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