Harris Steel Group

1. Harris Steel Group Group Project BFIN 241 – Finance for Managers 3rd April 2007

2. Background • Founded 1954, Public 1967 • Quarterly Dividends Paid since 1972 • Industrial reinforcement materials • Fabrication/placing of concrete reinforcing steel • Welded Wire Mesh • Industrial Steel Grating • Concrete post-tensioning systems • Installation

3. Background • 1500 Employees • 44 facilities in Canada and United States • Products and services delivered through Harris Rebar, Laurel Steel and Fisher & Ludlow • Serves all of Canada, eastern, central, western United States

4. Recent Events • January 24, 2004, Nucor Joint Venture • Merger bid January 2, 2007 • Offered 1.25 Billion CAD • Stock rose $2.56 • Nucor paid 46.25 per share (6.3% more than closing price). • Approved by Harris Family (own more than 50% shares)

5. Recent Events • Surging demand for steel spurred $78 Billion in mergers and acquisitions last year • Nucor wants to expand production of steel rebar • Harris Steel Group biggest producer of steel rebar in Canada • Biggest transaction ever for Nucor

6. Recent Events • Second half of 2002 and early 2003 an economic recession in the USA and the threatening war on Iraq • March 5th 2002 President Bush announced that tariffs ranging from 8-30 % would be imposed on steel imports • Canada and Mexico exempt from these tariffs • December 4 2003 President Bush announced the withdrawal of the steel import tariffs

7. Recent Events • Merger bid January 2007 • Nucor paid 46.25 per share (6.3% more than closing price). • Approved by Harris Family (own more than 50% shares)

8. Sales Trend • 2002 $ 528,315,425 • 2003 $ 516,741,731 -2.2 % • 2004 $ 731,536,662 +41.6 % • 2005 $ 1,013,197,000 +38.5 %

9. Sales per Year

10. Retained Earnings • 2002 retained earnings is $189,519,785 • 2003 retained earnings is $191,139,294 • 2004 retained earnings is $257,371,215 • 2005 retained earnings is $311,499,000 • Steady increase over the years in retained earning even though sales dropped in the first year

11. Retained Earnings

12. Strong Corporation • Ability to generate cash flows, even in a challenging environment. • Record breaking profits in a period where many competitors were seeking bankruptcy protection. • Balance sheet provides significant financial flexibility.

13. Earnings • Earnings of $64.1 million in year 2005. • Many internal and external growth opportunities were taken advantage of. • Large earn-out gains from reinforcing operations to Nucor.

14. Profit Margin Trend

15. Shareholders • Strong policy of returning excess capital to the shareholders. • 50% increase in dividends per share last March. • Followed by another increase of 11% in December. • DPS were quadrupled in June of 2004. • Single class of common shares.

16. Earnings Per Share • EPS were $2.38 in 2005. • Dividends per share were $0.37 • Harris Steel Shareholders have experienced quarterly dividends per share since 1972.

17. Earnings and Dividends Trend

18. Equity • Shareholder equity grew 119% in 2005 • Debt is 13% of total assets – directly related to volume increases of business • Return on equity was recorded at 19.59% in 2005

19. Expansion • Harris Steel is increasingly expanding across North America, as well as overseas. • Total assets are up 45.7% from last year.

20. Ratios

21. Ratios

22. Strengths Liquidity – current ratio consistently above 2.0 Assets are mainly current and have the ability to be dissolved to cover any debts Have the ability to generate free cash flow and profits even in a tough and economic environment

23. Strengths Have a strong balance sheet that provides the liquidity to invest in substantial inventory levels allowing them to capitalize on meeting the most demanding, time-sensitive customer priorities. They balance low inventory costs with higher sales prices and produce exceptionally well. No substantial long term debt

24. Weakness There is no substantial long term debt which means that Harris Steel may not be investing funds efficiently to expand the company. Profitability ratios show below industry average levels Profit margin is less than half of industry average. P/E Ratio is 19.39, potential investors may go to a competitor to invest their funds

25. Industry Comparison

26. Graphical Comparison

27. Opportunities To purchase more reinforcing steel developments, for example Lafarge Canada Inc. in British Columbia, Alberta and Saskatchewan. To strategically grow their business in regional markets in Canada and the United States. Improve production methods through long term financing Improve production outputs through long term financing

28. Threats Massive expansion in the world steel market in 2004, causing increases in the supply of raw materials, especially scrap, used to make steel. This resulted in a spectacular increase in the price of steel. Therefore many of the orders for steel supplies were cancelled, or reduced or surcharges added. If the market for steel continues to expand this is a real threat to this company because they can lose a lot of their business. Many new companies enter the market as the prices have been driven up and forcing smaller companies

29. D.O.L. • Due to the fact that we cannot determine the number of units that were sold, we cannot establish the DOL. • Several reasons why this might happen • Most obvious is that they have many different products at different prices

30. D.F.L. • 2002… DFL = 39,224,416 / (39,224,416 – 1,054,225 - [1,617,103 / 1 – 0.371]) • 2002 DFL = 1.10 • 2003… DFL = 11,893,193 / (11,893,193 – 136,999 – [1,604,119 / 1 – 0.621]) • 2003DFL = 1.58 • 2004… DFL = 110,123,310 / (110,123,310 – 9,742 – [5,245,741 / 1- 0.336]) • 2004DFL = 1.07 • 2005… DFL = 112,443,000 – (112,443,000 – 2,127,000 – [9,962,000 / 1 – 0.358]) • 2005DFL = 1.19 • Financial Leverage is shown here due to the fact that the DFL is greater than 1, every year.

31. D.T.L • DTL also cannot be calculated as we are unable to determine a value for the DOL

32. Stock Analysis • Last trading day 12 Mar 2007 • Last price CAD 46.25 • Symbol HSG.TO • Hist. volatility 180 35.65 % • Avg. Volume last month 32’920 • Latest P/E Ratio 16.06 • Avg. Analyst Rating Hold

33. Stock chart 30 March 2001 to 30 March 2006

34. Stock chart 2 Oct 2006 to 31 Oct 2006

35. Stock chart 7 Nov 2006 to 2 Jan 2007

36. Takeover bid Takeover speculations Hostile takeover bid for Arcelor Takeover-battles in steel industry Market correction Growing Chinese demand, takeover speculations Corporate scandals hit stock market Implementation of U.S. steel tariffs Start of Iraq war, start of market rally Joint-venture agreement with Nucor Threatening Iraq war, recession Evaluation of U.S. steel tariffs Withdrawal of steel tariffs September 11th

37. Stock price vs. steel price

38. Performance Analysis Performance $ 500,000 Investment 29 Dec 2000 - 2 Mar 2007 1098 % $ 5,990,909 2 Jan 2004 – 2 Mar 2007 779 % $ 4,393,333 23 Jan 2006 – 2 Mar 2007 65 % $ 826,999

39. 5 Year Performance Analysis Nominal stock return 849 % Inflation 12.13 % Real stock return 836.87 % $ 500,000 Investment $ 4,684,350 Nominal return GIC 23.65 % Inflation 12.13 % Real return GIC 11.52 % $ 500,000 Investment $ 557,600 Outperformance stock 825.35 % Difference in capital gain $ 4,626,750

40. Recommendations • Maintain a solid rate of efficiency within. • Obtain more investors of Harris Steel in order to continue to expand worldwide. • Use of long-term financing to increase leverage and ROE. • Merger with Nucor can help increasing purchasing power, reduce COGS

41. Final Thoughts • By continuing to grow and expand, Harris Steel will continue to satisfy shareholders with increasingly growing share prices, and outstanding growth in dividend payments each quarterly period.