485 154,712 61,890,197 216,698 Amount (millions) $ 532.4 4.2 $ 536.6 5.5 62,106,895 $ 542.1 15.9 0.7 (0.6) 16.0 0.5 (0.8) $ 15.7 RUSSEL METALS432018 ANNUAL REPORT Dividends paid and declared were as follows: Dividends paid (millions) Dividends per share Quarterly dividend per share declared on February 7, 2019 (February 14, 2018) 2018 $ 94.3 $ 1.52 2017 $ 93.9 $ 1.52 $ 0.38 $ 0.38 NOTE 17 SHARE-BASED COMPENSATION ACCOUNTING POLICIES The Company accounts for Share Options and Share Appreciation Rights ("SARs") 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 inputs for the Black-Scholes option 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 was 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 certain 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 2017 2018 1,941,719 64,815 (216,698) (98,750) 2,383,203 141,773 (154,712) (428,545) 1,691,086 1,941,719 Weighted Average Exercise Price 2017 2018 $ 25.13 31.46 21.43 26.73 $ 25.75 $ 26.25 28.99 23.27 33.32 $ 25.13 $ 26.04 1,256,599 1,329,718 $ 26.34 RUSSEL METALS442018 ANNUAL REPORT The weighted average share price for the options exercised during the year was $21.43 (2017: $28.61) The outstanding options had exercise price ranges as follows: (number of options) $ 29.00 - $ 31.46 $ 25.37 - $ 28.99 $ 16.58 - $ 25.36 Options outstanding 2018 213,987 851,285 625,814 2017 149,172 1,037,262 755,285 1,691,086 1,941,719 The options expire in the years 2019 to 2028 and have a weighted average remaining contractual life of 4.1 years (2017: 5.4 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 2018 5% 29% 5 yrs 2.28% $ 5.04 2017 5% 26% 5 yrs 2.25% $ 4.14 Expected volatility is based on historical volatility over the last five years. Share Appreciation Rights In February 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. Balance, beginning of year Granted Balance, end of the year Number of SARs 2017 2018 Weighted Average Exercise Price 2017 2018 63,291 67,856 131,147 - 63,291 63,291 $ 28.99 31.17 $ - 28.99 $ 30.12 $ 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 volume weighted average price of a common share on the Toronto Stock Exchange for the last five trading days immediately prior to the grant date. DSUs are granted quarterly to the account of each non-executive director 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. (number of units) Balance, beginning of the year Granted Paid out Balance, end of the year 2018 250,021 48,839 (44,070) 254,790 2017 207,650 42,371 - 250,021 The liability and fair value of DSUs was $5.4 million at December 31, 2018 (2017: $7.3 million). Dividends declared on common shares accrue to units in the DSU plan in the form of additional DSUs. RUSSEL METALS452018 ANNUAL REPORT Restricted Share Units The Company has a Restricted Share Unit ("RSU") Plan for eligible employees as designated by the Board of Directors. 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 volume weighted average price of a common share 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 2018 74,145 179,202 (69,759) 183,588 2017 216,402 77,601 (219,858) 74,145 The RSU liability at December 31, 2018 was $2.6 million (2017: $1.3 million). The fair value of RSUs was $3.9 million at December 31, 2018 (2017: $2.2 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 DSUs, SARs and RSUs Employee Share Purchase Plan 2018 2017 $ 0.5 1.9 0.6 $ 3.0 $ 0.6 4.6 0.7 $ 5.9 NOTE 18 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) 2018 2017 Net income used in calculation of basic and diluted earnings per share $ 219.0 $ 123.8 (number of shares) Weighted average shares outstanding Dilution impact of share options Diluted weighted average shares outstanding 2018 2017 62,028,991 106,690 61,788,013 145,076 62,135,681 61,933,089 RUSSEL METALS462018 ANNUAL REPORT NOTE 19 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 losses (gains) NOTE 20 INTEREST AND FINANCE EXPENSE (millions) Interest on 6% $300 million Senior Notes Interest on 6% $150 million Senior Notes Other interest expense Interest expense Other finance expense 2018 2017 $ 290.5 44.6 $ 335.1 $ 126.8 56.6 13.7 12.7 4.7 (0.5) 1.3 $ 215.3 2018 $ 18.7 7.5 5.4 31.6 $ 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 $ 1.2 $ 3.3 Long-term debt interest expense is charged to earnings using the effective interest method. 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. Debt accretion and issue cost amortization for the year ended December 31, 2018 was $1.0 million (2017: $0.7 million). NOTE 21 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 that 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. 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. RUSSEL METALS472018 ANNUAL REPORT 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 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 Other Average effective tax rate 2018 2017 $ 77.4 1.7 - $ 52.2 3.3 (0.1) $ 79.1 $ 55.4 2018 27.0% (1.3%) 0.3% - - 0.5% 26.5% 2017 26.9% 3.2% 0.3% 0.5% (0.1%) 0.1% 30.9% RUSSEL METALS482018 ANNUAL REPORT The combined Canadian statutory rate is the aggregate of the federal income tax rate of 15.0% (2017: 15.0%) and the average provincial rates of 12.0% (2017: 11.9%). The 2018 average effective tax rate was lower than the average Canadian corporate tax rate principally due to differing tax rules applicable to certain of the Company's subsidiaries outside Canada. The 2017 average effective tax rate was higher due to differing tax rules outside Canada and contingent consideration which was not tax deductible. The U.S. tax reform, which reduced the U.S. Federal statutory tax rate from 35% to 21% led to a material reduction in the Company's U.S. income tax provision in 2018. c) Deferred income tax assets and liabilities were as follows: Deferred Income Tax Assets (millions) Balance December 31, 2016 Benefit (expense) to consolidated statement of earnings Reclass assets/liabilities and other Balance December 31, 2017 Benefit (expense) to consolidated statement of earnings Property Plant and Losses Equipment Pension And Benefits Goodwill And Intangibles Other Timing Total $ 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) $ - $ 0.8 $ 0.3 $ 3.0 $ 0.6 $ 4.7 - (0.1) (0.1) (0.2) (0.1) (0.5) Balance December 31, 2018 $ - $ 0.7 $ 0.2 $ 2.8 $ 0.5 $ 4.2 Deferred Income Tax Liabilities (millions) Balance December 31, 2016 (Benefit) expense to consolidated statement of earnings Reclass assets/liabilities and other Benefits to other comprehensive income Business acquisition (Note 5) Balance December 31, 2017 (Benefit) expense to consolidated statement of earnings Reclass assets/liabilities and other Benefits to other comprehensive income Property Plant and Losses Equipment Pension And Benefits Goodwill And Intangibles Other Timing Total $ - $ 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 $ (1.1) $ 15.0 $ (2.6) $ 10.9 $ (4.5) $ 17.7 0.4 (0.2) - 2.3 0.5 - 0.3 - 1.2 (0.3) (0.1) - (1.5) (0.2) - 1.2 - 1.2 Balance December 31, 2018 $ (0.9) $ 17.8 $ (1.1) $ 10.5 $ (6.2) $ 20.1 Net deferred liability at December 31, 2017 Net deferred liability at December 31, 2018 $ 13.0 $ 15.9 d) At December 31, 2018, the Company had U.S. state tax losses carried forward which, at U.S. state tax rates, have an estimated value of $0.9 million (2017: $1.1 million). The majority of the tax losses carried forward will expire between 2030 and 2037, 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, 2018 and 2017, the Company had $5.9 million of capital losses carried forward which may only be used to offset future capital gains. These losses have no expiry date. The deferred tax asset in respect of these losses of $0.8 million has not been recognized. RUSSEL METALS492018 ANNUAL REPORT e) At December 31, 2018, the aggregate amount of temporary differences associated with undistributed earnings of non-Canadian subsidiaries was $436 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 22 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 records the liability for contingent consideration on its 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. SUPPORTING INFORMATION (millions) Provision for decommissioning liabilities Deferred compensation and employee incentives Contingent consideration Less: current portion 2018 $ 2.0 8.0 - 10.0 (1.8) 2017 $ 2.4 8.6 3.3 14.3 (3.3) $ 8.2 $ 11.0 a) The following table presents the movement in the provision for decommissioning liabilities: (millions) Balance, beginning of the year Utilization Balance, end of the year 2018 2017 $ 2.4 (0.4) $ 2.7 (0.3) $ 2.0 $ 2.4 RUSSEL METALS502018 ANNUAL REPORT Deferred compensation includes the RSU and DSU liabilities. The RSU and DSU liabilities that will be b) paid within the current year amounting to $1.8 million have been classified as current accrued liabilities. NOTE 23 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 offshore. RUSSEL METALS512018 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 $62.2 million (2017: $49.3 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 Asset impairment Other income Earnings before finance expense and provision for income taxes Finance expense, net 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 2018 2017 $ 2,100.8 1,597.5 456.5 4,154.8 10.2 $ 1,635.2 1,270.2 380.1 3,285.5 10.5 $ 4,165.0 $ 3,296.0 $ 169.4 133.6 47.2 $ 80.0 106.8 34.2 350.2 (20.4) (3.3) 4.4 330.9 (32.8) (79.1) 221.0 (19.2) - 4.6 206.4 (27.2) (55.4) $ 219.0 $ 123.8 $ 32.7 7.1 0.8 0.7 $ 41.3 $ 23.6 4.5 1.1 0.1 $ 29.3 $ 29.8 4.8 0.8 0.3 $ 35.7 $ 22.5 4.1 1.0 - $ 27.6 RUSSEL METALS522018 ANNUAL REPORT (millions) Current Identifiable Assets Metals service centers Energy products Steel distributors Non-Current Identifiable Assets Metals service centers Energy products Steel distributors 2018 2017 $ 675.4 744.5 216.0 1,635.9 280.8 66.5 6.9 $ 503.3 632.4 152.5 1,288.2 259.4 70.1 6.7 Total identifiable assets included in segments 1,990.1 1,624.4 Assets not included in segments Cash and cash equivalents Income taxes receivable and deferred 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 payable and deferred income tax 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 124.3 9.4 4.4 (0.9) 125.8 9.2 3.5 (3.8) $ 2,127.3 $ 1,759.1 $ 270.8 171.0 30.0 471.8 $ 181.3 142.5 23.6 347.4 128.5 41.6 443.6 5.8 31.1 207.7 39.3 296.6 12.0 29.3 $ 1,122.4 $ 932.3 2018 2017 $ 2,721.0 1,433.8 $ 4,154.8 $ 237.9 112.3 $ 350.2 $ 1,375.9 614.2 $ 1,990.1 $ 2,299.3 986.2 $ 3,285.5 $ 160.5 60.5 $ 221.0 $ 1,201.3 423.1 $ 1,624.4 RUSSEL METALS532018 ANNUAL REPORT c) Revenues by product: (millions) Carbon Tubing/Pipe (Standard, Oil Country Tubular Goods, Line Pipe) Plate (Discrete & Plate in Coil) Structurals (WF & I Beams, Angles, Channels, Hollow Tubes) Flanges, Valves, Fittings and other Energy Products Bars (Hot Rolled and Cold Finished) Flat Rolled (Sheet & Coil) Grating/ Expanded/Rails Total Carbon Total Non-Ferrous (Sheet, Extrusion, Tubes, etc.) Other 2018 2017 $ 929.4 791.7 901.4 672.5 197.1 321.2 35.3 3,848.6 131.6 184.8 $ 746.8 587.5 714.2 557.5 160.1 260.1 32.8 3,059.0 114.5 122.5 $ 4,165.0 $ 3,296.0 NOTE 24 RELATED PARTY TRANSACTIONS During the years ended December 31, 2018 and 2017 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, 2018, there were no loans or credit transactions outstanding with key management personnel or directors. Key management personnel includes the Chief Executive 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 2018 $ 9.9 5.8 0.4 $ 16.1 2017 $ 7.1 4.5 0.5 $ 12.1 NOTE 25 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. RUSSEL METALS542018 ANNUAL REPORT 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. 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. RUSSEL METALS552018 ANNUAL REPORT 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. 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. Effective January 1, 2019, the Company will adopt IFRS 16 (Note 4). SUPPORTING INFORMATION a) Financial assets and liabilities Financial assets and liabilities are as follows: December 31, 2018 (millions) Cash and cash equivalents Accounts receivable Financial assets Bank indebtedness Accounts payables and accrued liabilities Long-term debt Total December 31, 2017 (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 $ 124.3 567.5 3.3 - - - $ 695.1 Loans and Receivables $ 125.8 446.2 0.5 - - - - $ 572.5 Other Financial Liabilities $ - - - (128.5) (494.7) (443.6) Total $ 124.3 567.5 3.3 (128.5) (494.7) (443.6) $ (1,066.8) $ (371.7) 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) For the year ended December 31, 2018, the fair value loss from derivative financial instruments on the consolidated statement of earnings was $0.9 million (2017: loss of $0.4 million) including embedded derivative and forward contracts. RUSSEL METALS562018 ANNUAL REPORT 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". 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, 2018 and 2017 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, 2018 (millions) 6% $300 million Senior Notes due April 19, 2022 6% $150 million Senior Notes due March 16, 2026 Total Current portion Long-term portion December 31, 2017 (millions) 6% $300 million Unsecured Senior Notes due April 19, 2022 Finance lease obligations Total Current portion Long-term portion Carrying Amount Fair Value Level 2 $ 297.2 146.4 $ 299.6 145.9 $ 443.6 $ 445.5 $ - $ 443.6 Carrying Amount Fair Value Level 2 $ 296.5 0.1 $ 308.6 0.1 $ 296.6 $ 308.7 $ 0.1 $ 296.5 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, 2018, 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 12);  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, 2018 and 2017, other than the allowance for doubtful accounts (Note 7). As at December 31, 2018, trade accounts receivable greater than 90 days represented less than 4% of trade accounts receivable (2017: 3%). Interest rate risk d) Interest rate risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in market rates of interest. The Company is not exposed to significant interest rate risk. The Company's long-term debt is at fixed rates. The Company's bank borrowings, net of cash and cash equivalents used to finance working capital, which is short-term in nature, is at floating interest rates. RUSSEL METALS572018 ANNUAL REPORT Foreign exchange risk e) Foreign exchange risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company uses foreign exchange contracts with maturities of less than a year to manage foreign exchange risk on certain future committed cash outflows. As at December 31, 2018, the Company had outstanding forward foreign exchange contracts in the amount of US$19.5 million, maturing in 2019 (2017: US$22.8 million). A 1% change in foreign exchange rates would not result in a significant increase or decrease in accounts payable or net earnings. Liquidity risk f) Liquidity risk is the risk that the Company will not meet its financial obligations when due. Liquidity adequacy is assessed in view of seasonal needs, growth requirements, capital expenditures, and the maturity profile of indebtedness. Cash is managed by the centralized treasury function and is invested in money market instruments or bank deposits, with durations ranging up to sixty days. A centralized treasury function ensures that the Company maintains funding flexibility by assessing future cash flow expectations and by maintaining its committed borrowing facilities. As at December 31, 2018, the Company was contractually obligated to make payments under its financial liabilities that come due during the following periods: (millions) 2019 2020 2021 2022 2023 2024 and beyond Total Accounts Payable $ 494.7 - - - - - $ 494.7 Long-Term Debt Maturities Long-Term Debt Interest $ - - - 300.0 - 150.0 $ 27.0 27.0 27.0 18.9 9.0 22.9 Operating Lease Obligations $ 31.3 26.2 20.9 15.5 11.9 32.6 Total $ 553.0 53.2 47.9 334.4 20.9 205.5 $ 450.0 $ 131.8 $ 138.4 $ 1,214.9 Operating lease expense for the year ended December 31, 2018 was $30.1 million (2017: $26.5 million). At December 31, 2018, the Company was contractually obligated to repay its bank borrowings and letters of credit under its bank facilities (Note 12). 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 26 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 METALS582018 ANNUAL REPORT The Company and certain of its subsidiaries have been named defendants in a number of legal actions. Although the outcome of these legal actions cannot be determined, management intends to defend all such legal actions and has recorded provisions, as required, based on its best estimate of the potential losses. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company's financial position, cash flows or operations. The Company 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. RUSSEL METALS592018 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 8, 2019 at 10:00 am DIRECTORY BOARD OF DIRECTORS OFFICERS JAMES F. DINNING Chair of the Board JOHN G. REID President & Chief Executive Officer MARION E. BRITTON Executive Vice President, Chief Financial Officer & Secretary LESLEY M. COLEMAN Vice President, Controller & Assistant Secretary RYAN W. MACDERMID Vice President, Risk Management & Legal SHERRI L. MCKELVEY Assistant Secretary Fiber Tube Laser JMS Russel Metals Processing Facility ALAIN BENEDETTI Corporate Director JOHN M. CLARK President Investment and Technical Management Corp. JAMES F. DINNING Chair of the Board BRIAN R. HEDGES Corporate Director BARBARA S. JEREMIAH Corporate Director ALICE D. LABERGE Corporate Director WILLIAM M. O’REILLY Corporate Director JOHN G. REID President & Chief Executive Officer 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 6600 Financial Drive Mississauga, Ontario L5N 7J6 905-819-7777 1-800-268-0750 www.russelmetals.com 

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