Russel Metals Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the Years Ended December 31
The following management discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
Consolidated Financial Statements. The
following tables provide a summary of revenues and operating earnings for the
Company's
continuing operations by business segment, and certain related information, for
the December
31 year ends. See Note 16 to the Consolidated Financial Statements for
additional segment
information.
The 1995 year shows a furthering of the Company's movement towards a Metals
operating
company. In May 1995, the Shareholders approved the change of the Company's
name to Russel
Metals Inc. The sale of the White Pass Petroleum business for net proceeds of
$34.1 million as
well as the sale of the remaining discontinued consumer group operations for
$27.5 million cash
plus $15.5 million of debt and equity, significantly reduced the Company's
investment in non-metals businesses.
In 1995, 88.4% of revenues were from Metals operations compared to 80.3% in
1994. With
Metals representing the principal business, the Company is including additional
segment
information within the Metals operations. Certain costs previously reported
under the Metals
segment are now included in Corporate. Metals segment operating margins for
1994 and 1993
have been adjusted to reflect this change.
<TABLE>
<CAPTION>
Revenues
($000's) 1995 Change 1994 Change
1995 1994 1993 As % of 1994 As % of 1993
<S> <C> <C> <C> <C> <C>
Metals $1,318,375 $1,072,751 $ 703,871 22.9 % 52.4 %
Transport 173,300 263,419 263,015 (34.2) % 0.2 %
Total $1,491,675 $1,336,170 $ 966,886 11.6 % 38.2 %
Segment Operating Margins
($000's) 1995 Change 1994 Change
1995 1994 1993 As % of 1994 As % of 1993
Metals $52,596 $59,167 $21,428 (11.1) % 176.1%
Transport 10,985 18,777 20,904 (41.5 )% (10.2) %
Total $63,581 $77,944 $42,332 (18.4 )% 84.1%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Return on Average Net Assets
($000's)
Operating Margin Return
Actual Average Net Assets on Average Net Assets
Dec 31,
1995 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C>
Metals $349,200 $373,800 $261,200 14.1 % 22.7 %
Transport 100,400 118,800 115,600 9.3 % 16.2 %
Corporate and
Discontinued 187,100 197,900 231,600
$636,700 $690,500 $608,400 9.2 % 12.8 %
Average net assets are calculated based on opening and closing monthly position.
</TABLE>
Segment Information
Metals - The following table shows the revenues and operating margins and the
changes for the
business segments of the Metals operations for the periods indicated:
<TABLE>
<CAPTION>
($000's)
1995 Change 1994 Change
1995 1994 1993 As % of 1994 As % of 1993
<S> <C> <C> <C> <C> <C>
Revenues
Service Centers $ 825,267 $ 731,438 $515,386 12.8 % 41.9%
Specialty Metals and Trading 493,108 341,313 188,485 44.5 % 81.1%
$1,318,375 $1,072,751 $703,871 22.9 % 52.4%
Segment Operating Margins
Service Centers $28,999 $37,785 $12,100 (23.3) % 212.3%
Specialty Metals and Trading 23,597 21,382 9,328 10.4 % 129.2%
$52,596 $59,167 $21,428 (11.1) % 176.1%
</TABLE>
Metals revenues increased 22.9% in 1995 compared to 1994. This increase
compares to an
increase of 52.4% in 1994 compared to 1993.
The Company has segmented its Metals operations between service center
operations and
specialty metals and trading operations. Specialty metals operations include
pipe and tubular
distributors and processing and distribution operations with specialized niches.
These businesses typically have a different margin and cost profile than the
service center segment. The majority
of the Company's acquisitions in the last two years have been in specialty
businesses. Acquisitions made during 1994 accounted for approximately 88% of
the revenue increase in specialty metals
and trading during 1995.
Trading revenues for 1995 were approximately 6% higher than 1994. The high
demand for steel
and corresponding short fall of domestic mill capacity in the first quarter of
1995 led to bookings
which were delivered and converted into sales in the second and third quarter.
Import bookings decreased after the second quarter, reflecting softer North
American demand and a corresponding
increase in the ability of the domestic mills to supply their customers' needs.
The service center segment includes general line and flat rolled steel
operations as well as other
ferrous and non-ferrous metals products sold through locations in Canada and the
United States.
The increase in service center revenue of 12.8% in 1995 compared to 1994 relates
to higher
average selling prices per ton sold in 1995 compared to 1994. The actual tons
sold in 1995 were
approximately the same as 1994.
The reduced profitability of the service center operations in 1995 compared to
1994 has been
caused by a change in the supply pricing trends, primarily in flat rolled
products. During 1994,
rapidly increasing prices generated inventory gains which contributed to
stronger operating
margins. In 1995, as prices stabilized or, as in the case of flat rolled
products, declined, the
Company experienced inventory losses which have contributed to lower operating
margins.
High inventory levels experienced throughout the industry in the second quarter
of 1995 in the
service center sector further lowered the margins as inventory positions were
reduced. The
Company reduced Metals inventory levels from the peak of $270.0 million at
May 31, 1995 to
$238.5 million at year end.
Metals revenues for 1994 increased 52.4% compared to 1993. Approximately two-
thirds of the
52.4% increase was fueled through internal growth and one-third through
acquisitions. Service
center revenues increased by 41.9% while specialty metals and trading increased
81.1%. The service center increase was mainly internal growth related primarily
to increased volume and metals prices across Canada. Trading revenues
increased 20.1% primarily as a result of higher
imports to North America due to increased demand for steel compared to 1993.
Specialty metals
revenues more than doubled in 1994 compared to 1993 with approximately 56% of
the increase related to acquisitions.
<PAGE>
Segment operating margins from Metals tripled in 1994 compared to 1993. Similar
to revenues,
internal growth (higher volumes and prices) accounted for approximately two-
thirds of the
segment operating margin increase and acquisitions one-third.
Transport - The reduced revenue from Transport operations in 1995 compared to
1994 relates to
the sale of the White Pass Petroleum operations effective May 31, 1995 and the
sale of
Consolidated Fastfrate effective September 1, 1994. Tri-Line trucking
operations had increased
revenue of 7.2% related to increased volumes in 1995 compared to 1994. Thunder
Bay Terminals
and White Pass Rail experienced revenues in 1995 similar to those of 1994.
The reduced segment operating margin relates to the sale of the businesses noted
above as well
as a provision of $4.0 million in the fourth quarter of 1995 to cover
anticipated environmental and
other regulatory expenditures related to the White Pass operation.
The remaining operations, Thunder Bay Terminals, White Pass Rail and Tri-Line
trucking
operations, experienced an increase in operating margins of approximately 11%
compared to
1994. In the fourth quarter of 1995, the trucking operations experienced a
softening of volumes
indicating the peak in the transport cycle may have been reached.
Total revenues from Transport operations in 1994 approximated 1993 revenues.
However, the
1994 revenues represent higher sales in the White Pass Petroleum and Rail
operations and lower
coal throughput at Thunder Bay Terminals. Also, higher sales at Tri-Line
Expressways' truckload
operations offset the reduction in pool car revenues due to the sale of
Consolidated Fastfrate
effective September 1, 1994.
Segment operating margins of $18.8 million for 1994 were $2.1 million lower than
1993. The
reduction mainly relates to the lower volumes at Thunder Bay Terminals partially
offset by higher
margins at Tri-Line Expressways.
Consolidated Results
Revenues - The increase in consolidated revenues of 11.6% in 1995 compared to
1994 represents
an increase in revenues from Metals offset by a decrease in revenues from
Transport.
The increase in 1994 revenues compared to 1993 revenues of 38.2% related to
higher volumes and
prices in the Metals operations.
Operating Margins - The decrease in segment operating margins of 18.4% is a
combination of
decreased segment operating margins in Metals and Transport operations as
discussed above.
The 1994 segment operating margins almost doubled compared to 1993. The
increase in
operating earnings is a result of substantially increased sales levels and
strong operating margins
in Metals.
Interest Expense - The following table shows the components of interest expense.
The most
significant factor affecting interest expense in 1995 was the high level of
borrowings under the
Company's short-term debt. The floating rate long-term interest relates
primarily to the U.S. note
which was previously swapped from fixed to floating rates. The reduction of
floating rate long-term interest expense is primarily due to a stronger Canadian
dollar. The decrease in fixed rate
interest in 1995 relates to the repayment of the 8.79% debentures in May 1994.
The table of
average net assets employed shows that the average net assets for 1995 were
$82.1 million higher
than 1994. The additional borrowings were primarily to support the higher
working capital level
in Metals and for the replacement dock facility (see discussion in Liquidity
section).
<TABLE>
<CAPTION>
($000's)
1995 1994 1993
<S> <C> <C> <C>
Interest expense
Long-term
Fixed Rate $12,594 $14,523 $22,166
Floating Rate 16,291 16,762 8,103
Short-term
Standby and
Operating Loans 13,040 4,012 5,073
$41,925 $35.297 $35,342
</TABLE>
Earnings from Continuing Operations - The 1995 earnings from continuing
operations of $7.3
million compares to $16.7 million for 1994. The decrease is a result of lower
segment operating
margins in both Metals and Transport and higher interest costs in 1995 compared
to 1994.
The earnings of $16.7 million in 1994 compares to a loss of $1.9 million for
1993.
Discontinued Operations - As at December 31, 1994, the Company announced a plan
to discontinue
its Consumer operations. The 1994 loss from discontinued operations of $25.5
million, net of
income taxes, includes a provision of $13.8 million, net of income taxes, to
cover the estimated loss
on disposal and estimated results to date of disposal. This loss compares to
earnings from
discontinued operations of nil for 1995 and 1993.
<PAGE>
Cyclicality
The Company's operations are engaged in businesses that are substantially
affected by changes
in economic cycles and whose revenues and earnings vary with the level of
general economic
activity in the markets they serve. The Metals operations service a wide
variety of customers in
both Canada and the United States, representing a cross section of all major
industrial segments.
The revenues will fluctuate with the level of general business activity in
Canada and selected
regional markets in the United States. The Canadian service centers, which
represent a larger
portion of the Company's operations, are most significantly affected by economic
conditions in
Ontario and Quebec, where demand for general line and flat rolled steel products
from the
construction and capital goods sectors fluctuates considerably through an
economic cycle. The
cyclical nature of the Metals operations is evident from the segment margins of
Metals during
1991 and 1992 compared to 1993 and 1994, with the later period reflecting an
economic recovery.
Liquidity and Capital Resources
The average net assets employed, shown earlier, indicate the operating assets of
the Company for
the Metals and Transport operations. The remaining $197.9 million of corporate
assets are not
productively employed by the Company. The monetization of these assets
represents a significant
liquidity opportunity as the funds will be used to expand the Metals operation,
or alternatively, to
reduce interest bearing debt.
On November 6, 1995, the Company completed the sale of its Cashway Building
Centres business
to a group led by management for proceeds of approximately $36.5 million. Under
the terms of
sale, the Company has leased real property, valued at $23.0 million, to the
purchaser and has
retained a minority equity interest and subordinated debt in the new company
valued at $11.5
million. This transaction has reduced corporate assets by approximately $21.5
million.
Corporate and discontinued assets are comprised of the following items:
1995 1994
Deferred Tax Debits and Taxes Recoverable $ 69.0 $ 68.0
Working Capital - Discontinued Operations - 17.1
Property held for resale 57.2 68.5
Minority Equity Interest in Divested Operations 13.4 13.1
Debt in Divested Operations 22.7 7.7
Deferred Financing costs 9.1 8.6
Other 15.7 5.8
TOTAL $187.1 $188.8
In 1995, the Company capitalized $20.0 million related to a dock facility which
was destroyed in
an underwater avalanche in November 1994 in Skagway, Alaska. The remaining
amount
expended on the dock, net of $10.0 million insurance proceeds advanced in
December 1995, is
included in accounts receivable. The Company believes that it has a valid
insurance claim for the
replacement costs of this facility and that it is entitled to recover
substantially all of the amounts
expended to date. The Company has recently commenced legal action against its
insurers for the
recovery of these costs.
During 1995, the Company utilized $8.4 million cash in continuing operations.
Continuing
operations generated $16.5 million cash from operations and $5.3 million from
working capital.
The sale of the White Pass Petroleum operations generated cash of $34.1 million,
while capital
spending utilized $46.1 million. During 1995, expenditures also included $4.9
million to acquire
three specialty Metals processing businesses and a $7.5 million increase in long
- -term receivables,
primarily related to divestitures. Discontinued operations generated $43.6
million in cash during
the period, primarily related to the sale of Cashway Building Centres and
Willson Stationers.
During 1994, the Company utilized $139.8 million of cash in continuing
operations and generated
$3.3 million of cash from discontinued operations. Continuing operations
generated cash from
operations of $57.6 million and $80.4 million from the issue of common shares,
with $55.0 million
of the common share issue used to redeem preference shares. Cash utilized by
continuing
operations included $44.4 million to acquire three pipe distributors, $30.2
million to repay the
Australian debenture and $120.0 million for increased working capital
requirements. The $120.0
million increase in working capital in 1994 resulted primarily from revenue
growth in the Metals
operations.
During 1993, the Company generated cash flows of $49.0 million from the issue of
common
shares, $132.4 million from the issue of the 10.25% Senior Notes and $17.3
million from
continuing operations. The Company used $34.4 million in cash to fund increased
working capital
and $87.7 million to repay long-term debt.
In December 1995, the Company replaced its revolving credit facility, arranged
with a new
syndicate of Canadian and U.S. banks. The Company now has a $350 million
banking facility,
including letters of credit, which matures on December 19, 1999 and may be
extended for an
additional one year period on each anniversary, with the permission of the
syndicate. The first
anniversary for an additional one year extension is December 19, 1996. The
Company is entitled
to borrow, on a revolving basis, up to an amount equal to the sum of specified
percentages of
eligible accounts receivable and inventories, less an amount equal to the
principal amounts of the
Company's 10.2% debentures, to a maximum of $350 million.
The Company has no significant long-term debt repayments scheduled before 1998.
The $16.6
million in current long-term debt as at December 31, 1995, represents the 10.2%
debentures
retractable annually until due on July 13, 1998.
The 1998 repayment of $20.4 million relates to the 8.61% Series C First Mortgage
Bonds of
Thunder Bay Terminals which will be offset by a long-term receivable from
Ontario Hydro.
Fixed charges were approximately $47.4 million in 1995, $39.8 million in 1994
and $39.4 million
in 1993. For this purpose, fixed charges consist of interest expenses on all
debt, amortization of
deferred financing costs and a portion of operating lease rental expense that is
representative of
the interest factor (deemed to be one-third of minimum operating lease rentals
of continuing
operations). The ratio of earnings (earnings (loss) before income taxes plus
fixed charges) to fixed
charges was 1.24 for 1995, 1.81 for 1994 and 0.91 for 1993. The Company's
earnings from
continuing operations were reduced by depreciation and amortization of $17.4
million in 1995,
$16.6 million in 1994 and $18.6 million in 1993.
Based upon the Company's current performance and management's estimates of
operations
prepared for internal planning purposes, for the period to December 31, 1999,
the Company
believes that it will generate a sufficient amount of cash flow from operations
to pay all of its
preferred share dividends, interest obligations on its indebtedness and
operating costs as they
become due during that period. The Company also believes that future borrowings
under the
Revolving Credit Facility will provide sufficient financial resources to meet
its obligations as they
come due.
Outlook
The pricing stability of steel products will continue to be the major factor
influencing fiscal 1996
results. Imports and additional mill capacity scheduled to come on-line later
this year and in 1997
are providing uncertainty as to steel pricing directions.
Accounting Policies
In certain respects, Canadian GAAP may differ from U.S. GAAP. Relevant
differences between
Canadian GAAP and U.S. GAAP are provided in Note 20 to the Consolidated
Financial
Statements.
<PAGE>
RUSSEL METALS/NEWS
FOR IMMEDIATE RELEASE
STOCK SYMBOL: TSE: RUS.A
NASDAQ: RUSAF
RUSSEL METALS REPORTS 1995 RESULTS
TORONTO (March 7, 1996) -- Russel Metals Inc. today reported improved overall
results for the
year ending December 31, 1995. The Company's continuing operations reported a
decline in
earnings in 1995 due to lower operating profits and higher interest costs.
Consolidated revenues for the year increased by 12% to $1.49 billion of which
88% was derived
from Metals operations compared to 80% in 1994. Year-over-year Metals sales grew
23% offset
by a decline in revenues in the Transport segment due to divestitures.
Operating margins for Metals declined 11% to $52.6 million in 1995. The lower
Metals margins
in 1995 were caused by a sharp decline in steel prices, primarily in flat rolled
products,
experienced in the second half of 1995. As prices declined, the Company incurred
inventory losses
which contributed to the lower operating margins. Transport total segment
margins declined 42%
to $11.0 million in 1995 caused by the divested operations discussed above as
well as a $4.0
million provision in the fourth quarter of 1995 to cover environmental
expenditures related to the
White Pass operation. Comparable remaining Transport operations generated an 11%
higher
operating margin in the year compared to fiscal 1994.
The Company's overall net income for 1995 improved to $7.3 million, or $0.10 per
share, from a
loss in 1994 of $8.8 million, or ($0.25) per share. The prior year results are
after a provision for
discontinued operations. The comparable continuing operations in the prior year
earned $16.7
million or $0.27 per share.
Russel Metals Chairman and Chief Executive Officer, John S. Pelton, commented,
"1995 was a
year of progress and disappointment. We strengthened and expanded our core
business, disposed
of the last under-performing non-Metals businesses and put in place an
innovative $350 million
banking facility. In addition our focus on cash flow management allowed us to
effectively deal
with the changing market conditions in the second half of the year. While real
progress was made
in pursuit of the Company's strategies, the expected improvement in earnings per
share did not
occur."
Mr. Pelton added, "The decline in steel prices, which was the principal cause
of disappointing
results, appears to have abated. Future pricing concerns relate primarily to
additional steel
production capacity scheduled to come on stream over the next two to three
years."
Russel Metals is one of the five largest processors of metal and metal products
in North America
through its network of 58 service centers. The Company's operating units trade
under various
names including Russel Metals, Drummond McCall, Baldwin International, Bahcall
Group, Total
Distributors, Pioneer Steel & Tube, Copco Steel, Comco Pipe and Supply and Wirth
Limited.
Russel Metals also has investments in the transportation sector.
-30-
For further information, contact:
David Fine
Vice President Planning
and Communications,
Russel Metals
(905) 819 - 7402
<PAGE>
<TABLE>
<CAPTION>
RUSSEL METALS INC.
CONSOLIDATED BALANCE SHEETS
At December 31
($000)
1995 1994
<S> <C> <C>
Current assets
Accounts receivable $206,419 $223,729
Income taxes recoverable 11,940 17,888
Inventories 242,568 239,629
Prepaid expenses and other assets 3,247 3,583
Current assets - discontinued operations - 79,258
464,174 564,087
Fixed assets
Property, plant and equipment 161,526 153,309
Property held for resale 57,224 68,549
218,750 221,858
Other assets
Long-term receivables 22,676 13,870
Other investments 16,441 11,258
Deferred charges 14,218 14,233
Goodwill 12,160 11,471
Deferred income taxes 57,089 50,141
Other assets - discontinued operations - 15,125
122,584 116,098
$805,508 $902,043
Current liabilities
Bank indebtedness $ 63,987 $ 99,122
Accounts payable and accrued liabilities 171,360 170,543
Current portion of long-term debt 16,585 16,985
Current liabilities - discontinued operations - 62,150
251,932 348,800
Long-Term Debt 166,520 171,013
Convertible Debentures and Shareholders' Equity 387,056 382,230
$805,508 $902,043
</TABLE>
<PAGE>
RUSSEL METALS INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For The Years Ended December 31
($000)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Sales and services
Metals $1,318,375 $1,072,751 $ 703,871
Transport 173,300 263,419 263,015
$1,491,675 $1,336,170 $ 966,886
Earnings before interest and taxes
Metals 52,596 59,167 21,428
Transport 10,985 18,777 20,904
Corporate (10,048) (10,270) (10,366)
53,533 67,674 31,966
Interest 41,925 35,297 35,342
Earnings (loss) before income taxes 11,608 32,377 (3,376)
Provision for (recovery of) income taxes 4,286 15,726 (1,433)
Earnings (loss) from continuing operations 7,322 16,651 (1,943)
Earnings (loss) from discontinued operations - net of
related income taxes - (25,454) 28
Net earnings (loss) for the year $ 7,322 $ (8,803) $ (1,915)
Earnings (loss) per common share from continuing operations
Basic $0.10 $0.27 $(0.24)
Fully diluted $0.10 $0.27 $(0.24)
Net earnings (loss) per common share
Basic $0.10 $(0.25) $(0.23)
Fully diluted $0.10 $(0.25) $(0.23)
</TABLE>
<PAGE>
RUSSEL METALS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
For The Years Ended December 31
($000)
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Operating activities
Net earnings (loss) from continuing operations $ 7,322 $ 16,651 $ (1,943)
Depreciation and amortization 17,447 16,570 18,611
Deferred income taxes (7,015) 24,812 4,742
Accrued revenue in respect of deferred income taxes (1,318) (899) (2,809)
Loss (gain) on sale of fixed assets 54 438 (1,343)
Cash from continuing operations 16,490 57,572 17,258
Changes in working capital items of continuing operations
Accounts receivable 16,016 (64,127) (41,800)
Income taxes recoverable 5,948 (2,306) 6,335
Inventories (19,373) (70,288) (27,613)
Current portion of long-term receivable - - 9,625
Accounts payable and accrued liabilities 2,379 14,995 21,189
Other 344 2,029 (2,177)
Cash from (used in) continuing operating activities 21,804 (62,125) (17,183)
Financing activities
Increase (decrease) in long-term debt (1,228) (30,899) 44,695
Increase in long-term receivable (7,488) (13,010) (2,273)
Issue of common shares - 80,396 48,959
Redemption of preferred shares - (55,000) -
Dividends (2,250) (3,461) (6,375)
Cash from (used in) financing activities (10,966) (21,974) 85,006
Investing activities
Purchase of fixed assets (46,111) (15,367) (11,580)
Proceeds on sale of fixed assets 4,627 4,011 6,890
Proceeds on sale of subsidiary company 34,074 6,885 -
Purchase of subsidiary companies (4,857) (44,395) -
Other (6,994) (6,790) (17,098)
Cash used in investing activities (19,261) (55,656) (21,788)
Increase (decrease) in cash from continuing operations (8,423) (139,755) 46,035
Cash from discontinued operations 43,558 3,261 29,184
Increase (decrease) in cash 35,135 (136,494) 75,219
Cash position, beginning of the year (99,122) 37,372 (37,847)
Cash position, end of the year $(63,987) $(99,122) $ 37,372
NOTE: For 1994 and 1995 cash position represents bank indebtedness.
</TABLE>
