Management's Report to the Shareholders
The accompanying interim consolidated financial statements, management's discussion and analysis and report to shareholders for the quarter ended March 31, 2006, have been prepared by management and approved by the Audit Committee and the Board of Directors of the Company.
These interim consolidated financial statements were prepared in accordance with Canadian generally accepted accounting principles and, where appropriate, reflect management's best estimates and judgements. Management is responsible for the accuracy, integrity and objectivity of the interim consolidated financial statements, management's discussion and analysis and report to shareholders within reasonable limits of materiality with that contained in the consolidated interim financial statements.
To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed 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 addition, the Company maintains a system of disclosure controls in order to provide reasonable assurance that the financial information is relevant, reliable and accurate.
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 interim consolidated financial statements, the management's discussion and analysis and the report to shareholders. The Audit Committee reports its findings to the Board of Directors for consideration in approving the interim consolidated financial statements, the managements discussion and analysis and the report to shareholders for presentation to the shareholders.
Dated May 3, 2006
(signed) E. M. Siegel, Jr. | | | (signed) Brian R. Hedges |
| | |
|
President and Chief Executive Officer | | | Executive Vice President and |
| | | Chief Financial Officer |
RUSSEL METALS INC. |
CONSOLIDATED BALANCE SHEETS |
(UNAUDITED) |
| | |
| March 31, | December 31, |
($000) | 2006 | 2005 |
|
ASSETS | | |
Current | | |
Cash and cash equivalents (Note 1) | $ 255,511 | $ 47,055 |
Accounts receivable | 412,079 | 359,594 |
Inventories | 519,586 | 474,034 |
Prepaid expenses and other assets | 6,338 | 7,010 |
Income taxes receivable | 777 | 304 |
|
| 1,194,291 | 887,997 |
| | |
Property, Plant and Equipment | 183,967 | 181,841 |
Assets Held For Sale | 5,085 | 5,085 |
Deferred Financing Charges | 6,950 | 7,240 |
Goodwill | 9,205 | 9,205 |
Future Income Tax Assets | 997 | 994 |
Other Assets | 2,838 | 2,821 |
|
| $ 1,403,333 | $ 1,095,183 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY | | |
Current | | |
Bank indebtedness (Note 7) | $ - | $ 2,098 |
Accounts payable and accrued liabilities | 328,589 | 312,937 |
Income taxes payable | 7,834 | 5,588 |
Discontinued operations | 2,345 | 2,386 |
|
| 338,768 | 323,009 |
| | |
Other Accrued Liabilities | 15,090 | 15,210 |
Long-Term Debt | 204,243 | 204,033 |
Pensions and Benefits | 1,311 | 8,949 |
Future Income Tax Liabilities | 8,312 | 5,285 |
|
| 567,724 | 556,486 |
|
Shareholders' Equity | 835,609 | 538,697 |
|
| $ 1,403,333 | $ 1,095,183 |
|
ON BEHALF OF THE BOARD,
(signed) Carl Fiora | | | (signed) Alain Benedetti |
| | |
|
Director | | | Director |
| | | |
RUSSEL METALS INC. |
CONSOLIDATED STATEMENTS OF EARNINGS |
(UNAUDITED) |
|
| Quarters ended March 31, |
($000) | 2006 | 2005 |
|
Revenues | $ 740,728 | $ 693,609 |
Cost of sales and operating expenses | 679,446 | 634,802 |
|
Earnings before the following | 61,282 | 58,807 |
Restructuring | - | (405) |
Interest expense, net | (3,159) | (4,899) |
|
Earnings before income taxes | 58,123 | 53,503 |
Provision for income taxes | (20,747) | (20,013) |
|
Earnings from continuing operations | 37,376 | 33,490 |
Loss from discontinued operations | - | (46) |
|
Net earnings for the period | $ 37,376 | $ 33,444 |
|
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS |
(UNAUDITED) |
|
| Quarters ended March 31, |
($000, except per share data) | 2006 | 2005 |
|
Retained earnings, beginning of the period | $ 342,015 | $ 262,733 |
Net earnings for the period | 37,376 | 33,444 |
Dividends on common shares | (17,778) | (10,015) |
|
Retained earnings, end of the period | $ 361,613 | $ 286,162 |
|
Basic earnings per common share | | |
- continuing operations | $ 0.71 | $ 0.67 |
|
Basic earnings per common share | $ 0.71 | $ 0.67 |
|
Diluted earnings per common share | | |
- continuing operations | $ 0.70 | $ 0.66 |
|
Diluted earnings per common share | $ 0.70 | $ 0.66 |
|
RUSSEL METALS INC. |
CONSOLIDATED CASH FLOW STATEMENTS |
(UNAUDITED) |
|
| Quarters ended March 31, |
($000) | 2006 | 2005 |
|
Operating activities | | |
Earnings from continuing operations | $ 37,376 | $ 33,490 |
Depreciation and amortization | 4,797 | 4,637 |
Future income taxes | 1,085 | 5,686 |
(Gain) loss on sale of fixed assets and assets held for sale | (55) | (1) |
Stock-based compensation (Note 5) | 920 | 193 |
Pension funding in excess of pension expense (Note 8) | (6,909) | - |
|
Cash from operating activities before working capital | 37,214 | 44,005 |
|
Changes in non-cash working capital items | | |
Accounts receivable | (52,254) | (58,296) |
Inventories | (45,160) | 26,635 |
Accounts payable and accrued liabilities | 15,609 | (32,251) |
Current income taxes | 3,783 | (58,719) |
Other | 672 | 1,041 |
|
Change in non-cash working capital | (77,350) | (121,590) |
|
Cash used in operating activities | (40,136) | (77,585) |
|
Financing activities | | |
(Decrease) increase in bank borrowing | (2,098) | 84,895 |
Issue of common shares - public issue (Note 9) | 271,420 | - |
Issue of common shares - options exercised (Note 5) | 4,805 | 3,716 |
Dividends on common shares | (17,778) | (10,015) |
Deferred financing costs | (66) | (125) |
|
Cash from financing activities | 256,283 | 78,471 |
|
Investing activities | | |
Purchase of fixed assets | (6,571) | (5,075) |
Proceeds on sale of fixed assets | 61 | 123 |
Other | (1,181) | 1,221 |
|
Cash used in investing activities | (7,691) | (3,731) |
|
Discontinued operations | | |
Operating activities | - | (46) |
Investing activities | - | 4,088 |
|
Cash from discontinued operations | - | 4,042 |
|
Increase in cash and cash equivalents | 208,456 | 1,197 |
Cash and cash equivalents, beginning of the period | 47,055 | 634 |
|
Cash and cash equivalents, end of the period | $ 255,511 | $ 1,831 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(UNAUDITED)
1. These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles; however, they do not include all of the disclosure requirements for annual consolidated financial statements. These interim consolidated financial statements follow the same accounting policies disclosed in Note 1 to the 2005 annual consolidated financial statements except as disclosed in Note 2. These interim consolidated financial statements should be read in conjunction with the 2005 annual consolidated financial statements including notes thereto. These interim consolidated financial statements contain all adjustments necessary for a fair presentation of the results for the periods reported.
Cash and cash equivalents include cash on account, demand deposits and short-term deposits with remaining maturities of less than three months on acquisition.
2. Change in Accounting Policies
On January 1, 2006, the Company adopted EIC-156, Accounting by a Vendor for Consideration Given to a Customer (including a Reseller of the Vendor's Products). This standard requires that the consideration given to a customer be recorded as a reduction of revenues, not as cost of sales or as an operating expense. The standard requires retroactive restatement of prior periods and accordingly revenues and cost of sales for the first quarter of 2005 were reduced by $0.3 million. This restatement reduced revenues and cost of sales for the year ended December 31, 2005 by $1.2 million but had no impact on net earnings.
3. Economic Cycle
All three of the metals operating segments are significantly affected by economic cycles in the markets where they operate. Revenues and operating profits in the energy sector are also affected by oil and gas drilling in western Canada, which is predominantly carried out during the period from October to March. For these reasons, the results of operations for the periods shown are not necessarily indicative of the results for the full year.
4. Interest Expense
| Quarters ended March 31, |
($000) | 2006 | 2005 |
|
Interest on long term debt | $ 3,661 | $ 3,770 |
Other interest expense | - | 1,129 |
Interest income | (502) | - |
|
Total interest | $ 3,159 | $ 4,899 |
|
Interest paid in the quarter ended March 31, 2006 was $7.5 million (2005: $10.4 million).
5. Stock-based Compensation
During the quarter ended March 31, 2006, the Company issued 663,334 stock options (2005: nil) at an exercise price of $25.75. The assumptions used in the Black-Scholes option-pricing model are identical to those disclosed in Note 11 to the 2005 annual consolidated financial statements, except for the expected volatility of 28.6% and the expected life of 5 years, resulting in a weighted average fair value of $5.02 per option granted. The total fair value of $3.3 million will be expensed over the vesting period; one fifth immediately and the remaining on a straight line basis over 4 years.
The following is a continuity of the Company's stock options outstanding for the quarters ended March 31:
| | Weighted Average |
| Number of Options | Exercise Price |
| 2006 | 2005 | 2006 | 2005 |
|
Balance, January 1 | 1,869,466 | 1,793,816 | $ 11.12 | $ 6.52 |
Granted | 663,334 | - | 25.75 | - |
Exercised | (546,000) | (655,817) | 8.46 | 5.74 |
Expired or forfeited | - | (12,000) | - | 6.75 |
|
Balance, March 31 | 1,986,800 | 1,125,999 | $ 9.79 | $ 6.97 |
|
Exercisable | 279,733 | 211,999 | $ 16.45 | $ 5.71 |
|
6. Segmented Information
| Quarters ended March 31, |
($000) | 2006 | 2005 |
|
Segment Revenues | | |
Metals service centers | $ 388,598 | $ 399,752 |
Energy tubular products | 186,223 | 162,259 |
Steel distributors | 164,509 | 130,114 |
|
| 739,330 | 692,125 |
Other | 1,398 | 1,484 |
|
| $ 740,728 | $ 693,609 |
|
Segment Operating Profits | | |
Metals service centers | $ 31,697 | $ 31,417 |
Energy tubular products | 18,424 | 17,391 |
Steel distributors | 18,094 | 14,997 |
|
| 68,215 | 63,805 |
Other (loss) income | (1,388) | (930) |
Corporate expenses | (5,545) | (4,068) |
|
| $ 61,282 | $ 58,807 |
|
| March 31, | December 31, |
| 2006 | 2005 |
|
Identifiable assets | | |
Metals service centers | $ 624,053 | $ 583,827 |
Energy tubular products | 292,035 | 280,968 |
Steel distributors | 190,326 | 138,119 |
|
Identifiable assets by segment | 1,106,414 | 1,002,914 |
|
Assets not included in segments | | |
Cash and cash equivalents | 255,511 | 47,055 |
Income tax assets | 1,774 | 1,298 |
Deferred financing charges | 6,950 | 7,240 |
Other assets | 2,838 | 2,821 |
Corporate and other operating assets | 29,846 | 33,855 |
|
Total assets | $ 1,403,333 | $ 1,095,183 |
|
7. Revolving Credit Facilities
On March 20, 2006, the Company amended its existing syndicated credit facility to reduce the maximum borrowings under the facility from $200 million to $125 million and to reduce standby fees and borrowing costs. The provisions of the revised facility, including financial covenants therein, are consistent with the previous facility.
8. Pension and Benefits
In the first quarter of 2006, the Company's contributed $7.6 million to its pension plans In addition to its minimum required annual contributions, the Company contributed $4.1 million for prior service costs. For the quarter ended March 31, 2006 the total benefit cost relating to employee future benefits was $0.7 million (2005: $0.8 million).
9. Shareholders' Equity
The components of shareholders' equity are as follows:
| March 31, | December 31, |
($000) | 2006 | 2005 |
|
Common shares | $ 485,254 | $ 208,139 |
Contributed surplus | 1,121 | 1,091 |
Retained earnings | 361,613 | 342,015 |
Cumulative translation adjustment | (12,379) | (12,548) |
|
| $ 835,609 | $ 538,697 |
|
The number of common shares issued and outstanding was as follows:
| Number of | Amount |
| Shares | ($000) |
|
Balance December 31, 2005 | 50,656,009 | $ 208,139 |
Stock options exercised | 546,000 | 5,695 |
Common shares issued | 11,000,000 | 271,420 |
|
Balance March 31, 2006 | 62,202,009 | $ 485,254 |
|
On March 16, 2006, the Company closed its public offering of 10,000,000 common shares at a price of $25.75 per share and received net proceeds of $247 million. The Company granted the underwriters an option, exercisable in whole or in part and at anytime up to 30 days following March 16, 2006 to purchase up to an additional 1,000,000 common shares on the same terms as the issue. These additional shares were issued on March 30, 2006 for net proceeds of $24.7 million. In addition to the underwriters fees, expenses of $0.5 million have also been netted from the proceeds of this offering.
| Quarters ended March 31, |
| 2006 | 2005 |
|
Average shares outstanding | | |
Basic | 52,528,777 | 50,040,378 |
Diluted | 53,279,433 | 50,520,359 |
|
10. Supplemental Cash Flow Information
Income tax paid in the quarter ended March 31, 2006 was $16.0 million (2005: $72.9 million).
