1. | | Summary of Significant Accounting Policies |
|
a) | | Principles of consolidation |
|
The consolidated financial statements include the accounts of Russel Metals Inc. and its subsidiary companies herein referred to as the Company. The reporting currency is Canadian dollars unless otherwise noted. All material inter-company balances, transactions and profits have been eliminated. |
|
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. Material differences from accounting principles generally accepted in the U.S. are disclosed in Note 16. |
|
b) | | Inventories |
|
Inventories are recorded at the lower of cost and net realizable value. Cost is determined on either an average cost basis or an actual cost basis depending on the business unit. |
|
c) | | Property, plant, equipment and depreciation |
|
Property, plant, equipment and leasehold improvements are recorded at cost. Depreciation is provided on a straight-line basis at rates that charge the original cost of such assets to operations over their estimated useful lives. The rates used are 20 to 40 years for buildings, 10 years for machinery and equipment, 2 to 5 years for computer equipment and over the lease term for leasehold improvements. Depreciation expense was $15,312,000 in 2003 (2002: $13,973,000; 2001: $12,993,000). |
|
d) | | Deferred financing charges and amortization |
|
Costs incurred that relate to financing are deferred and amortized over the period of the related financing. Deferred financing charges are recorded at cost less accumulated amortization. Amortization of deferred financing charges was $1,190,000 in 2003 (2002: $1,219,000; 2001: $1,243,000). |
|
e) | | Goodwill and amortization |
|
Goodwill represents the excess purchase price paid on acquisitions over the value assigned to identifiable net assets acquired. Goodwill on acquisitions subsequent to July 1, 2001 is not amortized but is subject to an annual permanent impairment test (see Note 3). Goodwill on acquisitions prior to July 1, 2001 was amortized on a straight-line basis over a period not exceeding 40 years or written down when there has been a permanent impairment in value. Effective January 1, 2002 all goodwill ceased to be amortized and is subject to an annual permanent impairment test. Amortization recorded in 2001 was $427,000. |
|
f) | | Pensions |
|
The cost of pension benefits earned by employees covered under defined benefit plans is determined using the projected benefit method prorated on service and is charged to expense as services are rendered. Aggregate gains and losses are amortized on a straight-line basis over the estimated average remaining service lives of the employee groups, using the corridor approach. The cost of post-retirement benefits other than pensions is recognized on an accrual basis over the working lives of employees. |
|
g) | | Income taxes |
|
The Company uses the liability method of income tax allocation. Under this method, future tax assets and liabilities are determined based on differences between the financial accounting and tax bases of assets and liabilities and are measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. |
|
h) | | Foreign currency translation |
|
The accounts of foreign subsidiaries are translated into Canadian dollars at the noon spot rates in effect at the balance sheet date. For 2003, the U.S. dollar published exchange rate was 1.2924 (2002: 1.5796). Revenues and expenses are translated at the average rate of exchange for the year. For 2003, the U.S. dollar published average exchange rate was 1.4010 (2002: 1.5703; 2001: 1.5489). The resulting gains or losses are accumulated as a separate component of shareholders' equity. |
|
Effective January 1, 2001, the Company adopted the Canadian accounting standards on foreign currency translation and accordingly, exchange gains or losses on long-term debt denominated in foreign currencies not designated as a hedge are expensed as incurred (see Note 12). Exchange gains or losses on the translation of long-term debt denominated in a foreign currency designated as a hedge of the Company's net investment in foreign subsidiaries are included in the separate component of shareholders' equity. |
|
i) | | Earnings per share |
|
Basic earnings per common share are calculated using the weighted daily average number of common shares outstanding. The weighted average number of common shares for 2003 was 40,021,479 (2002: 38,024,034; 2001: 37,981,501). |
|
j) | | Stock-based compensation |
|
Effective January 1, 2003, the Company adopted the fair value method of accounting for stock-based payments. Prior to 2003, the Company had chosen to account for the employee stock-based compensation plans using the intrinsic value-based method. Pro forma net income and earnings per share have been provided as if the fair value-based accounting method had been used since January 1, 2001 (see Note 11). |
|
k) | | Revenue recognition |
|
Revenue is recognized when the goods are shipped to the customer when collection is reasonably assured. Revenue on certain sales in the energy segment, where the Company acts as an agent, is presented on a net basis. |
|
l) | | Derivative financial instruments |
|
The Company uses foreign exchange contracts to manage foreign exchange risk on certain committed cash outflows. Realized and unrealized foreign exchange gains and losses not designated as a hedge are included in income. Derivatives are not entered into for speculative purposes and the use of derivative contracts is governed by documented risk management policies. |
|
m) | | Cash |
|
Cash includes short-term investments with a maturity of less than 30 days. |
|
n) | | Use of estimates |
|
The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. In particular, inventories, accounts receivable, other contingencies and assigned values on net assets acquired represent management's best estimates. Actual results could differ from these estimates. |
|
2. | | Change in Accounting Policies |
|
a) | | In the fourth quarter of 2003, the Company prospectively adopted effective January 1, 2003 the fair value method of accounting for employee stock-based payments issued after that date. The impact of the adoption of this standard for the year ended December 31, 2003 resulted in additional compensation expense of $217,000. If this standard had been adopted prior to the release of the quarterly statements the effect on the first, second and third quarters would have been an increase in compensation expense of $48,000, $53,000 and $55,000 respectively. The Company has not restated its quarterly results. For options issued prior to January 1, 2003, the Company had chosen to account for the employee stock-based compensation plans using the intrinsic value-based method as allowed by the Canadian standard adopted on January 1, 2001. As required by the transitional provisions of the standard, pro forma net income and earnings per share information has been provided as if the fair value-based accounting method had been used since January 1, 2001 for options issued prior to January 1, 2003 (see Note 11). |
|
b) | | Effective May 1, 2003, the Company adopted the new accounting standard for Long-Lived Assets and Discontinued Operations. This standard, along with emerging issues abstracts EIC-134 Accounting for Severance and Termination Benefits and EIC-135 Accounting for Costs Associated with Exit and Disposal Activities (Including Costs Incurred in a Restructuring) have been applied to the restructuring as a result of the Acier Leroux inc. acquisition (see Note 3). |
|
c) | | In 2003, the Company also adopted the new standard on financial statement presentation and new accounting guideline on disclosure of guarantees. The implementation of these standards did not have a material effect on the Company's results of operations, financial position or cash flows. |
|
d) | | Effective January 1, 2002, the Company adopted the provisions of the Canadian accounting standard for goodwill and other intangibles. Under this standard, goodwill is no longer amortized but is subject to an impairment test at least annually. As required by the standard, the Company has performed a transitional goodwill impairment evaluation based on discounted cash flows in each reporting unit as at January 1, 2002. The transitional impairment loss of $15,123,000 as a result of this evaluation has been charged to retained earnings at January 1, 2002. |
|
| | The following table presents the impact on comparative net earnings and earnings per share had the new standard been in effect January 1, 2001. |
|
($000 except per share data) | 2003 | | 2002 | | 2001 |
|
Net earnings as reported | $ 18,499 | | $ 29,236 | | $ 8,608 |
Goodwill amortization | - | | - | | 427 |
|
Net income adjusted | $ 18,499 | | $ 29,236 | | $ 9,035 |
|
Basic earnings per share - as reported | $ 0.41 | | $ 0.71 | | $ 0.17 |
Basic earnings per share - adjusted | $ 0.41 | | $ 0.71 | | $ 0.18 |
|
|
e) | | Effective July 1, 2001, the Company adopted the accounting standard for business combinations. The Company has applied this new standard in its acquisitions subsequent to July 1, 2001 (see Note 3) and as required by the standard's transitional provisions the goodwill generated from these acquisitions was not amortized. |
|
f) | | Effective January 1, 2001, the Company adopted the Canadian accounting standards for earnings per share and foreign currency translation. Under the earnings per share standard, the treasury stock method is used for determining the dilutive effect of stock options issued. Under the accounting standard for foreign currency translation, foreign exchange gains and losses on long-term debt are no longer deferred and amortized. The implementation of these standards does not have a material effect on the Company's results of operations, financial position or cash flows. |
|
3. | | Business Acquisitions |
|
a) | | On July 3, 2003, the Company successfully completed its offers to purchase Acier Leroux inc. Acier Leroux is a service center operation with Canadian locations in Ontario, Quebec and the Atlantic provinces. Acier Leroux Class A multiple voting shares validly tendered under the offer represented 99.52% of the issued and outstanding Class A shares. Acier Leroux Class B subordinate voting shares validly tendered under the offer represented 97.53% of the issued and outstanding Class B shares. Acier Leroux debentures validly tendered under the offer represented 86.61% of the outstanding 8% convertible unsecured subordinated debentures and 87.2% of the outstanding 7.25% convertible unsecured subordinated debentures. The Company issued 3,546,874 shares and paid $48,947,000 in cash in consideration for the shares and $16,684,000 in cash in consideration for debentures tendered under the offer. In addition the Company entered into an arrangement with the former Chairman and Chief Executive Officer of Acier Leroux requiring payments over a three-year period in the amount of $1,350,000, which has been accrued as a transaction cost. |
|
| On August 19, 2003, the Company, under the provisions of the Companies Act (Quebec), acquired the remaining shares of Acier Leroux for $1,190,000 in cash. On August 27, 2003, Acier Leroux redeemed the debentures not acquired in the offer. |
|
| Effective September 9, 2002, the Company purchased substantially all of the assets of the Milwaukee, Wisconsin service center operation formerly known as Williams Steel for $17.0 million in cash. This acquisition was intended to strengthen the existing Bahcall operations in Wisconsin and led to the restructuring of these operations. Costs associated with the restructuring of the Williams Steel location of $0.2 million were included in goodwill. Effective March 1, 2002, the Company purchased the operations and the fixed assets of Arrow Steel Processors, a coil processor of customer owned material located in Texas for $4.4 million cash. |
|
| Effective October 15, 2001, the Company purchased 100% of the shares of A. J. Forsyth and Company Limited, a Canadian service center operation located in British Columbia, for cash consideration of $22.0 million and assumed bank debt of $13.9 million. The acquisition was made to strengthen the B.C. Region and led to the restructuring of the B.C. service center operations. Costs of $1.2 million associated with the restructuring of the A. J. Forsyth locations were included in goodwill on acquisition, which totaled $7.6 million. |
|
| Effective August 16, 2001, the Company purchased 100% of the shares of Spartan Steel Products, Inc., a U.S. distributor of energy sector pipe, for cash consideration of $3.0 million and assumed bank debt of $3.3 million. Effective October 9, 2001, the Company purchased 100% of the shares of 1377804 Ontario Inc., a Canadian service center operation located in Ontario, for cash consideration of $255,000. |
|
| Effective September 1, 2000, the Company purchased Triumph Tubular & Supply Ltd., a Calgary, Alberta distributor of oil country tubular goods, additional amounts under an earnout based on results may be paid over five years and will be incremental to goodwill. The additional amount related to 2003 is $nil (2002: $nil; 2001: $102,000). |
|
| These acquisitions have been accounted for using the purchase method and their results of operations have been consolidated since their respective acquisition dates. |
|
| Net assets acquired, at assigned values at acquisition dates: |
|
($000) | 2003 | | 2002 | | 2001 |
|
Accounts receivable | $ 74,483 | | $ 4,110 | | $ 12,323 |
Inventories | 82,880 | | 8,567 | | 15,945 |
Fixed assets | 60,769 | | 6,273 | | 16,693 |
Other assets | 2,122 | | 54 | | 510 |
Goodwill | 4,216 | | 2,680 | | 8,321 |
|
Total assets -- continuing operations | 224,470 | | 21,684 | | 53,792 |
Accounts payable and accrued liabilities | (44,778) | | (346) | | (8,203) |
Accrued pension and benefit liability | (1,380) | | - | | - |
Future income taxes | 11,278 | | 68 | | (3,181) |
|
Net identifiable assets -- continuing operations | 189,590 | | 21,406 | | 42,408 |
Discontinued operations | 8,010 | | - | | - |
Debt assumed, net of cash | (123,956) | | - | | (17,120) |
|
Net assets acquired | $ 73,644 | | $ 21,406 | | $ 25,288 |
|
Consideration: | | | | | |
Cash | $ 50,137 | | $ 21,406 | | $ 25,288 |
Russel Metals common shares | 19,969 | | - | | - |
Transaction costs, net of taxes | 3,538 | | - | | - |
|
| $ 73,644 | | $ 21,406 | | $ 25,288 |
|
|
| The preliminary net assets acquired in the Leroux transaction include certain contingencies and estimates such as the expected proceeds on disposition of certain Leroux assets. The purchase price allocation is expected to be final in the second quarter of 2004. |
|
| The goodwill for 2003 and 2002 has been allocated to the service center segment and for 2001 $7.6 million was allocated to the service center segment with the balance in energy. The tax-deductible portion of goodwill is $nil (2002: $2.7 million; 2001: $0.8 million). Cash included in debt assumed was $2.7 million (2001: $nil). |
|
| In May 2001, the Company announced that it had been unsuccessful in finalizing an agreement for the acquisition of a U.S. service center operation. The due diligence process and legal expenses resulted in a write-off of costs of $1.7 million. |
|
b) | | Restructuring |
|
| In 2003, a restructuring charge of $3.6 million was recorded relating to the severance, employee benefits and termination costs of the closure of the Russel Metals' operations as a result of the acquisition of Acier Leroux. These costs primarily relate to the closure of the Russel Metals' Lachine, Quebec location. These costs also relate to employee related charges in the Atlantic and Ontario regions. Operations ceased at Lachine on December 31, 2003, at which time the building was being readied for sale. The continuity of the restructuring provision is as follows: |
|
($000) | | | 2003 | | | | |
|
| Special | | Contract | | | | |
| Termination | | Termination | | | | |
| Costs | | Costs | | Other | | Total |
|
Restructuring charged in the year | $ 327 | | $ 2,507 | | $ 749 | | $ 3,583 |
Cash payments | (99) | | (105) | | (217) | | (421) |
|
Balance at end of year | $ 228 | | $ 2,402 | | $ 532 | | $ 3,162 |
|
|
| In 2002, costs of restructuring the Bahcall locations, including the closure of the Waukeshau location and employee terminations, of $3.1 million were charged to income. |
|
| In 2001, the costs of restructuring the Russel Metals B.C. locations of $2.4 million were charged to income. During 2002, $0.4 million of this provision, not required for restructuring, was included in income. |
|
($000) | 2002 | | 2001 |
|
Restructuring - Russel Metals B.C. operations | $ (392) | | $ 2,400 |
Restructuring - Bahcall operations | 3,141 | | - |
|
Restructuring costs | $ 2,749 | | $ 2,400 |
|
|
| As at December 31, 2003, the remaining balance in these reserves was $0.7 million (2002: $3.9 million). |
|
c) | | Goodwill Impairment |
|
| The Company completed its annual goodwill impairment test during the fourth quarter of 2003. This evaluation concluded that the fair value associated with the service center segment's Williams Bahcall operation could not support the carrying value of the goodwill and accordingly the Company recorded a goodwill impairment charge of $2.4 million. |
|
d) | | Discontinued Operations |
|
| As part of the acquisition of Acier Leroux, the Company adopted a formal plan to dispose of their U.S. operations. At December 31, 2003, all of these operations have been divested except a service center in Plattsburgh, New York. This service center and certain other Leroux assets are expected to be disposed of in the next year and consequently have been included in discontinued operations. The revenue generated by the service center since acquisition was $3.3 million. |
|
4. | | Divestitures |
|
Divestitures include the sale of the inventory and fixed assets of Total Distributors, the Company's Tulsa-based energy sector operation for cash of $9.6 million on June 15, 2001. This sale resulted in a loss on sale of business of $6.0 million. |
|
5. | | Property, Plant and Equipment |
|
($000) | | | 2003 | | | | 2002 |
|
| Cost | | Net | | Cost | | Net |
|
Land and buildings | $ 139,850 | | $ 106,460 | | $ 73,983 | | $ 43,008 |
Machinery and equipment | 179,548 | | 68,140 | | 163,044 | | 56,686 |
Leasehold improvements | 25,454 | | 10,329 | | 25,777 | | 10,818 |
|
| $ 344,852 | | $ 184,929 | | $ 262,804 | | $ 110,512 |
|
|
6. | | Other Assets |
|
Other assets included a demand loan to an officer at interest rates prescribed by tax authorities for the purchase of Company shares in the amount of $nil (2002: $710,820). This loan was repaid in its entirety in February 2003. |
|
7. | | Revolving Credit Facilities |
|
The Company has a credit facility with a syndicate of banks, which provides a line of credit to a maximum of $253.8 million, including letters of credit. The Company has extended the facility to June 19, 2005. Borrowings under this facility are restricted by certain financial covenants with which the Company was in compliance at December 31, 2003. The obligations of the Company under this Agreement are secured by a pledge of trade accounts receivable and inventories of a significant portion of the Company's operations. At December 31, 2003, the Company had borrowings of $79.0 million (2002: $5.8 million) and letters of credit of $25.8 million (2002: $8.0 million) under this facility. |
|
In addition, certain U.S. subsidiaries of the Company have their own credit facility. The maximum borrowing under this facility is US $35.0 million. At December 31, 2003, these subsidiaries had no borrowings (2002: US $11.8 million) and letters of credit of US $9.4 million (2002: US $5.6 million) under this facility. |
|
8. | | Long-Term Debt |
|
($000) | 2003 | | 2002 |
|
10% Senior Notes US $115.6 million | | | |
due June 1, 2009 | $149,402 | | $182,602 |
8% Subordinated Debentures due June 15, 2006 | 30,000 | | 30,000 |
|
| $179,402 | | $212,602 |
|
|
a) | | 10% Senior Notes |
|
During 2003 and 2002, US $69.4 million of these are notes of Russel Metals Inc., legal entity, and have been designated as a hedge of the Company's net investment in foreign subsidiaries. The remaining US $46.2 million are notes of RMI USA LLC, a U.S. subsidiary of Russel Metals Inc. |
|
The notes are redeemable, as units, in whole or in part, at the joint option of the Company and the U.S. Subsidiary, on or after June 1, 2004 at 105% of the principal amount declining rateably to 100% of the principal amount on or after June 1, 2007. In addition, the notes are also redeemable, in whole, at the option of the Company at any time at 100% of the principal amount in the event of certain changes affecting Canadian withholding taxes. The notes contain certain restrictions on the payment of common share dividends. |
|
During the year ended December 31, 2001, the Company repurchased US $9.4 million of the 10% Senior Notes for US $9.4 million in cash. |
|
b) | | 8% Subordinated Debentures |
|
The 8% Subordinated Debentures, which are unsecured and mature in June 2006, are redeemable at face value subject to certain conditions being met. |
|
9. | | Interest expense |
|
($000) | | 2003 | | 2002 | | 2001 |
|
Interest on long-term debt | | $18,839 | | $20,550 | | $21,396 |
Other interest expense (income) | | 3,961 | | (226) | | 1,621 |
|
| | $22,800 | | $20,324 | | $23,017 |
|
|
Total interest paid by the Company in 2003 was $21,746,000 (2002: $20,298,000; 2001: $23,272,000). |
|
10. | | Income taxes |
|
a) | | The non-current future income tax balances consist of: |
|
($000) | 2003 | | 2002 |
Future income tax assets | | | |
Tax benefits of loss carryforwards | $ 8,820 | | $ 8,988 |
Plant and equipment | 198 | | 1,677 |
Pensions and benefits | 974 | | 988 |
Other timing | 3,294 | | 3,362 |
|
Gross future income tax assets | 13,286 | | 15,015 |
Valuation allowance | (2,828) | | (4,317) |
|
Total future income tax assets | 10,458 | | 10,698 |
|
| | | |
Future income tax liabilities | | | |
Plant and equipment | (6,650) | | (5,930) |
Pension and benefits | 2,608 | | 2,174 |
Other timing | 1,117 | | (8,028) |
Unrealized foreign exchange charged to equity | (3,184) | | 3,035 |
|
Total future income tax liabilities | (6,109) | | (8,749) |
|
Net future income taxes | $ 4,349 | | $ 1,949 |
|
|
b) | | The Company's effective income tax rate is derived as follows: |
|
($000) | | 2003 | | 2002 | | 2001 |
|
Average combined statutory rate | | 37.0% | | 39.0% | | 41.9% |
Statutory tax rate changes | | 2.8% | | - | | (2.4)% |
Large Corporation Tax | | 0.6% | | 0.5% | | 2.8% |
Rate difference of U.S. companies | | - | | (1.1)% | | 4.1% |
Other | | 0.4% | | 0.2% | | (1.1)% |
|
Average effective tax rate | | 40.8% | | 38.6% | | 45.3% |
|
|
c) | | The details of the income tax provision are as follows: |
|
($000) | | 2003 | | 2002 | | 2001 |
|
Current provision | | $13,763 | | $ 9,655 | | $ 3,631 |
Future provision | | (1,364) | | 8,708 | | 3,881 |
Statutory rate adjustments | | 900 | | - | | (378) |
|
| | $13,299 | | $18,363 | | $ 7,134 |
|
|
d) | | Income taxes paid in 2003 were $7,777,000 (2002: $5,942,000; 2001: $2,058,000). |
|
e) | | The Company has Canadian net operating losses carried forward for tax purposes for which a valuation allowance has been recorded that expire as follows: |
|
($000) | Year of Expiry | | Amount | |
|
| 2005 | | $ 195 | |
| 2006 | | 651 | |
| 2007 | | 838 | |
| 2008 | | 585 | |
| 2009 | | 4 | |
| 2010 | | 1,013 | |
|
|
| In addition, the Company has recorded a valuation allowance for timing differences of approximately $4.8 million (2002: $7.7 million). |
|
11. | | Shareholders' Equity |
|
a) | | The components of shareholders' equity are as follows: |
|
($000) | 2003 | | 2002 |
|
Common shares | $147,981 | | $122,324 |
Retained earnings | 110,502 | | 105,858 |
Contributed surplus | 192 | | - |
Cumulative translation adjustment | (4,833) | | (5,742) |
|
| $253,842 | | $222,440 |
|
|
b) | | At December 31, 2003, the authorized share capital of the Company consists of: |
|
| (i) | an unlimited number of common shares without nominal or par value; |
| (ii) | an unlimited number of Class I preferred shares without nominal or par value, issuable in series; and |
| (iii) | an unlimited number of Class II preferred shares without nominal or par value, issuable in series. |
|
| The Company has 1,200,000 cumulative, redeemable Class II preferred shares, Series C with annual cash dividends of $1.875 per share payable in quarterly instalments authorized, issued and outstanding as of December 31, 2003 and 2002. This series of Class II preferred shares is non-voting and is redeemable at a price of $25 per share without condition. |
|
| 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 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. |
|
c) | | The number of common shares issued and outstanding at December 31 was as follows: |
|
| Number of | | Amount |
| Shares | | ($000) |
|
Balance, December 31, 2001 | 37,981,501 | | $122,071 |
Stock options exercised | 75,500 | | 253 |
|
Balance December 31, 2002 | 38,057,001 | | 122,324 |
Shares issued -- Acier Leroux acquisition | 3,546,874 | | 19,969 |
Stock options exercised | 1,419,567 | | 5,688 |
Shares cancelled | (100) | | - |
|
Balance, December 31, 2003 | 43,023,342 | | $147,981 |
|
|
d) | | The Company has a shareholder approved share option plan, the purpose of which is to provide the Directors and 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 4,500,000. The options are exercisable on a cumulative basis to the extent of either 33 1/3% or 20% per year of total options granted, except that under certain specified conditions the options become exercisable immediately. The consideration paid by employees for purchase of common shares is added to share capital. |
|
| The following is a continuity schedule of options outstanding: |
|
| | | Weighted Average |
| Number of Options | | Exercise Price |
| 2003 | | 2002 | | 2003 | | 2002 |
|
Balance, beginning of the year | 2,682,100 | | 2,293,600 | | $3.94 | | $3.97 |
Granted | 795,000 | | 604,000 | | 5.22 | | 3.87 |
Exercised | (1,419,567) | | (75,500) | | 3.99 | | 3.35 |
Expired | (26,400) | | (140,000) | | 4.30 | | 4.54 |
|
Balance, end of the year | 2,031,133 | | 2,682,100 | | $4.40 | | $3.94 |
|
Exercisable | 795,922 | | 1,651,600 | | $4.46 | | $4.21 |
|
|
| The outstanding options at December 31, 2003 have exercise prices ranging from $5.50 - $6.00 (87,000 options); $3.50 - $5.49 (484,600 options) and $3.00 - $3.49 (1,459,533 options). In 2002, the exercise price of the options ranged from $3.00 to $6.375. The options expire in the years 2005 to 2012 and have a weighted average remaining contractual life of 7.1 years (2002: 7.7 years). |
|
| On January 1, 2003, the Company adopted the fair value-based method of accounting for stock-based compensation. Prior to January 1, 2003, the Company accounted for stock options using the intrinsic value-based method. |
|
| As required by the standard, disclosure of pro forma net earnings and earnings per share, as calculated under the fair value-based method as if this method had been adopted since January 1, 2001 is as follows: |
|
($000 except per share data) | | 2003 | | 2002 | | 2001 |
|
Net earnings -- as reported | | $ 18,499 | | $ 29,236 | | $ 8,608 |
Additional compensation expense | | (496) | | (764) | | (901) |
|
Net earnings | | $ 18,003 | | $ 28,472 | | $ 7,707 |
| | | | | | |
Basic earnings per common share | | $ 0.39 | | $ 0.69 | | $ 0.14 |
Diluted earnings per common share | | $ 0.38 | | $ 0.66 | | $ 0.14 |
|
|
| The Black Scholes option-pricing model assumptions used to compute compensation expense under the fair value-based method are as follows: |
|
| | 2003 | | 2002 | | 2001 |
|
Dividend yield | | 5.0% | | 5.0% | | 5.0% |
Expected volatility | | 34.6% | | 39.6% | | 41.8% |
Expected life | | 7 yrs | | 7 yrs | | 10 yrs |
Risk free rate of return | | 5.0% | | 5.0% | | 5.0% |
Weighted average fair value of options granted | | $1.30 | | $1.09 | | $0.91 |
|
|
e) | | Diluted share amounts were computed as follows: |
|
| | 2003 | | 2002 | | 2001 |
|
Weighted average shares outstanding | | 40,021,479 | | 38,024,034 | | 37,981,501 |
Shares assumed issued - options | | 1,981,324 | | 1,948,942 | | 461,667 |
|
Diluted weighted average shares outstanding | | 42,002,803 | | 39,972,976 | | 38,443,168 |
|
|
12. | | Financial Instruments |
|
a) | | Fair value |
|
The fair value of long-term debt as at December 31, 2003 and 2002 is estimated based on the last quoted trade price, where they exist, or on the current rates available to the Company for similar debt of the same remaining maturities. |
|
($000) | 2003 | | 2002 |
|
Long-term debt | | | |
Carrying amount | $179,402 | | $212,602 |
Fair value | 187,912 | | 219,032 |
|
|
As at December 31, 2003 and 2002, the estimated fair value of financial assets, liabilities and off balance sheet instruments approximates their carrying values. |
|
b) | | Credit risk |
|
The Company, in the normal course of business, is exposed to credit risk from its customers. This risk is mitigated by the fact that its customer base is geographically diverse and in different industries. The Company is also exposed to credit risk from the potential default by any of its counterparties on its foreign exchange forward contracts. The Company mitigates this risk by entering into forward contracts with Canadian chartered banks only. |
|
c) | | Interest rate risk |
|
The Company is not exposed to significant interest rate risk. The Company's long-term debt is at fixed rates. The Company's bank debt that is used to finance working capital, which is short-term in nature, is at floating interest rates. |
|
d) | | Foreign exchange risk |
|
The Company uses foreign exchange contracts to manage foreign exchange risk on certain future committed cash outflows. As at December 31, 2003, the Company had outstanding forward foreign exchange contracts in the amounts of US $15.3 million (2002: US $3.0 million) and € 1.825 million (2002: € nil). The foreign exchange gain included in 2003 net earnings from continuing operations was $881,000 (2002 loss: $560,000; 2001 loss: $190,000). |
|
The Company has designated US $69.4 million of the Senior Notes and other U.S. borrowings as a hedge of its net investment in foreign subsidiaries. The exchange gains and losses on U.S. borrowing not designated as a hedge of its net investment are charged to income as incurred. This resulted in a foreign exchange gain of $348,000 (2002 gain: $261,000; 2001 loss: $1.4 million). |
|
13. | | Segmented Information |
|
The Company conducts business primarily in three metals business segments. |
|
i) | | Service center distribution |
|
| The Company's network of service centers carries a full 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 aluminum. The Company services all major geographic regions of Canada and certain regions in the Midwestern United States. |
|
ii) | | Energy sector distribution |
|
| The Company's energy sector distribution operations carry a more specialized and limited product line than the service centers. These operations distribute pipe, tube, valves and fittings, primarily to the energy sector in Western Canada and the Western United States. |
|
iii) | | Steel import/export |
|
| The Company's steel import/export business primarily imports foreign steel products into Canada and the United States for sale to third party steel service centers and other customers. |
|
The Company has segmented its operations on the basis of management reporting and geographic segments in which it operates. |
|
a) | | Results by business segment: |
| | |
($000) | | 2003 | | 2002 | | 2001 |
|
Segment Revenues | | | | | | |
Service center distribution | | $ 922,778 | | $ 750,878 | | $ 706,173 |
Energy sector distribution | | 297,532 | | 289,623 | | 360,515 |
Steel import/export | | 283,579 | | 348,055 | | 321,454 |
|
| | 1,503,889 | | 1,388,556 | | 1,388,142 |
Other | | 13,201 | | 14,719 | | 14,367 |
|
| | $1,517,090 | | $1,403,275 | | $1,402,509 |
|
Segment Operating Profits | | | | | | |
Service center distribution | | $ 37,903 | | $ 31,516 | | $ 19,352 |
Energy sector distribution | | 13,764 | | 13,612 | | 18,406 |
Steel import/export | | 13,380 | | 28,090 | | 14,175 |
|
| | 65,047 | | 73,218 | | 51,933 |
Other income | | 4,002 | | 5,732 | | 6,177 |
Corporate expenses | | (8,018) | | (8,539) | | (7,489) |
|
| | $ 61,031 | | $ 70,411 | | $ 50,621 |
|
Capital Expenditures | | | | | | |
Service center distribution | | $ 33,466 | | $ 11,416 | | $ 6,639 |
Energy sector distribution | | 1,032 | | 1,009 | | 1,347 |
Steel import/export | | 77 | | 202 | | 32 |
Other | | 304 | | 141 | | 134 |
|
| | $ 34,879 | | $ 12,768 | | $ 8,152 |
|
Depreciation Expense | | | | | | |
Service center distribution | | $ 12,747 | | $ 11,549 | | $ 10,846 |
Energy sector distribution | | 1,126 | | 1,010 | | 1,110 |
Steel import/export | | 529 | | 502 | | 148 |
Other | | 910 | | 912 | | 889 |
|
| | $ 15,312 | | $ 13,973 | | $ 12,993 |
|
Identifiable Assets | | | | | | |
Service center distribution | | $ 501,433 | | $ 312,999 | | $ 298,098 |
Energy sector distribution | | 144,809 | | 145,670 | | 149,623 |
Steel import/export | | 71,436 | | 162,776 | | 112,941 |
|
Identifiable assets by segment | | 717,678 | | 621,445 | | 560,662 |
| | | | | | |
Assets not included in segments | | | | | | |
Cash | | 19,008 | | 25,068 | | 17,151 |
Income tax assets | | 16,370 | | 12,004 | | 17,950 |
Deferred financing charges | | 3,547 | | 4,962 | | 6,177 |
Other assets | | 2,840 | | 3,172 | | 3,197 |
Corporate and other operating assets | | 31,176 | | 28,943 | | 31,732 |
|
Total assets | | $ 790,619 | | $ 695,594 | | $ 636,869 |
|
|
b) | | Results by geographic segment: |
|
($000) | | 2003 | | 2002 | | 2001 |
|
Segment Revenues | | | | | | |
Canada | | $1,137,906 | | $ 991,821 | | $ 941,105 |
United States | | 365,983 | | 396,735 | | 447,037 |
|
| | $1,503,889 | | $1,388,556 | | $1,388,142 |
|
Segment Operating Profits | | | | | | |
Canada | | $ 55,784 | | $ 54,899 | | $ 46,940 |
United States | | 9,263 | | 18,319 | | 4,993 |
|
| | $ 65,047 | | $ 73,218 | | $ 51,933 |
|
Identifiable Assets | | | | | | |
Canada | | $ 580,955 | | $ 439,910 | | $ 425,564 |
United States | | 136,723 | | 181,535 | | 135,098 |
|
| | $ 717,678 | | $ 621,445 | | $ 560,662 |
|
|
14. | | Pensions and Benefits |
|
The Company maintains defined benefit pension plans, post retirement benefit plans and defined contribution pension plans in Canada and 401(k) defined contribution pension plans in the United States. |
|
The components for the Company's pension and benefit expense include the following: |
|
($000) | | 2003 | | 2002 | | 2001 |
|
Defined benefit pension plans | | | | | | |
Benefits earned during the year | | $1,538 | | $1,399 | | $1,237 |
Interest cost on benefit obligation | | 3,825 | | 3,639 | | 3,469 |
Expected return on plan assets | | (3,353) | | (3,333) | | (3,396) |
Curtailment loss | | 225 | | - | | - |
Settlement loss | | 648 | | - | | - |
Other | | 170 | | 208 | | (110) |
|
| | 3,053 | | 1,913 | | 1,200 |
Post retirement benefits | | 112 | | 390 | | 380 |
Defined contribution plans | | | | | | |
Paid during the year | | 794 | | 834 | | 522 |
|
| | 3,959 | | 3,137 | | 2,102 |
Related to discontinued operations | | (462) | | (475) | | (498) |
|
Pension and benefit expense | | $3,497 | | $2,662 | | $1,604 |
|
|
The actuarial determinations were based on the following assumptions in each year: |
|
| | 2003 | | 2002 | | 2001 |
|
Assumed discount rate -- year end | | 6.5% | | 6.5% | | 6.5% |
Expected long-term rate of return on plan assets | | 7.0% | | 7.0% | | 7.0% |
Rate of increase in future compensation | | 4.0% | | 4.0% | | 4.0% |
Rate of increase in future government benefits | | 3.5% | | 3.5% | | 3.5% |
|
|
The health care cost trend rates used were 5% for dental and 9% (2002: 9%; 2001: 8%) graded out for medical, which is reduced 1% per year until 5% and 5% thereafter. A 1% change in trend rates would result in an increase in the accrued benefit obligation for post retirement benefits of $639,000 or a decrease of $571,000 and an increase in net periodic cost of $68,000 or a decrease of $57,000. |
|
The following information pertains to the Company's defined benefit pension and other benefit plans, excluding those which are in the process of being wound up. |
|
| Pension Plans | | Other Benefit Plans |
($000) | 2003 | | 2002 | | 2003 | | 2002 |
|
Reconciliation of accrued benefit obligation | | | | | | | |
Balance, beginning of the year | $54,808 | | $55,541 | | $5,828 | | $5,605 |
Acquisition | 5,603 | | - | | - | | - |
Current service cost | 1,538 | | 1,399 | | 48 | | 44 |
Participant contribution | 337 | | 351 | | - | | - |
Interest cost | 3,825 | | 3,639 | | 372 | | 357 |
Benefits paid | (2,682) | | (2,587) | | (300) | | (273) |
Plan amendments | 141 | | 92 | | - | | - |
Corporate restructuring giving rise to: | | | | | | | |
Settlement | (3,447) | | - | | - | | - |
Curtailment | 225 | | - | | (305) | | - |
Actuarial (gain) loss | 364 | | (3,627) | | - | | 95 |
|
Balance, end of the year | $60,712 | | $54,808 | | $5,643 | | $5,828 |
|
Reconciliation of fair value of plan assets | | | | | | | |
Balance, beginning of the year | $45,825 | | $47,852 | | $ - | | $ - |
Acquisition | 4,223 | | - | | - | | - |
Actual return of plan assets | 6,310 | | (1,576) | | - | | - |
Employer contributions | 2,322 | | 1,785 | | 300 | | 273 |
Employee contributions | 337 | | 351 | | - | | - |
Corporate restructuring giving rise to: | | | | | | | |
Settlement | (3,447) | | - | | - | | |
Benefits paid | (2,682) | | (2,587) | | (300) | | (273) |
|
Balance, end of the year | $52,888 | | $45,825 | | $ - | | $ - |
|
Unamortized amounts | | | | | | | |
Funded status -- (deficit) | $(7,824) | | $(8,983) | | $(5,643) | | $(5,828) |
Unrecognized prior service cost | 264 | | 163 | | - | | - |
Unamortized net actuarial loss (gain) | 2,134 | | 5,534 | | (473) | | (476) |
|
Accrued benefit liability | $(5,426) | | $(3,286) | | $(6,116) | | $(6,304) |
|
|
As at December 31, 2003 and 2002, five of the Company's pension plans, included in the previous table, had a projected benefit obligation of $42,694,000 (2002: $42,814,000), a fair value of plan assets of $39,092,000 (2002: $37,186,000) and an unfunded obligation of $3,602,000 (2002: $5,628,000). The closure of Lachine (see Note 3) resulted in a partial settlement and curtailment of one of the Company's plans. The plan acquired with the Leroux acquisition, which is discussed below, is excluded from these figures. |
|
In 2003, the Company acquired two pension plans as part of the Leroux acquisition. These plans had assets of $4,223,000 and an accrued benefit obligation of $5,603,000 as of the acquisition date. The deficit in the plan of $1,380,000 was included in the net assets acquired in the Leroux acquisition. The year-end discount rate used for this plan was 6.25%. Also at December 31, 2003, the Company has certain unfunded executive arrangements with an accrued benefit obligation of $4,693,000 (2002: $4,524,000). |
|
The Company expects to contribute approximately $2.3 million to its defined benefit plans and $0.4 million to its other benefit plans in 2004. |
|
The other benefit plans primarily represent obligations to retired employees of sold or closed businesses. Less than 1% of all active employees are entitled to retirement benefits. |
|
($000) | 2003 | | 2002 |
|
Defined contribution plans | | | |
Fair value of plan assets | | | |
Canadian plans | $ 5,588 | | $ 5,142 |
401(k) U.S. plans | 18,181 | | 17,273 |
|
| $23,769 | | $22,415 |
|
|
($000) | 2003 | | 2002 |
|
Plans in the process of being wound up | | | |
Fair value of plan assets | $ 2,616 | | $ 2,455 |
Projected benefit obligation | - | | - |
|
Surplus | $ 2,616 | | $ 2,455 |
|
|
The plans in the process of being wound up relate to previously discontinued operations. The resolution of the surplus may result in sharing arrangements with employees of those operations. |
|
As at December 31, 2003, approximately 44% of all pension plan assets were invested in equities, 30% in fixed income securities, and 26% in cash and cash equivalents. The expected return on plan assets is based on historical returns on the Company's Master Trust. Management endeavours to have an asset mix of approximately 55% in equities, 40% in fixed income securities and 5% in cash and cash equivalents. The volatility of the markets has caused management to invest a greater percent of the pension plan assets in cash and cash equivalents. The plan assets are not invested in either derivatives or real estate assets. |
|
15. | | Contingencies, Guarantees and Commitments |
|
a) | | The Company and certain of its subsidiaries have been named defendants in a number of legal actions. Although the outcome of these claims cannot be determined, management intends to defend all claims and has recorded provisions based on its best estimate of the potential losses. In the opinion of management the resolution of these matters is not expected to have a materially adverse effect on the Company's financial position, cash flows or operations. |
|
b) | | The Company and its subsidiary companies have operating lease commitments, with varying terms, requiring approximate annual payments as follows: 2004: $8,862,000; 2005: $8,054,000; 2006: $5,991,000; 2007: $4,347,000; 2008: $3,425,000; 2009 and beyond: $6,705,000. Rental expense on operating leases were as follows: 2003: $10,104,000, 2002: $9,753,000 and 2001: $10,645,000. |
|
c) | | The Company is incurring site cleanup and restoration costs related to properties held for resale. Remedial actions are currently underway at several sites. The estimated costs of these cleanups have been provided for based on management's best estimates. Additional costs may be incurred at these or other sites, as site cleanup and restoration progress, but the amounts cannot be quantified at this time. |
|
16. | | United States Generally Accepted Accounting Principles |
|
The following table represents the material differences between Canadian and U.S. Generally Accepted Accounting Principles (GAAP): |
|
