Russel Metals Inc. — Management Reports 2021

Feb 10, 2021

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2020

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, 2020, 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 10, 2021.

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: volatility in metal prices; cyclicality of the metals industry; volatility in oil and natural gas prices; capital budgets in the energy industry; climate change; product claims; significant competition; sources of metals supply; manufacturers selling directly; material substitution; credit risk; currency exchange risk; restrictive debt covenants; asset impairments; the unexpected loss of key individuals; decentralized operating structure; future acquisitions; the failure of our key computer-based systems, labour interruptions; laws and governmental regulations; litigious environment; environmental liabilities; carbon emissions; health and safety laws and regulations and common share risk.

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.

NON-GAAP MEASURES

This MD&A includes a number of measures that are not prescribed by International Financial Reporting Standards ("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. These measures include Adjusted EBITDA which represents earnings before long-lived asset impairment charges, interest, income taxes, depreciation and amortization; and free cash flow which represents cash from operating activities before changes in working capital less capital expenditures. We believe that Adjusted EBITDA and free cash flow 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. The items excluded in determining Adjusted EBITDA and free cash flow are significant in assessing operating results and liquidity. Adjusted EBITDA and free cash flow should not be considered in isolation or 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.

Adjusted net earnings and adjusted net earnings per share are non-GAAP measures that exclude non-cash longlived asset impairment. We believe that adjusted net earnings and adjusted net earnings per share may be useful in assessing our operating performance but should not be considered as an alternative to net earnings or net earnings per share.

We are one of the largest metals distribution companies in North America. We conduct business primarily in three segments: metals service centers, energy products, and steel distributors.

OVERVIEW OF THE FOURTH QUARTER AND 2020 ANNUAL RESULTS

Our net earnings for the year ended December 31, 2020, were $25 million or $0.39 per share compared to net earnings of $77 million or $1.23 per share for 2019. Our adjusted net earnings (excluding the after-tax impact of non-cash asset impairment charges of $26 million related to our U.S. energy operations) for the year ended December 31, 2020 were $50 million or $0.81 per share. Revenues for the year ended December 31, 2020 were $2.7 billion compared to $3.7 billion in 2019. Adjusted EBITDA was $159 million compared to $203 million in 2019.

In the 2020 fourth quarter, our revenues, Adjusted EBITDA and adjusted earnings per share were $671 million, $41 million and $0.22 per share, respectively. Revenues during the quarter benefited from multiple steel price increases and stronger seasonal demand in the metals service centers and steel distributors segments. During the 2020 fourth quarter, items of note that negatively impacted Adjusted EBITDA included a net increase in our inventory valuation reserves of $3 million related to our line pipe/OCTG operations and non-cash stock-based compensation expense of $4 million due to our improved share price. During the 2020 fourth quarter, we recognized $8 million in federal government wage subsidies, as compared to $20 million in the 2020 third quarter.

Market Conditions

The global pandemic created extraordinary market volatility in 2020, from a severe deterioration of activity in the second quarter to gradual improvement through the third quarter and a stronger pick-up towards the end of the fourth quarter in metals service centers and steel distributors. Our operations were deemed essential and remained open throughout 2020. In the 2020 fourth quarter, rapid increases in raw material pricing, improved demand and low inventory levels throughout the supply chain drove a substantial increase in steel prices.

Business Optimization

During 2020, we implemented a number of our value-added processing initiatives in several of our regions. On December 30, 2020, we acquired Sanborn Tube Sales of Wisconsin, Inc. ("Sanborn "), a leader in value-added manufacturing, for US$13 million. Sanborn operates three tube lasers from its facility located in Pewaukee, Wisconsin and will complement our existing locations in that region. During 2020, we expanded our Trenton, Georgia facility which now includes a bar storage facility, fiber tube and flat lasers. The rationalization of our B.C. region was completed through the closure and sale of the real estate related to our Kelowna and Kitimat service centers. The sale of these two facilities resulted in proceeds of $10 million and a gain on sale of $6 million which was recorded in the 2020 third quarter.

In our energy products segment, we furthered our objective of reducing capital employed in our line pipe/OCTG operations. During the year, we completed the merger of our two Canadian line pipe/OCTG operations and advanced the orderly liquidation of our U.S. line pipe/OCTG operations. As a result, we reduced our line pipe/OCTG inventory by $73 million for the year, including $34 million in the 2020 fourth quarter. In our field stores, we rationalized six Elite Supply Partners locations.

Liquidity and Capital Structure Improvements

During 2020, we generated $371 million of cash from operating activities and ended the year with total liquidity of $406 million.

During September 2020, we updated and improved our credit facility to provide additional borrowing base flexibility and extended its maturity. In October 2020, we issued $150 million 5 ¾% senior unsecured notes due October 2025. In November 2020, we redeemed our $300 million 6% senior unsecured notes due 2022. The combination of these initiatives will reduce our interest expense and extend our debt maturities. During the 2020 fourth quarter, our interest expense included $1.3 million in deferred financing costs related to the redemption of senior unsecured notes due 2022.

RECONCILIATION OF NET EARNINGS TO ADJUSTED EBITDA

The following table provides a reconciliation of net earnings (loss) and earnings (loss) per share for the year and quarter ended December 31, 2020 to adjusted net earnings and adjusted net earnings per share.

	Millions					Per Share
December 31, 2020		QuarterEnded		YearEnded		QuarterEnded		YearEnded
Net earnings (loss)	$	(8.8)	$	24.5	$	(0.14)	$	0.39
Asset impairment, after tax		22.6		25.6		0.36		0.42
Adjusted net earnings		13.8		50.1	$	0.22	$	0.81
Provision for income taxes		(3.8)		3.4
Provision for income taxes on asset impairment		7.5		8.2
Interest and finance expense		9.0		36.7
Adjusted EBIT		26.5		98.4
Depreciation and amortization		14.6		60.6
Adjusted EBITDA	$	41.1	$	159.0

SUMMARIZED FINANCIAL INFORMATION

The following tables disclose selected information related to revenues, earnings and common shares over the last three years.

2020

					Year
		Quarters Ended			Ended
(in millions, except per share data and volumes)	Mar. 31	June 30	Sept. 30	Dec. 31	Dec. 31
Revenues	$814.7	$588.1	$614.9	$670.5	$ 2,688.3
EBITDA	35.5	31.5	47.2	11.1	125.2
Adjusted EBITDA	39.2	31.5	47.2	41.2	159.0
Net earnings (loss)	13.5	4.6	18.2	(8.8)	24.5
Basic earnings (loss) per common share	$0.17	$0.07	$0.29	$(0.14)	$0.39
Diluted earnings per common share	$0.17	$0.07	$0.29	$(0.14)	$0.39
Total assets	$ 2,010.5	$ 1,824.5	$ 1,787.7	$ 1,596.3	$ 1,596.3
Non-current financial liabilities	$542.7	$538.1	$536.0	$382.5	$382.5
Dividends paid	$0.38	$0.38	$0.38	$0.38	$1.52
Market price of common shares
High	$23.00	$18.29	$19.71	$23.09	$23.09
Low	$10.97	$12.51	$16.23	$17.34	$10.97
Shares outstanding end of quarter	62,184,978	62,184,978	62,184,978	62,295,441	62,295,441
Average shares outstanding	62,179,130	62,182,055	62,183,036	62,215,545	62,191,208
Number of common shares traded on the TSX	19,490,294	24,546,823	12,319,978	13,239,649	69,596,744

2019
					Year
		Quarters Ended			Ended
(in millions, except per share data and volumes)	Mar. 31	June 30	Sept. 30	Dec. 31	Dec. 31
Revenues	$ 1,032.6	$936.7	$869.2	$837.4	$ 3,675.9
EBITDA	71.9	64.8	48.7	17.6	203.0
Adjusted EBITDA	71.9	64.8	48.7	17.6	203.0
Net earnings (loss)	34.3	30.8	18.1	(6.6)	76.6
Basic earnings (loss) per common share	$0.55	$0.50	$0.29	$(0.11)	$1.23
Diluted earnings (loss) per common share	$0.55	$0.50	$0.29	$(0.11)	$1.23
Total assets	$ 2,199.2	$ 2,115.9	$ 2,074.9	$ 1,929.0	$ 1,929.0
Non-current financial liabilities	$540.0	$541.1	$538.9	$539.2	$539.2
Dividends paid	$0.38	$0.38	$0.38	$0.38	$1.52
Market price of common shares
High	$25.22	$24.61	$22.56	$23.35	$25.22
Low	$20.75	$20.90	$18.47	$19.85	$18.47
Shares outstanding end of quarter	62,109,395	62,109,395	62,173,430	62,173,430	62,173,430
Average shares outstanding	62,107,839	62,108,622	62,170,481	62,173,430	62,132,030
Number of common shares traded on the TSX	13,787,516	10,661,704	12,814,804	14,601,555	51,865,579

On January 1, 2019, we retroactively adopted IFRS 16-Leases.

2018
					Year
		Quarters Ended			Ended
(in millions, except per share data and volumes)	Mar. 31	June 30	Sept. 30	Dec. 31	Dec. 31
Revenues	$931.3	$978.2	$ 1,140.1	$ 1,115.4	$ 4,165.0
EBITDA	69.0	106.0	110.6	81.0	366.6
Adjusted EBITDA	69.0	106.0	110.6	81.0	366.6
Net earnings	38.5	66.1	68.2	46.2	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	$ 1,924.2	$ 2,057.8	$ 2,140.9	$ 2,130.4	$ 2,130.4
Non-current financial liabilities	$442.6	$443.0	$443.3	$443.6	$443.6
Dividends paid	$0.38	$0.38	$0.38	$0.38	$1.52
Market price of common shares
High	$32.65	$31.33	$30.99	$28.20	$32.65
Low	$27.08	$26.24	$26.20	$19.72	$19.72
Shares outstanding end of quarter	61,965,644	62,077,045	62,090,045	62,106,895	62,106,895
Average shares outstanding	61,921,421	62,012,928	62,081,187	62,097,921	62,028,991
Number of common shares traded on the TSX	16,027,868	8,981,225	10,136,481	14,371,151	49,516,725

RESULTS OF OPERATIONS

The following table provides earnings before interest and income taxes. The corporate expenses included are not allocated to specific operating segments. Gross margins (revenues 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.

			varianceas a %
(millions, except percentages)	2020	2019	of 2019
Segment RevenuesMetals service centersEnergy productsSteel distributorsOther	$ 1,621.8797.5261.97.1	$ 1,958.01,310.7395.911.3	(17%)(39%)(34%)
	$ 2,688.3	$ 3,675.9	(27%)
Segment Operating ProfitsMetals service centersEnergy productsSteel distributorsCorporate expensesGain on sale of assetsAsset impairmentOtherEarnings before interest and income taxes	$103.9(3.3)9.2(19.4)6.1(33.8)1.9$64.6	$73.768.815.8(17.0)--5.0$146.3	41%(105%)(42%)(14%)(33%)
Segment Gross Margin as a % of RevenuesMetals service centersEnergy productsSteel distributors	22.0%15.1%12.8%	18.8%16.6%11.0%
Total operations	19.3%	17.4%
Segment Operating Profit as a % of RevenuesMetals service centersEnergy productsSteel distributors	6.4%(0.4%)3.5%	3.8%5.2%4.0%
Total operations	3.7%	4.0%

Results of our U.S. operations for the year ended December 31, 2020 were converted at $1.3412 per US$1 compared to $1.3268 per US$1 for the year ended December 31, 2019. Our U.S. operations represented approximately 32% of our total revenues. The exchange rate used to translate the balance sheet at December 31, 2020 was $1.2732 per US$1 versus $1.2988 per US$1 at December 31, 2019.

METALS SERVICE CENTERS

a) Description of operations

We provide processing and distribution services to a broad base of approximately 31,000 end users through a network of 47 Canadian locations and 17 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 as well as the Southeastern and Midwestern regions in the United States.

b) Metals service centers segment results -- 2020 compared to 2019

(millions)	2020	2019	% Change
Financial Highlights
Revenues	$ 1,622	$ 1,958	(17%)
Gross margin ($)	357	368	(3%)
Gross margin (%)	22.0%	18.8%
Earnings from operations	104	74	41%

Tons shipped in 2020 were approximately 7% lower than 2019. Our U.S. service centers had a 1% increase in tons with all Canadian regions experiencing decreased volumes. During the year ended December 31, 2020 our reduction in tons shipped was lower than the average published by the Metals Service Center Institute as our operations garnered market share. The average selling price per ton was 11% lower than 2019. The average selling price in the 2020 fourth quarter increased 5% over the 2020 third quarter due to price increases late in the fourth quarter.

Gross margin as a percentage of revenues of 22.0% for the year ended December 31, 2020 was higher than the 18.8% in 2019 due to value-added processing and the lower average cost of inventory.

Operating expenses for 2020 were $254 million, 14% lower than the $295 million in 2019 due to lower business activity and government wage subsidies that allowed us to sustain employment levels. In July 2020 we launched our multi-year ERP upgrade project. Operating expenses relating to the new ERP project were $4 million for the year ended December 31, 2020.

Metals service centers operating profits for the year ended December 31, 2020 of $104 million were higher than the $74 million reported for 2019. Our average revenue per invoice for 2020 was approximately $1,906 compared to $2,371 for 2019, reflecting decreased steel prices. We handled approximately 3,403 transactions per day in 2020 compared to 3,303 per day in 2019.

ENERGY PRODUCTS

a) Description of operations

We distribute tubes, valves, fittings, oil country tubular goods (OCTG) and line pipe, 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 Texas, Oklahoma and Colorado. 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 14 U.S. facilities in our valve and fitting operations. 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.

b) Energy products segment results -- 2020 compared to 2019

(millions)	2020	2019	% Change
Financial Highlights
Revenues	$798	$ 1,311	(39%)
Gross margin ($)	121	217	(44%)
Gross margin (%)	15.1%	16.6%
(Loss) earnings from operations	(3)	69	(105%)

The price of oil, including the Western Canadian select discount, and natural gas can impact rig count and drilling activities, which affects demand for our products.

Depressed oil prices resulted in reduced rig counts and delayed energy projects that caused a significant decrease in revenues particularly for our line pipe and OCTG operations. In 2020, the average Canadian rig counts were 89 compared to 134 in 2019 and the average U.S. rig counts were 433 compared to 943 in 2019.

Gross margin as a percentage of revenues was 15.1% compared to 16.6% in 2019 mainly due to lower industrywide OCTG and line pipe prices in reaction to lower demand and excess inventories throughout the industry created by reduced North American rig counts. The lower line pipe prices resulted in an increase in our energy product inventory provisions of $12 million related to our line pipe and OCTG operations.

Operating expenses for the year ended 2020 were $124 million compared to $148 million in 2019. The decrease was due to headcount reductions, location closures, work sharing arrangements and government employment incentives.

Operating losses were $3 million for 2020 compared to profits of $69 million for 2019. Our field store operations generated an operating income of $23 million in the year compared to $73 million in 2019. Our line pipe and OCTG operations generated an operating loss of $26 million in the year compared to a loss of $4 million in 2019.

STEEL DISTRIBUTORS

a) Description of operations

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 located in Houston, Texas, where it processes coil for its customers. Our steel distributors source their steel both domestically and off shore.

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.

b) Steel distributors segment results -- 2020 compared to 2019

(millions)	2020	2019	% Change
Financial Highlights
Revenues	$262	$396	(34%)
Gross margin ($)	34	43	(23%)
Gross margin (%)	12.8%	11.0%
Earnings from operations	9	16	(42%)

Revenues in our steel distributors were 34% lower in 2020 compared to 2019 due to lower demand caused by general economic conditions.

Gross margin as a percentage of revenues was 12.8% for the year ended December 31, 2020 compared to 11.1% for the year ended December 31, 2019 due to an inventory provision recorded in our U.S. operation in 2019.

Operating expenses declined to $24 million in 2020 from $28 million in 2019. Operating profits for 2020 of $9 million were lower compared to $16 million for 2019 due to reduced demand.

CORPORATE EXPENSES -- 2020 COMPARED TO 2019

Corporate expenses were $19 million in 2020 compared to $17 million in 2019. During the year, the non-cash stock-based compensation expense was $5 million due to our improved share price compared to $4 million in 2019.

ASSET IMPAIRMENT

The challenging economic conditions experienced in 2020 due to the global pandemic and the oil price turmoil, resulted in a triggering event and the need to test long-lived assets for impairment. The impairment tests resulted in non-cash charges of $34 million. In the 2020 fourth quarter, we recorded an asset impairment charge of $30 million relating to our U.S. field store operations and in the 2020 first quarter, we recorded an asset impairment charge of $4 million relating to our U.S. line pipe operation. The recoverable amounts for the rest of our operations exceeded their carrying value and no other further impairment was recorded.

GAIN ON SALE OF ASSETS

During the third quarter of 2020, as part of our rationalization in the B.C. region, we sold the real estate associated with our Kitimat and Kelowna branches for net proceeds of $10 million resulting in a gain on sale of $6 million.

INTEREST EXPENSE

Net interest expense was $37 million for 2020 compared to $41 million for 2019 due to reduced working capital levels. The capital structure improvements are expected to further reduce our interest expense in 2021.

INCOME TAXES

We recorded a provision for income taxes of $3 million for 2020 compared to a provision of $29 million for 2019. Our effective income tax rate for 2020 was 12.2% compared to 27.3% for 2019. The decrease in the 2020 effective tax rate was due to the utilization of capital losses for the gain on sale of assets and certain provisions of the CARES Act.

NET EARNINGS

Net earnings for 2020 were $25 million compared to $77 million in 2019. Basic earnings per share for 2020 was $0.39 per share compared to $1.23 per share in 2019.

SHARES OUTSTANDING AND DIVIDENDS

The weighted average number of common shares outstanding for 2020 was 62.2 million compared to 62.1 million for 2019 as a result of the exercise of options. Common shares outstanding at December 31, 2020 and February 10, 2021 were 62.3 million.

We paid common share dividends of $95 million or $1.52 per share in 2020 and 2019.

We have $150 million of 6% senior unsecured notes due March 16, 2026. The indenture for these senior notes has restrictions on the payment of quarterly dividends in excess of $0.38 per share. These notes can be redeemed at par on or after March 16, 2024.

We have $150 million of 5 ¾% senior unsecured notes due October 27, 2025. The indenture for these senior notes contains restrictions on the payment of quarterly dividends in excess of $1.60 per annum. These notes can be redeemed at par on or after October 27, 2024.

Under our syndicated bank facility, the payment of dividends are 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.

ADJUSTED EBITDA

The following table shows the reconciliation of net earnings to Adjusted EBITDA:

(millions)	2020	2019
Net earnings	$24.5	$76.6
Provision for income taxes	3.4	28.8
Interest, net	36.7	40.9
Assets impairment	33.8	-
Earnings before asset impairment, interest,
finance expense and income taxes (Adjusted EBIT)	98.4	146.3
Depreciation and amortization	60.6	56.7
Earnings before asset impairment, interest, income taxes,
depreciation and amortization (Adjusted EBITDA)	$159.0	$203.0

CAPITAL EXPENDITURES

Capital expenditures were $25 million in 2020 compared to $35 million in 2019. We continued to invest in valueadded processing with an investment of $5 million in the expansion of our Trenton, Georgia facility and $2 million for a structural expansion to include plasma beam coping in our Edmonton, Alberta location.

We expect capital expenditures to be lower than depreciation of property, plant and equipment in 2021.

LIQUIDITY

During the cycle, we experience significant swings in working capital with accounts receivable and inventory comprising our largest liquidity risks.

At December 31, 2020, we had net cash, defined as cash less bank indebtedness, of $26 million compared to net bank indebtedness of $46 million at December 31, 2019. We generated cash of $119 million from operations during 2020 and $257 million from working capital. We invested $25 million for capital expenditures, utilized $5 million for income tax payments and returned $95 million in dividends to our shareholders.

Total assets were $1.6 billion at December 31, 2020, compared to $1.9 billion at December 31, 2019. At December 31, 2020, current assets excluding cash represented 70% of our total assets excluding cash, compared to 72% at December 31, 2019.

Accounts receivable generated cash of $115 million in 2020, due to lower revenues. Accounts receivable represented 22% of our total assets excluding cash, at December 31, 2020 compared to 24% at December 31, 2019.

Inventories generated cash of $169 million due to reduced purchases in response to lower demand and a reduction in our line pipe and OCTG inventories as part of our initiative to reduce capital employed in those businesses. Inventories represented 45% of our total assets at December 31, 2020 compared to 46% at December 31, 2019.

Inventory by Segment (millions)	Dec. 31	Sept. 30	June 30	Mar. 31	Dec. 31
	2020	2020	2020	2020	2019
Metals service centersEnergy productsSteel distributors	$27937364	$26743687	$29747095	$320487100	$29549495
Total	$	$	$	$	$
	716	790	862	907	884
Inventory Turns (quarters ended)	Dec. 31	Sept. 30	June 30	Mar. 31	Dec. 31
	2020	2020	2020	2020	2019
Metals service centers
Energy productsSteel distributors	4.51.73.9	4.71.22.5	4.01.12.4	4.32.22.2	4.52.53.3

At December 31, 2020, our metals service centers had lower inventory tons than at December 31, 2019 due to reduced purchases in response to the economic downturn. Inventory levels increased in the fourth quarter due to higher steel prices and improved demand. Inventory levels in our energy products segment decreased from 2019 due to slowing demand and reduced capital allocated to our line pipe and OCTG operations. In steel distributors, the decrease in inventory value over 2019 was due to a reduction in purchases due to reduced demand.

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)	2020	2019
Cash from operating activities before non-cash working capitalPurchase of property, plant and equipment	$119.2(24.9)	$171.5(34.8)
	$94.3	$136.7

DEBT

As at December 31 (millions)	2020	2019
Long-term debt
5 ¾% $150 million Senior Notes due October 27, 2025	$147	$-
6% $150 million Senior Notes due March 16, 2026	147	147
6% $300 million Senior Notes due April 19, 2022	-	298
	$294	$445

In October 2020, we issued $150 million of 5 ¾% senior unsecured notes due 2025. In November 2020, we redeemed our $300 million 6% senior unsecured notes due in 2022.

CASH AND BANK CREDIT FACILITY

(millions)	2020	2019
Bank loans	$-	$(57)
Cash net of outstanding cheques	26	11
Net cash (bank indebtedness)	26	(46)
Letters of credit	(68)	(33)
	$(42)	$(79)
Facility
Borrowings and letters of credit	$400	$400
Letters of credit	50	50
Facility availability	$450	$450
Available line based on borrowing base	$450	$450

We have a committed credit facility with a syndicate of Canadian and U.S. banks that provides $50 million for letters of credit and $400 million which can be utilized for borrowings or additional letters of credit. On September 29, 2020, the facility was amended to provide additional borrowing base flexibility and other improvements and extended to expire on September 21, 2023. 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 $450 million.

As of December 31, 2020, we were entitled to borrow and issue letters of credit totaling $450 million under this facility. At December 31, 2020, we had no borrowings and $68 million of letters of credit outstanding. At December 31, 2019 we had $57 million in borrowings and letters of credit of $33 million.

At December 31, 2020, we were in compliance with all of our financial covenants.

With our cash, cash equivalents and our bank facility we have access to approximately $406 million of cash based on our December 31, 2020 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, 2020, we were contractually obligated to make payments as per the following table:

	Payments due in
Contractual Obligations				2022		2024	2026 and
(millions)		2021		and 2023		and 2025	thereafter	Total
Bank loans	$	-	$	-	$	-	$-	$-
Accounts payable		291		-		-	-	291
Debt		-		-		150	150	300
Long-term debt interest		18		35		35	5	93
Lease obligations		24		38		27	55	144
Total	$	333	$	73	$	212	$210	$828

In addition, we are obligated to pay $68 million in letters of credit when they mature in 2021.

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 16 of our 2020 consolidated financial statements. During 2020 we contributed $3 million to these plans. We expect to contribute approximately $3 million to these plans during 2021. 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. We do not have additional funding obligations on a solvency basis and no additional funding would 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 $6 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 facilities table and short-term and low value operating lease obligations disclosed in the contractual obligations table. On January 1, 2019, we adopted the new lease accounting standard IFRS 16 and only short-term and low value leases are off-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, 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, 2020 approximated our reserve level at December 31, 2019. Bad debt expense for 2020 as a percentage of revenue was less than 1%.

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. When recent selling prices are not available, future selling prices are estimated using current replacement cost plus an applicable margin. The inventory reserve level at December 31, 2020 was $7 million greater than the level at December 31, 2019.

Other areas involving significant estimates and judgements include:

Long-lived Asset Impairment

The determination of whether long-lived assets, including 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 a discount rate requires significant judgement.

During 2020, we concluded that the rapid deterioration of the North American economic environment resulted in a triggering event and the need to perform impairment testing of our long-lived assets including goodwill and intangibles. We forecasted future cash flows by considering the reduced activity to determine recoverable amounts. Based on this analysis, we recorded impairments in the 2020 first quarter and the 2020 fourth quarter. There is no certainty that there will not be future impairments should the economic markets in which we operate continue to deteriorate.

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.

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 $159 million in plan assets at December 31, 2020, which is approximately $6 million higher than at December 31, 2019. The discount rate used on the employee benefit plan obligation for December 31, 2020 was 2.50%, which is 50 basis points lower than the discount rate at December 31, 2019. The employee benefit obligation at December 31, 2020 was approximately $164 million which is approximately $9 million higher than at December 31, 2019.

Leases

We recognize right-of-use assets and lease obligations which includes our arrangements that contain a lease. The determination of the asset and obligation requires an assessment of whether we are reasonably certain that an extension option will be exercised, calculation of a discount rate inherent in the lease or an incremental borrowing rate and whether the right-of-use asset is impaired. These determinations require significant judgement.

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.

The President & Chief Executive Officer and the Executive Vice President & 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, 2020. 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 distribution business is a mature and cyclical industry. We believe we enhance returns by managing costs and working capital throughout the cycle. Capital allocation priorities and limits are managed centrally with day-to-day decision making delegated to the various operations. Furthermore, our variable compensation model is based on the return on net assets for each business unit, which provides our business managers a basis to proactively adjust costs and working capital to local market conditions. 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 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 further improves our returns.

We believe that the steel pricing cycle will continue to be highly volatile, and that our decentralized management structure and philosophy that allows the fastest reaction to changes that affect the industry will be the most successful. We will continue to invest in our business systems to enable faster reaction times to changing business conditions.

RISK

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.

The pandemic has created uncertainty in the health and welfare of the communities where we operate and resulted in temporary business closures including certain of our customers and reduced economic activity. We do not know when the uncertainty caused by the virus will cease and business conditions will return to normal levels.

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, varying capacity utilization rates for North American steel producers and changing import levels and tariffs. Future tariff changes to country or product exemptions may impact steel prices and product availability.

A significant percentage of our revenues are dependent on the oil and gas industry whose activity fluctuates with oil and gas prices. The oversupply of oil has resulted in reduced drilling and lower demand for OCTG and line pipe. In addition, certain pipe manufacturers have attempted to bypass distributors which has further exacerbated the competitive pricing environment. Our strategy includes a reduction of the capital allocated to our OCTG and line pipe operations. 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.

The continued impact of the pandemic and prevailing oil price conditions may lead to changes in estimates in our financial statements and the effect of such changes could be material and result in impairments of long-lived assets, including goodwill and intangibles, provisions for inventory and credit losses.

The USMCA replaced NAFTA on July 1, 2020. It is expected that this agreement will have a positive effect on the post pandemic demand for North American sourced metal products such as steel and aluminum.

On February 25, 2020, the U.S. International Trade Commission issued a final determination that fabricated structural steel imports from Canada, China and Mexico do not materially injure the U.S. fabricated steel industry. Therefore, no anti-dumping or countervailing duties will be applied on imports from these countries. This ruling should lead to increased steel fabrication in Canada which should benefit our customer base.

On March 13, 2020, the Canadian Industrial Trade Tribunal (CITT) issued a report concluding that hot rolled plate products from Brazil, Denmark, Indonesia, Italy, Japan and Korea would continue to be dumped into the Canadian marketplace if current orders were lifted and that such actions would likely result in injury to the industry. The Tribunal continued previous duties for an additional five years in respect to the subject goods.

On October 9, 2020, the Canada Border Services Agency (CBSA) made a preliminary determination that imports of hot rolled plate products from Taiwan, Germany and Turkey were harmful to the Canadian market and set provisional duties ranging from 3% to 97%. On the same date, the CBSA terminated its dumping investigation on hot rolled plate imports from South Korea and Malaysia.

On October 13, 2020, the U.S. Department of Commerce imposed additional requirements on the importation of steel products. When applying for an importer license, the importer must identify both the country or origin of the steel product as well as where the steel used in the manufacture of the steel product was melted and poured.

On November 16, 2020, the CITT issued its findings that corrosion resistant steel from Turkey, the UAE and Vietnam (excluding specified facilities) have been dumped in the Canadian market and thus are subject to Anti-Dumping duties and that the goods have been subsidized. Further analysis found that the volume of goods exported from the UAE and Vietnam were negligible and therefore terminated the injury inquiry of these goods. The result is that material from Turkey (excluding specified facilities) is now subject to both Anti-Dumping and Countervailing duties.

On February 5, 2021, the CITT issued its findings that hot-rolled carbon steel heavy plate and high-strength lowalloy steel heavy plate from Taiwan, Chinese Taipei and Germany that are being dumped into the Canadian market have caused injury to the domestic industry. On the same date the CITT determined that the volume of the above referenced goods being dumped from Turkey is negligible and terminated its inquiry on material originating in or being exported from Turkey.

FOURTH QUARTER RESULTS

Revenues in the fourth quarter of 2020 were 20% lower than the same quarter in 2019. Operating income was $27 million compared to $2 million in 2019. During the quarter ended December 31, 2020, Adjusted EBITDA was $41 million compared to $18 million in 2019.

Our net loss for the quarter ended December 31, 2020 was $9 million or $0.14 per share. Our adjusted net earnings for the quarter ended December 31, 2020 were $14 million or $0.22 per share.

The following table provides earnings before interest, taxes and other income or expense in a format consistent with our annual results. Quarters Ended variance

	December 31				as a %
(millions, except percentages)		2020		2019	of 2019
Segment RevenuesMetals service centersEnergy productsSteel distributorsOther	$$	419.2175.973.61.9670.6	$$	411.6342.680.62.6837.4	2%(49%)(9%)(20%)
Segment Operating Profits (Loss)Metals service centersEnergy productsSteel distributorsCorporate expensesOther	$	35.6(7.0)4.9(7.5)0.5	$	8.8(1.8)(3.2)(2.6)1.1
Earnings before asset impairment, interest and income taxes	$	26.5	$	2.3
Segment Gross Margin as a % of RevenuesMetals service centersEnergy productsSteel distributors		25.0%12.2%15.4%		18.8%11.4%3.6%
Total operations		20.8%		14.6%
Segment Operating Profit as a % of RevenuesMetals service centersEnergy productsSteel distributors		8.5%(4.0%)6.7%		2.1%(0.5%)(4.0%)
Total operations		4.0%		0.3%

Metals service centers revenues were 2% higher than the same quarter in 2019 as a result of increased demand and selling prices. Tons shipped in the fourth quarter of 2020 for metals service centers were 2% higher than the fourth quarter of 2019 and selling prices were consistent with the fourth quarter of 2019. Gross margin as a percentage of revenues increased to 25.0% for the fourth quarter of 2020 from 18.8% for the fourth quarter of 2019. At the end of the 2020 fourth quarter, steel prices increased significantly due to raw material input prices and tight inventory levels in the supply chain.

In the fourth quarter of 2020, revenues at our energy products segment were 49% lower than 2019. Lower demand was experienced in the 2020 fourth quarter due to lower rig counts and resulted in an operating loss in this segment in the fourth quarter.

Our steel distributors reported operating profits in the 2020 fourth quarter of $5 million compared to an operating loss of $3 million in the 2019 fourth quarter due to an inventory provision recorded in 2019.

Corporate expenses were higher than 2019 due to non-cash stock-based compensation expense of $4 million in the quarter from our improved share price.

OUTLOOK

Through the early stage of 2021, we have experienced continuing improvement in demand levels at our metals service centers and steel distributors segments. In addition, steel prices and margins have remained at levels well above the average in the 2020 fourth quarter. In energy products, inventory shortages have led to gradually improved prices and modest demand increases.