<PAGE> 1
Page 1 of 16 Pages
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Fee Required)
For the fiscal year ended December 31, 1997 Commission File Number: 1-5415
------------------ ------
A. M. CASTLE & CO.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-0879160
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3400 North Wolf Road, Franklin Park, Illinois 60131
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 455-7111
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- --------------------------- ------------------------------------
Common Stock - no par value American and Chicago Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act: None
---------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K X .
---
The approximate aggregate market value of the registrant's common stock held by
non-affiliates of the registrant on March 2, 1998 was $338,789,160.
------------
The number of shares outstanding of the registrant's common stock on March 2,
1998 was 14,043,074 shares.
----------
DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference Applicable Part of Form 10-K
- ------------------------------------- ----------------------------
Annual Report to Stockholders for the Parts I, II and IV
year ended December 31, 1997
Proxy Statement dated March 9, 1998 Part III
furnished to Stockholders in connection with
registrant's Annual Meeting of Stockholders
================================================================================
<PAGE> 2
PAGE 2 OF 16
PART I
Item 1. Business.
A. M. Castle & Co. is one of North America's largest, independent metals
service center companies. The registrant (Company) provides a complete range
of inventories as well as preprocessing services to a wide variety of
customers.
In the last three years, sales mix in the Company's core business was
approximately as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Carbon and Stainless 73% 74% 77%
Non-Ferrous Metals 27% 26% 23%
---- ---- ----
100% 100% 100%
</TABLE>
These metals are inventoried in many forms including round, hexagon,
square and flat bars; plates; tubing; shapes; and sheet and coil.
Depending on the size of the facility and the nature of the markets it
serves, each of the Company's service centers is equipped as needed with Bar
Saws, Close Tolerance Plate Saws, Oxygen and Plasma Arc Flame Cutting
Machinery, Stress Relieving and Annealing Furnaces, Surface Grinding Equipment,
Edge Conditioning Equipment, Sheet Shears and Coil Processing Equipment. The
Company also does specialized fabrications for customers through pre-qualified
subcontractors.
Emphasis on the more highly engineered grades and alloys of metals,
supported by strong service commitments, has earned the Company a leadership
role in filling the needs of users of those metals.
The Company has its main office, and largest distribution center, in
Franklin Park, Illinois. This center serves metropolitan Chicago and,
approximately, a nine state area. In addition, there are distribution centers
in various other cities (see Item 2). The Chicago, Los Angeles and Cleveland
distribution centers together account for approximately one-half of all sales.
In the United States, the Company serves the wide range of industrial
companies within the $600 billion producer durable equipment sector of the
economy. The customer base includes many Fortune 500 companies as well as
thousands of medium and smaller sized ones spread across the entire spectrum of
metals using industries. The Company's customer base is well diversified with
no single industry accounting for more than 6% of the Company's total business
and, no one customer, more than 2%. The Company's coast-to-coast network of
metals service centers provides next day delivery to over 90% of the markets it
serves, and two day delivery to virtually all of the rest.
<PAGE> 3
PAGE 3 OF 16
In Canada, the Company serves a wide range of businesses similar to the
market profile in the United States. These markets are serviced by the
Company's Canadian subsidiary A. M. Castle & Co. (Canada) Inc.
In Mexico, the Company operates through a joint venture, Castle de Mexico,
S.A. de C.V., and targets a wide range of businesses within the producer
durable goods sector.
Markets in western Europe, South America and the Pacific Rim are serviced
through the Company's International Sales Department located in the Franklin
Park facility, and starting in late 1996, the Company's new United Kingdom
based subsidiary, A. M. Castle & Co. Limited, a U.K. Corporation.
The Company's Hy-Alloy Steels Co. division, located in Bedford Park,
Illinois, a Chicago suburb, is a distributor of alloy bars stocked as rounds,
squares, hexes, and flats; and of alloy tubing. In 1993 a value-added bar
processing center, H-A Industries, was added. From this facility, the Company
operates a heat treat line producing quench and tempered alloy bar product, an
annealing line, and a bar turning and straightening line producing cold
finished bars.
The Company also operates two businesses acquired in 1996 whose activities
complement the Company's distribution and value added focus. Total Plastics,
Inc., acquired in January 1996, is a Midwest based distributor serving a wide
variety of users of industrial plastics. Cutter Precision Metals, Inc.,
acquired in April 1996, is a Pacific Northwest based metals distributor which
has added highly specialized sawing and grinding capabilities to the Company's
range of processing services.
In June of 1997 the Company acquired Keystone Tube Inc., a Midwest based
specialty distributor of tubular products and a leading processor of high-value
added mechanical tube and chrome plated bar serving the fluid power industry.
The acquisition expands an existing product line and broadens the Company's
core specialty metals business.
The Company also holds a one-third joint venture interest in Kreher Steel
Co., a Midwest based distributor, focusing on customers whose primary need is
for immediate, reliable delivery of large quantities of alloy, SBQ and
stainless bars.
In general, the Company purchases metals from many producers. In the case
of nickel alloys, it is single sourced. Satisfactory alternative sources,
however, are available for all metals that the Company buys and its business
would not be materially adversely affected by the loss of any one supplier.
Purchases are made in large lots and held in the distribution centers until
sold, usually in smaller quantities. The Company's ability to provide quick
delivery, frequently overnight, of a wide variety of metal products allows
customers to reduce inventory investment because they do not need to order the
large quantities required by producing mills.
The major portion of 1997 net sales were from materials owned by the
Company. The materials required to fill the balance of such sales were
obtained from other sources, such as direct mill shipments to customers or
purchases from other metals distributors. Sales are primarily through the
Company's own sales organization and are made to many thousands of customers in
a wide variety of industries. No single customer is significant to the
Company's sales volume. Deliveries are made principally by leased trucks.
Common carrier delivery is used in areas not serviced directly by the Company's
fleet.
The Company encounters strong competition both from other independent
metals distributors and from large distribution organizations, some of which
have substantially greater resources.
<PAGE> 4
PAGE 4 OF 16
The Company has approximately 1,850 full-time employees in its operations
throughout the United States, Canada and the United Kingdom. Approximately 300
of these are represented by collective bargaining units, principally the United
Steelworkers of America.
Item 2. Properties.
The Company's principal executive offices are at its Franklin Park plant
near Chicago, Illinois. All properties and equipment are well maintained and
in good operating condition and sufficient for the current level of activities.
Metals distribution centers and sales offices are maintained at each of the
following locations, all of which are owned in fee, except as indicated:
<PAGE> 5
PAGE 5 OF 16
<TABLE>
<CAPTION>
Approximate
Floor Area in
Locations Square Feet
- ------------- -------------
<S> <C>
Castle Metals
- -------------
Atlanta, Georgia 35,100 (1)
Charlotte, North Carolina 93,000
Chicago area -
Franklin Park, Illinois 533,600
Cincinnati, Ohio 9,300 (1)
Cleveland area -
Bedford Heights, Ohio 381,400
Dallas, Texas 78,000
Fairfield, Ohio 72,000 (1)
Houston, Texas 109,100
Kansas City, Missouri 170,000
Los Angeles area -
Paramount, California 264,900
Milwaukee area -
Wauwatosa, Wisconsin 98,000 (1)
Minneapolis, Minnesota 60,000
Philadelphia, Pennsylvania 71,600
Salt Lake City, Utah 45,400 (1)
Stockton, California 60,000 (1)
Wichita, Kansas 26,500 (1)
Worcester, Massachusetts 60,000
---------
Total Castle Metals 2,167,900
Hy-Alloy Steels Co.
- --------------------
Chicago area -
Bedford Park, Illinois 103,700
---------
H-A Industries
- --------------------
Hammond, Indiana 250,000 (1)
---------
A. M. Castle & Co. (Canada) Inc.
- ---------------------------------
Edmonton, Alberta 36,600 (1)
Montreal, Quebec 25,600 (1)
Toronto area -
Mississauga, Ontario 57,100 (1)
Etobicoke, Ontario 8,000 (1)
Winnipeg, Manitoba 28,900 (1)
---------
156,200
Cutter Precision Metals, Inc.
- -------------------------------
Kent, Washington 24,000 (1)
Santa Clara, California 20,000 (1)
---------
44,000
Castle Metals U.K. Ltd.
- ------------------------
Manchester, U.K. 12,000 (1)
---------
Keystone Tube, Inc.
- ---------------------
La Porte, Indiana 90,000
Riverdale, Illinois 115,000 (1)
Titusville, Pennsylvania 92,000
---------
297,000
</TABLE>
<PAGE> 6
PAGE 6 of 16
<TABLE>
<CAPTION>
Approximate
Floor Area in
Locations Square Feet
- -------------- ---------------
<S> <C>
Total Plastics, Inc.
- -----------------------
Detroit, Michigan 32,000 (1)
Elk Grove Village, Illinois 15,000 (1)
Fort Wayne, Indiana 15,000 (1)
Grand Rapids, Michigan 22,000 (1)
Indianapolis, Indiana 20,000 (1)
Kalamazoo, Michigan 50,000 (1)
----------
154,000
GRAND TOTAL 3,184,800
==========
Sales Offices (Leased)
- -------------------------
Buffalo, New York
Detroit, Michigan
Pittsburgh, Pennsylvania
Phoenix, Arizona
San Diego, California
Tulsa, Oklahoma
</TABLE>
(1) Leased: See Note 5 in the 1997 Annual Report to Stockholders,
incorporated herein by this specific reference, for information
regarding lease agreements.
<PAGE> 7
PAGE 7 OF 16
Item 3. Legal Proceedings.
There are no material legal proceedings other than the ordinary routine
litigation incidental to the business of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
<PAGE> 8
PAGE 8 OF 16
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters.
Item 6. Selected Financial Data.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required to be filed in Part II (Items 5, 6, and 7) in
Form 10-K has been included in the 1997 Annual Report to Stockholders, as
required by the Securities and Exchange Commission, and is included elsewhere
in the filing. Accordingly, the following items required under Items 5, 6, and
7 are incorporated herein by this specific reference to the 1997 Annual Report
to Stockholders: "Common Stock Information", page 15, "Eleven-Year Financial
and Operating Summary", pages 12 and 13, and "Financial Review", pages 14 and
15.
Item 8. Financial Statements and Supplementary Data.
See Part IV, Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
Item 9. Disagreements on Accounting and Financial Disclosure.
None.
<PAGE> 9
PAGE 9 OF 16
PART III
Item 10. Directors and Executive Officers of the Registrant.
<TABLE>
<CAPTION>
Executive Officers of The Registrant
------------------------------------
Name and Title Age Business Experience
- -------------- --- -------------------
<S> <C> <C>
Michael Simpson 59 Mr. Simpson began his employment with the
Chairman of the Board registrant in 1968. In 1974 Mr. Simpson was elected
President of Hy-Alloy Steels Co. Mr. Simpson was elected
Vice President - Midwest Region in 1977. In 1979 Mr.
Simpson was elected Chairman of the Board.
Richard G. Mork 62 Mr. Mork began his employment with the registrant in 1957.
President and Chief In 1977 Mr. Mork was elected to the position of Vice President
Executive Officer - Eastern Region and in 1988 to the position of Senior
Vice President and Chief Operating Officer. In 1990 Mr.
Mork was made President and Chief Executive Officer.
Edward F. Culliton 56 Mr. Culliton began his employment with the registrant in 1965.
Vice President and Mr. Culliton was elected Corporate Secretary in 1972 and
Chief Financial Officer Treasurer in 1975. In 1977 he was elected Vice President
of Finance. He is the Chief Financial Officer.
Sven G. Ericsson 49 Mr. Ericsson began his employment with the registrant in
Vice President - 1989. Mr. Ericsson was elected to the position of Vice
International President - Eastern Region in 1989, Vice President - Plate
and Carbon Products Group in 1992, and Vice President - International
in 1995.
M. Bruce Herron 52 Mr. Herron began his employment with the registrant in 1970.
Vice President - Mr. Herron was elected to the position of Vice President -
Western Region Western Region in 1989.
Stephen V. Hooks 46 Mr. Hooks began his employment with the registrant in 1972.
Vice President - Mr. Hooks was elected to the position of Vice President -
Midwest Region Midwest Region in 1993.
Fritz Oppenlander 45 Mr. Oppenlander began his employment with the registrant in
Vice President - 1996 and was elected Vice President - Operations in 1996.
Operations
Alan D. Raney 46 Mr. Raney began his employment with the registrant in 1986.
Vice President - Mr. Raney was elected Vice President - Midwest Region
Advanced Materials during 1989, and Vice President - Advanced Materials Group
Group in 1990.
Robert A. Rosenow 44 Mr. Rosenow began his employment with the registrant in
Vice President - 1977. In 1995, Mr. Rosenow was elected Vice President - Plate
Plate and Carbon and Carbon Products Group.
Group
Gise Van Baren 66 Mr. Van Baren began his employment with the registrant's
Vice President - Alloy Hy-Alloy Steels Co. (acquired in 1973) in 1954. He
Products Group and became Vice President of Hy-Alloy in 1976 and President in
President - Hy-Alloy Steels 1979. He was elected Vice President - Alloy Products
Division Group in 1991.
</TABLE>
<PAGE> 10
PAGE 10 OF 16
<TABLE>
<CAPTION>
Name and Title Age Business Experience
- -------------- --- -------------------
<S> <C> <C>
Craig R. Wilson 46 Mr. Wilson began his employment with the registrant in
Vice President - 1979. He was elected to the position of Vice President -
Eastern Region Eastern Region in 1997.
Paul J. Winsauer 46 Mr. Winsauer began his employment with the registrant in
Vice President - 1981. In 1996, Mr. Winsauer was elected to the position of
Human Resources Vice President - Human Resources.
James A. Podojil 55 Mr. Podojil began his employment with the registrant in
Chief Accounting Officer 1968. In 1977 he was elected to the position of Controller
and Treasurer/Controller and in 1985 was elected to the additional post of Treasurer.
Jerry M. Aufox 55 Mr. Aufox began his employment with the registrant in 1977.
Secretary and Corporate In 1985 he was elected to the position of Secretary and Counsel
Corporate Counsel. He is responsible for all legal affairs of
the registrant.
</TABLE>
<PAGE> 11
PAGE 11 OF 16
All additional information required to be filed in Part III, Item 10, Form
10-K, has been included in the Definitive Proxy Statement dated March 9, 1998
filed with the Securities and Exchange Commission, pursuant to Regulation 14A
entitled "Information Concerning Nominees for Directors" and is hereby
incorporated by this specific reference.
Item 11. Executive Compensation.
All information required to be filed in Part III, Item 11, Form 10-K, has
been included in the Definitive Proxy Statement dated March 9, 1998, filed with
the Securities and Exchange Commission, pursuant to Regulation 14A entitled
"Management Remuneration" and is hereby incorporated by this specific
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required to be filed in Part I, Item 4, Form 10-K, has
been included in the Definitive Proxy Statement dated March 9, 1998, filed with
the Securities and Exchange Commission pursuant to Regulation 14A, entitled
"Information Concerning Nominees for Directors" and "Stock Ownership of Certain
Beneficial Owners and Management" is hereby incorporated by this specific
reference.
Other than the information provided above, Part III has been omitted
pursuant to General Instruction G for Form 10-K and Rule 12b-23 since the
Company will file a Definitive Proxy Statement not later than 120 days after
the end of the fiscal year covered by this Form 10-K pursuant to Regulation
14A, which involves the election of Directors.
Item 13. Certain Relationships and Related Transactions.
None.
<PAGE> 12
PAGE 12 OF 16
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Financial statements (incorporated by reference to the 1997 Annual Report
to Stockholders) and exhibits are set forth in the accompanying index to
Financial Statements and Schedules. No reports on Form 8-K were filed in the
fourth quarter of 1997.
<PAGE> 13
PAGE 13 OF 16
A. M. CASTLE & CO.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<S> <C>
Report of Independent Public Accountants on Schedules......................................................... Page 14
Consent of Independent Public Accountants with respect to Form S-8 ........................................... Page 14
Consolidated Financial Statement Schedules
Valuation and Qualifying Accounts - Schedule II ....................................................... Page 15
Data incorporated by reference from 1997 Annual Report to Stockholders of A. M.
Castle & Co., included herein -
Consolidated Statements of Income - For the years ended December 31, 1997, 1996,
and 1995...................................................................................................... Page 17
Consolidated Statements of Reinvested Earnings - For the years ended December 31,
1997, 1996, and 1995.......................................................................................... Page 17
Consolidated Balance Sheets - December 31, 1997, 1996, and 1995............................................... Page 18
Consolidated Statements of Cash Flows - For the years ended December 31, 1997, 1996,
and 1995...................................................................................................... Page 19
Notes to Consolidated Financial Statements................................................................ Pages 20-24
Report of Independent Public Accountants..................................................................... Page 24
Exhibits:
20 - Report furnished to security holders .................................................................. Exhibit A
3 - Articles of Incorporation and amendments .............................................................. Exhibit B
3 - By laws of the Company ................................................................................ Exhibit C
10 - Long term incentive compensation plan ................................................................. Exhibit D
10 - 1990 restricted stock and stock option plan ........................................................... Exhibit E
10 - Description of management incentive plan .............................................................. Exhibit F
10 - 1996 restricted stock and stock option plan ........................................................... Exhibit G
</TABLE>
Except for Exhibits C, F and G, exhibits listed above are incorporated by
reference in accordance with Rule 12b-32 (17 CFR 240.12b-32) as the material
has been previously filed as part of registrants form 10-K filing for the
fiscal year ended December 31, 1996.
All schedules and exhibits, other than those listed above are omitted as
the information is not required or is furnished elsewhere in the financial
statements or the notes thereto.
<PAGE> 14
PAGE 14 OF 16
SUPPLEMENTAL REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To A. M. Castle & Co.:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in the A. M. Castle & Co. 1997 Annual Report
to Stockholders incorporated by reference in this Form 10-K, and have issued
our report thereon dated February 2, 1998. Our audits were made for the
purpose of forming an opinion on those statements taken as a whole. Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Arthur Andersen LLP
Chicago, Illinois,
February 2, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO FORM S-8
As independent public accountants, we hereby consent to the incorporation by
reference of the following into the Company's previously filed S-8 Registration
Statements Numbers 33-30545 and 33-37818:
1. Our supplemental report dated February 2, 1998 included in this Annual
Report on Form 10-K for the year ended December 31, 1997; and
2. Our report dated February 2, 1998 incorporated by reference in this
Annual Report on Form 10-K for the year ended December 31, 1997.
Arthur Andersen LLP
Chicago, Illinois
March 15, 1998
<PAGE> 15
PAGE 15 OF 16
SCHEDULE II
A. M. CASTLE & CO.
ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
-----------------------------------------------------
(Dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Balance, beginning of year $680 $600 $600
Add - Provision charged to income 281 245 530
- Recoveries 238 223 86
- From acquisitions 53 80 --
Less - Uncollectible accounts charged
against allowance (632) (468) (616)
----- ----- -----
Balance, end of year $620 $680 $600
===== ===== =====
</TABLE>
<PAGE> 16
PAGE 16 OF 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
A. M. Castle & Co.
- -------------------
(Registrant)
By: /s/ James A. Podojil
-----------------------------
James A. Podojil, Treasurer and Controller
(Mr. Podojil is the Chief Accounting Officer and has been authorized to sign
on behalf of the registrant.)
Date: March 2, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Michael Simpson /s/ William K. Hall
- ---------------------------- -------------------------------
Michael Simpson, William K. Hall, Director
Chairman of the Board Chairman, Audit Committee
March 2, 1998 March 2, 1998
/s/ Richard G. Mork /s/ John P. Keller
- ---------------------------- -------------------------------
Richard G. Mork, President - John P. Keller, Director
Chief Executive Officer, and Director March 2, 1998
March 2, 1998
/s/ Edward F. Culliton /s/ John W. McCarter, Jr.
- ---------------------------- -------------------------------
Edward F. Culliton, Vice President - John W. McCarter, Jr., Director
Chief Financial Officer, and Director March 2, 1998
March 2, 1998
/s/ Richard A. Virzi
-------------------------------
Richard A. Virzi, Director
March 2, 1998
<PAGE> 1
1997 ANNUAL REPORT [A.M. Castle Logo]
THE CASTLE DIFFERENCE
<PAGE> 2
CORPORATE PROFILE
Founded in 1890, A. M. Castle & Co. provides highly engineered materials and
value-added processing services to a wide range of industrial companies within
the $600 billion producer durable equipment sector of the economy. Our
customer base includes many Fortune 500 companies as well as thousands of
medium and smaller-sized ones spread across the entire spectrum of metals-using
industries. Within our core specialty metals business, we are recognized as
North America's largest industrial distributor of carbon, alloy and stainless
steels; nickel alloys; aluminum; titanium; copper and brass; as well as the
industry pioneer and premier provider of materials management programs that are
designed to reduce our customers' total costs. Through our subsidiary, Total
Plastics, Inc., we also distribute a broad range of value-added industrial
plastics. Together, Castle and its affiliated companies operate 47 locations
throughout North America. Our common stock is traded on the American and
Chicago Stock Exchanges under the ticker symbol CAS.
OUR CORPORATE GOALS
- - Market Leadership in all Core Products
- - Supplier of Choice to Our Customers
- - World Class Quality Process
- - Consistently Competitive Returns on Capital
- - Superior Long-Term Total Returns to Shareholders
THE CASTLE DIFFERENCE reflects the many strengths we have built over
the past several decades. We have achieved industry leadership in the
distribution of highly engineered materials by developing a world-class base of
both customers and suppliers. In a market that is moving toward increasingly
demanding performance and service features, we believe we offer the most
advanced processing technologies in our industry. We're also the industry
leader in integrated supply chain management, a strategic asset in winning and
keeping customers.
But with all these advantages, the fundamental reason for The Castle Difference
is our people. Their enthusiasm and dedication gives us great confidence in the
outlook for our company as we move toward the next century.
<TABLE>
<S> <C>
TABLE OF CONTENTS
Financial Highlights 1
Letter to Shareholders 2
Investment Report 5
The Castle Difference 6
Eleven-Year Financial & Operating Statements 12
Financial Review 14
Consolidated Statements and Notes 17
Management and Shareholder Information--Inside Back Cover
</TABLE>
<PAGE> 3
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
THE YEAR IN BRIEF
<TABLE>
<CAPTION>
(dollars and shares in thousands except per share amounts)
- -------------------------------------------------------------------------------------------------
%
1997 1996 Change
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING RESULTS Net sales $754,865 $672,617 12%
Gross profit on sales 214,579 191,166 12%
Income before taxes 39,531 43,136 (8%)
Net income 23,845 26,104 (9%)
PER SHARE OF
COMMON STOCK Net income (basic) 1.70 1.86 (9%)
Dividends .66 .57 16%
Stockholders' equity 9.74 8.70 12%
BALANCE SHEET Total assets 366,375 261,370 40%
Total debt 93,423 43,416 115%
Total equity 136,709 121,926 12%
Working capital 119,770 80,009 50%
Cash flow* 30,051 31,112 (3%)
Average shares outstanding 14,026 13,999 --
SELECTED RATIOS Return on sales 3.2% 3.9% (18%)
Return on assets 6.5% 10.0% (35%)
Return on opening equity 19.6% 25.3% (22%)
Current ratio 2.0 2.0 --
Debt-to-capital ratio 40.6% 26.3% 54%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Net income plus depreciation
[ GRAPH ]
NET SALES
($ Millions)
1993 1994 1995 1996 1997
- ---------------------------------
474 537 628 673 755
NET INCOME
($ Millions)
1993 1994 1995 1996 1997
- ---------------------------------
6.9 15.4 26.8 26.1 23.8
NET WORTH
($ Millions)
1993 1994 1995 1996 1997
- ---------------------------------
70 82 103 122 137
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT 1
<PAGE> 4
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES:
The bold statement on this year's front cover represents more than a decade's
work to create The Castle Difference -- the most innovative and highest
value-added materials management capability in our industry. More than
anything else, this expertise differentiates our company from other leading
metals distributors and processors.
Today, we are leveraging this capability into new distribution channels
and market niches. As we move toward the millennium and beyond, we are
uniquely positioned as a full-service, multi-channel materials management
company -- capable of growing average annual earnings at double-digit rates
while maintaining consistently high returns on our shareholders' capital. We
believe that we have developed the most compelling strategic and financial
model for growth in our industry. This model, the values that drive it, and
the opportunities upon which it is based, are the focus of our 1997 Annual
Report.
1997 FINANCIAL RESULTS
Fueled by strong contributions from the acquisitions made over the past two
years, our revenues rose 12% to a record $754.9 million. Our gross profit also
hit a record level, up 12% to $214.6 million. This achievement is especially
notable in a relatively flat mill pricing environment because it confirms the
high value that our customers place on the processing and logistical services
that are an integral part of the highly engineered products we provide to them.
Earnings of $23.8 million, or $1.70 per share, represented a decline of 9%
from 1996, which was the second strongest year on record. Earnings were
reduced by the higher level of transactional activity that occurs during
periods of relatively stable demand and pricing, and by underlying inflation in
our operating expenses which was not fully offset by productivity improvements.
Additionally, earnings were affected by the integration of our recent
acquisitions as well as by activities associated with the startup of an
unprecedented level of investment in processing technologies. Putting all of
this in perspective, during a year in which we made aggressive moves to support
future growth, we were still able to achieve a 20% return on our shareholders'
capital -- again the highest in our industry.
With our strong free cash flow, we were able to return more than $9.2
million to shareholders in dividends. This represents a 13% annual increase in
our quarterly dividend, contributing to a 53% increase in cash dividends over
the last three years. At 1997 year end, the dividend yield on our stock stood
at just under 3%, also the highest in our industry.
OUR GROWTH MODEL. The Castle growth model is simple, but, we believe, unique
in the metals distribution business. It begins with a large and growing market
- -- the $600 billion North American producer durable equipment sector.
Comprised of literally thousands of industries, we serve a highly diverse
customer base of which no one sector represents more than 6% of total sales,
and, no one customer, more than 2%. Within this market, we dominate the
product, industry and geographic segments in which we choose to participate.
We hold the #1 position in core products which account for 55% of sales, and
the #2 or #3 position in products which generate an additional 25% of total
volume. In turn, this product mix is supported by a wide range of leading-edge
processing technologies and logistical services -- many of them unique to
Castle, all of them designed to enhance our customers' productivity and
quality.
One of the cornerstones of the Castle growth model is our Total Service
Concept -- a comprehensive materials management system designed to dramatically
reduce our customers' total cost. Pioneered by Castle over a decade ago, TSC
still represents the leading edge in integrated supplier relationships in the
metals distribution industry.
Further strengthening our dominance in highly engineered metals is a more
recently implemented strategy aimed at expanding into multiple distribution
channels within the $6 billion specialty metals market. During the past few
years, we have added six new platform companies to the Castle family -- each of
them capable of 20% annual revenue growth; each of them run by entrepreneurial
and incentivized management teams; and each of them profitable.
Admittedly, none of these strategic elements, on their own, are unique.
Leading-edge companies across a wide array of industrial and service businesses
successfully employ these same concepts. What makes our model distinctive
within our industry is what we
- -------------------------------------------------------------------------------
2 1997 ANNUAL REPORT
<PAGE> 5
- --------------------------------------------------------------------------------
A.M. CASTLE & CO.
refer to as The Castle Difference...a materials management capability
which we believe to be unparalleled in the metals distribution business, and
which enables us to set the industry standards for customer satisfaction,
product quality and operational efficiency.
THE VALUES. While consistent growth and superior returns are the output of
this model, the energy behind it is our culture. Our culture is driven by two
fundamental principles: first, to conduct our business in accordance with the
highest standards of integrity so we may win the respect and confidence of our
shareholders, customers, suppliers and the public; and second, to function as
an agent of change by anticipating market developments and moving quickly to
seize emerging opportunities. As described in detail later in this Report, our
agility...our eagerness...to provide innovative solutions for customers far in
advance of the rest of the industry are the defining qualities of our 108-year
long cultural evolution.
How do we support and reinforce this behavior? While many companies are
currently revising their executive incentive plans to encourage a focus on
shareholder returns, Castle has long had a compensation plan in effect aligning
pay with total returns to investors. Our specific shareholder value objective
is to produce three-year average total returns which exceed the benchmark S&P
500 index by 5.5% per year. This may sound like an ambitious goal for a
company which competes in a cyclical industry. But in most three-year periods
over the last several decades, we have exceeded the S&P 500 index as well as
all other major market indices. And while we cannot make forecasts or
promises, we believe our opportunities to maintain these superior returns have
never been greater.
Underlying our shareholder value objective are aggressive annual profit
goals. Our minimum expectation is that we earn a 15% return on opening equity,
while a 25% return on investment is considered the benchmark of excellent
performance. Virtually all of our employees participate in compensation plans
linked to our return on investment standards. To further align our employees'
and shareholders' interests, in 1996, we began making all contributions to our
profit sharing plan in the form of Castle stock. We have found that this system
provides a powerful incentive to build shareholder value as an integrated team.
THE GROWTH OPPORTUNITIES. We know that, to continue delivering superior
returns to our shareholders, we must produce sustained revenue and earnings
growth. Several basic facts tell us that our opportunities for continued
growth are vast. First, every day, every end user within the $600 billion
North American producer durable equipment market consumes metals. Second,
their move toward sophisticated materials management concepts in which we've
developed a competitive advantage continues to gain momentum as they strive to
enhance productivity and quality. And finally, as the industry leader, we are
in the best position to meet these needs.
[ PHOTO OF RICHARD G. MORK & MICHAEL SIMPSON ]
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1997 ANNUAL REPORT 3
<PAGE> 6
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A.M. CASTLE & CO.
The most exciting program we have to capitalize on this growth opportunity
is our multi-channel strategy to penetrate specialty metals niches in which we
currently do not have a significant share. We are working toward deploying
cost-effective service capabilities to reach every end user within the producer
durable equipment sector -- from the major original equipment manufacturers and
their mid- and smaller-sized counterparts, to the contract manufacturers and
job shops that support them. As an example, for those companies requiring
just-in-time bulk delivery of alloy and stainless bars, our joint venture with
Kreher Steel now gives these customers a cost-effective solution at very high
service levels. And at the other end of the spectrum, we have developed
several innovative approaches to process smaller orders cost-effectively,
regardless of the size of the end user from which they originate.
In giving you this snapshot of some of the new growth initiatives in front
of us, we do not for a moment minimize the outstanding opportunities that exist
within our traditional core specialty metals business. These include a long
list of innovative processing technologies designed to build more value into
our customers' final products; advances in our market segmentation strategy in
order to reach all categories of customers in the most desirable manner; and
our continuous improvement process aimed at raising customer service levels as
well as our own productivity. Furthermore, we are now taking our Total Service
Concept to an entirely new dimension by leveraging it across multiple channels
within the Castle family of companies.
OUTLOOK FOR 1998 AND BEYOND. So as we look ahead, we are excited by the wide
range of growth opportunities in front of us. First and foremost, we have
chosen a target market that continues to exhibit healthy and stable demand as
well as outstanding geographic, industry and product diversification. Two
major economic developments in 1997 underscored the value of our long-term
market diversification strategy. In the fall, our focus on the producer
durable equipment sector shielded us from a temporary slowdown in the
automotive industry which affected many of our major competitors. Similarly,
since less than 5% of the highly engineered metals which we deliver to our
North American customers ultimately is destined for southeast Asian markets, we
expect the current situation there to have a negligible impact on our
performance.
With our rapid expansion, we have evolved the capabilities of
A. M. Castle & Co. into a full-service, multi-channel materials management
company with three-quarters of a billion dollars in 1997 revenues. More than
ever, it will be incumbent upon us to consistently improve our service levels,
to grow our market leadership and to increase our productivity at a rate at
least equal to or greater than the long-term inflationary trend. We believe
that our continuous improvement process will serve us well in meeting these
ongoing challenges.
In closing, we want to thank our 1,877 colleagues, a talented group of men
and women with a true commitment to creating value, each in his or her own
specific area of responsibility. We also are grateful to our customers and
suppliers. Finally, we especially want to thank our shareholders. We assure
you that being the custodians of your investment in our Company is a
responsibility we take most seriously, and we appreciate your continued
support.
[Signature] [Signature]
Michael Simpson Richard G. Mork
Chairman of the Board President and
Chief Executive Officer
February 17, 1998
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4 1997 ANNUAL REPORT
<PAGE> 7
INVESTMENT REPORT
Castle has a history of strong performance. Over the last few decades, our
average annual total return to shareholders has consistently outpaced the
Standard & Poor's 500 Index and the Lipper Growth & Income Index. Our goal is
to improve on that performance in the future.
TOTAL RETURN ON AN INVESTMENT IN CASTLE:
In 1997, a $1,000 investment produced a total return of 19% compared with 33%
for the S&P 500 Index and an inflation rate of 3.0%. Over the 15-year period
ended December 31, 1997, Castle generated a 20% compound annual rate of return
versus an 18% return for the S&P 500 and an annual inflation rate of 4%.
CASTLE'S DIVIDEND RECORD:
We continue to reward our shareholders with an attractive dividend yield. This
dividend emphasis offers investors three important advantages: relatively
steady income, reduced volatility, and enhanced total return through the
reinvesting and compounding of dividends.
Since 1994, we've raised our cash dividend four times, increasing its
value by 150 percent. At the end of 1997, our dividend yield was the highest
of any publicly traded metals distribution company and well above that of the
S&P 500 Index. As illustrated, during the 15-year period ended December 31,
1997, Castle's dividends rose at a compound annual rate of 20% versus an 18%
rate for the S&P 500 Index.
COMPOUND TOTAL RETURNS
<TABLE>
<CAPTION>
1 Year 3 Year 5 Year 10 Year 15 Year
<S> <C> <C> <C> <C> <C>
Castle 18.7% 29.4% 32.3% 21.4% 19.9%
S&P 500 33.2% 31.2% 20.2% 18.0% 17.5%
Lipper Growth & Income 27.0% 26.2% 18.1% 16.0% 15.6%
</TABLE>
TOTAL RETURN ON AN INVESTMENT IN CASTLE
[ GRAPH ]
<TABLE>
<CAPTION>
1983 1984 1985 1986 1987 1988 1989
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Castle's 1,535 1,565.7 2,112.1 1,719.3 2,180.0 3,520.8 3,591.2
S&P 1,226 1,303.2 1,717.7 2,038.9 2,146.9 2,508.3 3,296.9
Inflation 1,038 1,082.6 1,120.5 1,141.8 1,192.1 1,244.5 1,304.2
</TABLE>
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Castle's 3,206.8 3,345.6 3,743.7 5,682.9 7,019.5 14,501.7 12,774.5 15,168.5
S&P 3,194.7 4,169.0 4,490.1 4,939.1 5,003.3 6,884.5 8,467.9 11,279.3
Inflation 1,282.8 1,426.7 1,469.5 1,512.1 1,552.9 1,593.3 1,641.1 1,690.4
</TABLE>
CASTLE'S DIVIDEND RECORD
[ GRAPH ]
<TABLE>
<CAPTION>
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Castle's 100 132.9 182.9 199.8 199.5 224.3 301.1 318.1 252.8 187.4 187.4 230.9 378.4 500.3 579 33
S&P 100 105.91 110.97 116.48 123.63 137.13 154.85 170.04 171.31 174.26 176.79 185.65 194.09 209.70 218.00
</TABLE>
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1997 ANNUAL REPORT 5
<PAGE> 8
THE CASTLE DIFFERENCE . . . DECADES IN THE MAKING
SALES GROWTH ($ Millions)
[ GRAPH ]
<TABLE>
<CAPTION>
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 1997
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales 1 1 2 3 4 6 19 20 100 290 480 755
</TABLE>
Eight years ago, the inside cover of our Centennial Book contained this pledge:
"We, the employees of A. M. Castle & Co., wish to thank those
who have gone before us for their efforts in building our great
Company, and we pledge our commitment to them, to our customers
and to future employees that we will uphold the integrity,
dedication, perseverance and quality of the past 100 years as we
go forward into Castle's 2nd Century of Excellence."
In many ways, our company represents a trust between past, present and future
generations. All of us at Castle today share a strong sense of respect and
admiration toward those whose accomplishments brought us to where we are. We
also share a strong sense of commitment and obligation toward those who will
follow us. In this section, we provide further perspective on the historical
events and strategies behind The Castle Difference. We also provide some
insight into the exciting future which lies ahead of us.
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6 1997 ANNUAL REPORT
<PAGE> 9
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A. M. CASTLE & CO.
THE 1970s: RADICAL CHANGE FOR CASTLE AND ITS CUSTOMER BASE
Ironically, the foundation for The Castle Difference was set during one of the
most difficult decades in our long history ... the 1970s. Like most major
distributors, Castle struggled with the effects of steep inflation, growing
competition from imports, and the prohibitive cost of stocking a broad product
line. However, there were some bright spots during this period. We expanded
our stainless steel, carbon alloy and nickel alloy lines because of the
favorable margins associated with these products. And we also moved into
several new markets, including Tulsa and Wichita.
A major milestone occurred in 1973 with the acquisition of Hy-Alloy Steels
Co., an Illinois-based distributor of carbon alloys across a broad range of
sophisticated manufacturing applications. For Castle, the purchase made
perfect sense: Hy-Alloy generated $5 million in revenues and $230,000 in
earnings. But beyond its financial contribution, Hy-Alloy paved the way toward
a re-examination of our market strategies.
Increasingly, we realized that, if we stayed on our traditional course as
a general-line metals distributor, we would always be subject to the wide
swings in pricing and demand that characterized the commodity markets in which
we participated. And in turn, we would also have to accept the accompanying
swings in earnings and returns to shareholders that this volatility created.
Determined to break this cycle, we called a critical meeting in 1977 to
evaluate the future direction of our company. Two key decisions were reached
at this major turning point in our history: first, that our strategy predicated
on the slogan "Everything in Steel" was no longer right for Castle; and second,
that radical change in our product mix and market approach was required.
The success of two earlier acquisitions helped expedite our decision
process. Purchased in the mid-60s, Pacific Metals, a West Coast-based
distributor of nickel and aerospace grades of stainless and aluminum, had
achieved significant growth with less volatility in pricing and demand than we
experienced with our commodity metals. And Hy-Alloy, which also focused on
highly engineered materials, was rapidly evolving into a dominant factor in the
alloy bar markets. So we saw a model for the future in which we could
diversify into highly engineered products with applications across the entire
North American producer durable equipment sector, and, in turn, mitigate the
cyclicality inherent in the commodity metals markets.
As the 70s came to a close, both Castle and its customer base were on the
verge of significant, structural change. While we initiated a multi-year
transformation from a general line to a specialty metals distributor, our
customers were entering the first phase of a continuous effort to restructure
and improve their operating productivity. Consequently, our plan to move
beyond the primary drivers of price and availability traditionally associated
with the distribution function was completely aligned with our customers'
needs. And the foundation for The Castle Difference was well in place by the
end of this decade.
1973
- -------------------------------------------------------------------------
Castle acquires Hy-Alloy Steel Co., an Illinois-based distributor of high
value-added carbon alloys.
1974
- ---------------------------------------------------------------------------
[LOGO] A new logo for Castle Metals is created with the twin towers
symbolizing the company's dual objectives of building value for
customers and shareholders.
Castle announces its first stock split in a move to enhance the marketability
of its common stock.
1977
- ------------------------------------------------------------------------------
Management sets a new course for Castle, which will gradually transform the
Company from a general line to a specialty metals
distributor.
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1997 ANNUAL REPORT 7
<PAGE> 10
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A. M. CASTLE & CO.
THE 1980s: THE SHIFT TO SPECIALTY METALS AND EVOLUTION OF TSC
During the 1980s, virtually every U.S. company was forced to take a hard look
at what their core competencies were, and, perhaps more importantly from our
perspective, what they were not. Many manufacturing companies came to the
conclusion that such non-core functions as just-in-time inventory management
and specialized processing could be more efficiently outsourced to a
distributor with proven expertise in these areas. And furthermore, if the
technology and systems support were available as well, these distributors could
become "evergreen partners" in their businesses.
Correctly anticipating this trend, we took a number of innovative and
early steps to position our offering beyond just the immediate availability of
metals to a total materials management solution for our customers. We began to
invest aggressively in computerized systems to better align our inventories
with customers' needs. And we began to build more value into our metals with
processing services which would enhance the quality of our customers' final
products.
By the mid-80s, our Total Service Concept emerged as an outgrowth of the
drive to provide the highest level of value-added service in our industry.
Building on our early investments in systems, state-of-the-art facilities and
an expanded array of high value-added processing capabilities, we developed a
unique technology-driven sales approach ("TSC") that focused on all the areas
where we can help our customers reduce their total cost.
Our longer-term investors have witnessed the rapid growth in our TSC
business from less than 5% of sales to approximately 50% of our core business
volume today. This is the equivalent of a 30% compound annual growth rate.
But back in the 80s, the most exciting aspect of TSC was that it gave us a
unique platform to quantifiably demonstrate how The Castle Difference could
dramatically improve our customers' operating efficiency.
Acquisitions also continued to play a role in our growth during the 80s.
We acquired Massachusetts-based George F. Blake, Inc., which gave us an entree
into the concentration of high-tech industries across New England. And we
accelerated our expansion in the Carolinas, another geographic market with a
large component of sophisticated manufacturing applications, through the
purchase of two distributors in North Carolina.
Yet, we still faced significant challenges in the late 80s as our customer
base went through a final phase of restructuring before emerging as low-cost
competitors in the global marketplace. Recognizing that their drive for
productivity would only intensify in the 90s, we aggressively initiated
measures to make major improvements in our own service levels and expense
ratios.
Called Project 90, we completed several multi-year breakthrough projects
including the redeployment of inventory and processing equipment throughout our
coast-to-coast network of service centers, and the realignment of our sales and
marketing organization. So as the 80s came to a close, with our TSC concept
adding a new dimension to our identity as a leading distributor of highly
engineered metals and value-added services, we were well positioned to enter
the next decade.
1982
- ------------------------------------------------------------------------------
Castle initiates a formal quality process centered around the concepts of
zero-defects and continuous improvement.
1983
- -------------------------------------------------------------------------------
The acquisition trail continues with the purchase of Massachusetts-based
George F. Blake, Inc.
1984
- -------------------------------------------------------------------------------
Castle introduces its proprietary Total Service Concept, setting a new standard
for the metals distribution industry in providing customers with comprehensive
service solutions.
1985
- -------------------------------------------------------------------------------
Castle acquires two North Carolina-based distributors, Alloy Steel and Cavexsa.
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8 1997 ANNUAL REPORT
<PAGE> 11
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A. M. CASTLE & CO.
THE 1990s: EXPANDING OUR PROCESSING CAPABILITIES
For our customers, the 90s marked the start of an extended resurgence in which
U.S. manufacturers not only recaptured their global competitive advantage, but
actually took the lead in what has become the longest economic expansion on
record. As their recovery gained momentum, our long-term strategy to target
the North American producer durable equipment sector worked exactly as
intended. With no one customer representing more than 2% of our total business,
we were gradually able to moderate much of the cyclicality in our earnings
which plagued us in the 70s and 80s.
The 90s also marked another major turning point for Castle. The
disciplined and patient efforts, year in and year out during the 70s and 80s,
in building dominant franchises in our highly engineered metals and in
strengthening the basics of the business began paying off handsomely. Never one
to stand still, we initiated several exciting new ventures to bring even
greater value to our customers.
Prior to the passage of NAFTA, we moved into Canada with the 1990 purchase
of Norton Steel Co., Ltd. This acquisition became the foundation for our
Canadian subsidiary, which today has locations in Edmonton, Montreal, Toronto
and Winnipeg.
[ H-A LOGO ]
In 1993, we launched H-A INDUSTRIES, a 125,000 square foot value-added bar
processing center in Hammond, Indiana. The roll-out of H-A Industries
represents Castle ingenuity and drive at its best -- in creating
custom-engineered solutions unique to the industry. It began with a quench and
temper heat treat line, engineered to our exact specifications, so that it
would satisfy existing customers' requirements for high value-added products
with shorter lead times and superior quality. This was quickly followed by the
addition of unique annealing capabilities, and the introduction of bar turning
and straightening to HAI's service offering. In 1997, we expanded this plant
to 250,000 square feet, allowing us to double our heat treating capacity and to
triple our bar turning output.
Today, H-A Industries generates an outstanding revenue stream with
superior margins. Yet, it represents just one aspect of our integrated
processing strategy. We continue to reinforce The Castle Difference by
investing aggressively in other "backward integration" opportunities which were
previously available only at the producer level, as well as highly
sophisticated "forward integration" opportunities such as precision sawing and
double disk grinding. We completed a massive three-year expansion of our North
American plate processing capabilities, boosting our capacity by 40%
nationwide. And we significantly expanded our bar processing capabilities with
sawing systems and centerless grinding operations.
In 1997, we introduced laser, water-jet and plasma bevel cutting
equipment, making Castle the only metals distributor with all three of these
advanced capabilities. In the future, you will see more of these types of
processes, which are essential in creating a Difference that is so distinctly
recognizable that it becomes an integral part of the Castle brand name.
In addition to expanding our traditional core business, recent
acquisitions and joint ventures have opened the door to new market niches and
distribution channels. Much attention has been paid in the media to the new
"super-acquirers", who accumulate small independent, local or regional
participants within a fragmented industry into a huge
1990
- ----------------------------------------------------------------------------
Castle moves into Canada with the acquisition of Norton Steel Co., Ltd., our
Canadian subsidiary.
1992
- -----------------------------------------------------------------------------
Castle becomes the first major U.S. metals service chain to obtain ISO 9002
certification, the internationally recognized quality standard for competing
globally.
1993
- ------------------------------------------------------------------------------
[logo] H-A Industries is established. Its unique CNC quench and temper heat
treat line begins producing alloy bars for distribution throughout
North America.
1994
- -------------------------------------------------------------------------------
With the help of an outstanding joint venture partner, Castle
establishes a foothold in Monterrey, Mexico.
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1997 ANNUAL REPORT 9
<PAGE> 12
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A. M. CASTLE & CO.
THE 1990s: DEVELOPING NEW DISTRIBUTION CHANNELS
umbrella company. Like other consolidating industries, the metals
distribution industry has felt the imprint of the "super-acquirers".
While we do not dispute the merits of their consolidation strategy, our
own approach is quite different. In fact, none of the nine companies which we
acquired in the past several years were even for sale. We sought them out
after we had first identified the niches which we wanted to penetrate, and
because we believed they were ideally positioned to help us rapidly expand our
core business.
Another major point of differentiation is the strict investment criteria
which all of our acquisition candidates must meet. Applying the same tough
standards to these companies as we do to our core business, they must have the
potential to achieve a #1 or #2 market position in their respective niches.
They must also possess processing technologies and/or highly engineered
products that can be leveraged across our entire distribution network. In
terms of financial targets, they must be capable of meeting aggressive
double-digit annual revenue growth targets, and they must be profit
contributors from Day One. And finally, acquisition candidates must be led by
an entrepreneurial management team that shares our vision and values.
So clearly, we believe that each of the companies acquired in the past
several years has the potential to contribute the kind of growth and market
presence which we achieved with Hy-Alloy Steels and Pacific Metals, the
catalysts for our transformation into a specialty metals distributor. Now,
let's take a closer look at the specific strategies behind each of the platform
businesses we've created.
[ TPI LOGO ]
Acquired in January 1996, TOTAL PLASTICS, INC. ("TPI") marked our first
step in this new direction as well as a unique opportunity to transfer our
distribution expertise into another highly engineered material. An industrial
plastics distributor with $25 million in annual revenues, TPI's high
value-added market approach affords strikingly similar strategic versus
operating synergies. With the subsequent acquisitions of PONTIAC PLASTICS and
ASN PLASTICS, we have created an excellent platform for building TPI into one
of the Midwest's largest distributors and fabricators of industrial plastics.
Through our joint venture with KREHER STEEL CO., we gained instant entree
to a major market channel that we hadn't previously served. Kreher, a
Chicago-based distributor of alloy, SBQ and stainless bars with $110 million in
1996 sales, focuses on several of Castle's core products. But while our
marketing strategy emphasizes high value-added services, Kreher approaches the
market with a "full-bundle" orientation geared toward customers whose primary
need is reliable, immediate deliveries of larger quantities of material.
Together, we have created a major force in the distribution of specialty bars
to the North American OEM market.
[ CUTTER LOGO ]
Following rapidly on the heels of our joint venture agreement with Kreher,
we acquired CUTTER PRECISION METALS, a $25 million a year distributor with
operations in Kent, Washington and Santa Clara, California. The advantages of
this new platform business are three-fold. First, we expanded our presence in
the northwest region of the U.S. Second, we added another precision processing
capability not available elsewhere in our business. And longer-term, we gain
the opportunity to bring Cutter's unique expertise to a wide range of high-end,
technology-driven industries across North America.
As previously stated, we are committed to supporting our customers'
globalization of their production processes where and when
1995
- ----------------------------------------------------------------------------
[logo] Castle acquires Kalamazoo, Michigan-based Total Plastics, Inc., a
plastics distributor with a strong value-added focus.
1996
- -----------------------------------------------------------------------------
Total Plastics, Inc. expands with the purchase of Pontiac Plastics & Supply
Co., a distributor and fabricator serving the Detroit market.
1996
- -----------------------------------------------------------------------------
Castle enters a joint venture with Kreher Steel Co., a Chicago-based bulk
distributor of alloy, SBQ and stainless bars.
1996
- ------------------------------------------------------------------------------
[logo] Castle acquires Cutter Precision Metals, a Northwest-based high
value-added specialty metals distributor and precision processor.
- ------------------------------------------------------------------------------
10 1997 ANNUAL REPORT
<PAGE> 13
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A. M. CASTLE & CO.
BEYOND THE 1990s: GROWING THE CASTLE DIFFERENCE
we can add value to their efforts. This commitment took us into Mexico
in 1994, when we established CASTLE DE MEXICO through a joint venture
agreement. And in 1997, we established a base in Europe with the acquisition
of HIGH PERFORMANCE ALLOYS, LTD., a privately owned distributor headquartered
in Manchester, England.
[LOGO]
After years of searching for the best entree to the broad fluid power
market, we believe the acquisition of KEYSTONE TUBE and the subsequent
acquisition of KEYSTONE HONING may, together, prove to be the most significant
development of 1997. With annual revenues of $55 million, Keystone is a
leading distributor and processor of tubular products and chrome plated bar.
Going forward, the combination of Keystone and Castle creates an opportunity to
penetrate and, longer-term, even dominate the fluid power industry in a way
that neither company could achieve on its own.
Today, the name A. M. Castle & Co. reflects an identity that goes well
beyond that of the original Castle Metals. In the space of three momentous
years, we have created a family of companies, the sum of which are worth far
more collectively than as stand-alone businesses. Heading toward the
millennium, The Castle Difference will become even more pronounced as we
continue to innovate and anticipate the needs of our customers.
Castle has two great advantages as it leads the way into the future. The
first is our current positioning, which is the end-result of the many large and
small steps taken over the past three decades. We have built our company into
North America's largest industrial distributor of highly engineered metals and
value-added services.
As you've seen in this historical perspective, our customer base has
changed right along with us. Their requirements for just-in-time inventory, EDI
linkages, advanced processing technologies and total customer solutions have
caused the evolution of the metals distribution business to advance at an
unprecedented pace. But there is no let-up in their drive for continued
productivity improvement. In fact, we are already gearing up to meet
customers' requirements for further advances in working capital management,
integrated supplier communications, reduced cycle times and increasingly
demanding performance and service features. As an industry leader, we believe
these trends will fuel even greater recognition of The Castle Difference.
Looking ahead, our commitment to continuous process improvement will also
be increasingly critical. The quick fixes were made years ago. The
improvements we're making now are designed to raise our performance,
particularly in customer satisfaction, process excellence, quality and cost
efficiency. To accelerate this process, we're working to move decision making
as close to the customer as possible. The benefits have already started, but
will be seen increasingly this year and in the years that follow. Not
headline-making news perhaps, but ultimately very rewarding.
The changes we're making now aren't a dramatic departure from where we've
been going all along. They're aimed at making us the best industrial
distributor of highly engineered metals as defined by our customers, our
employees, and you, our shareholders. They're a natural by-product of the
direction Castle has been heading in for years.
The other great advantage we have as we move towards the 21st century is
the Castle team of employees. Committed to doing their consistently best work,
we'll be prepared not just to compete in the years ahead but to grow and
prosper as never before.
1996
- -------------------------------------------------------------------------------
Castle acquires High Performance Alloys, Ltd., a distributor of high
value-added specialty metals to European-based chemical, petrochemical, nuclear
power generation and aerospace manufacturers.
1997
- -------------------------------------------------------------------------------
Total Plastics, Inc., acquires Indiana-based ASN Plastics, bringing its network
to six service locations.
1997
- ------------------------------------------------------------------------------
[logo] Castle acquires Keystone Tube, a specialty distributor and
processor of tubular products and chrome plated bar.
1997
- ------------------------------------------------------------------------------
The acquisition of Keystone Honing Corp, a value-added processor of mechanical
tubes and chrome plated bars, expands the range of tubular processing services
to include trepanning, boring and gun drilling.
- ------------------------------------------------------------------------------
1997 ANNUAL REPORT 11
<PAGE> 14
- -----------------------------------------------------------------------------
A. M. CASTLE & CO.
CONSOLIDATED ELEVEN-YEAR FINANCIAL AND OPERATING SUMMARY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(Dollars in millions, except employee and per share data-Note 7) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL Tons sold (in thousands) 378 331 343
SUMMARY OF Net sales $754.9 $672.6 $627.8
EARNINGS Cost of sales 540.3 481.4 454.4
-----------------------
Gross profit 214.6 191.2 173.4
Operating expenses 164.7 140.2 121.7
Depreciation 6.2 5.0 4.5
----------------------
Profit from operations 43.7 46.0 47.2
Interest expense, net 4.2 2.9 2.9
----------------------
Income before income taxes 39.5 43.1 44.3
Income taxes 15.7 17.0 17.5
----------------------
Net income 23.8 26.1 26.8
Cash dividends 9.2 8.0 6.0
----------------------
Reinvested earnings $ 14.6 $ 18.1 $ 20.8
======================
- -----------------------------------------------------------------------------------------------------------------
SHARE DATA Number of shares outstanding at year-end (in thousands) 14,041 14,008 13,945
(NOTE 7) Net income per share basic $ 1.70 $ 1.86 $ 1.93
Net income per share diluted $ 1.69 $ 1.86 $ 1.93
Cash dividends per share $ .66 $ .57 $ .43
Book value per share $ 9.74 $ 8.70 $ 7.41
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL Working capital $119.8 $ 80.0 $ 84.4
POSITION Property, plant and equipment, net $ 77.4 $ 62.7 $ 44.5
AT YEAR-END Total assets $366.4 $261.4 $222.5
Short-term debt $ -- $ -- $ --
Long-term debt $ 90.7 $ 40.9 $ 28.0
Stockholders' equity $136.7 $121.9 $103.4
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL Return on sales 3.2% 3.9% 4.3%
RATIOS Asset turnover 2.1 2.6 2.8
Return on assets 6.5% 10.0% 12.0%
Leverage factor 3.0 2.5 2.7
Return on opening stockholders' equity 19.6% 25.3% 32.6%
Percent earnings reinvested 61.3% 69.3% 77.6%
Percent increase (decrease) in equity 12.1% 17.9% 25.8%
- -----------------------------------------------------------------------------------------------------------------
OTHER DATA Additions to property, plant and equipment $ 16.2 $ 22.5 $ 11.8
Stockholders at year-end 1,699 1,613 1,618
Employees at year-end 1,877 1,505 1,231
Per employee data (in thousands)
Net sales $402.2 $446.9 $510.0
Gross profit $114.3 $127.0 $140.8
Operating expenses, including depreciation $ 91.0 $ 96.4 $102.5
Profit from operations $ 23.3 $ 30.6 $ 38.3
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
This schedule is prepared reflecting accounting changes as required or allowed
to more fairly present the results of operations over the eleven-year period.
Statements for years preceding these changes have not been revised to reflect
their retroactive application of these changes. Refer to prior year annual
reports for specific accounting changes.
- ------------------------------------------------------------------------------
12 1997 ANNUAL REPORT
<PAGE> 15
- ------------------------------------------------------------------------------
A. M. CASTLE & CO.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
338 308 249 234 248 255 277 258
$536.6 $474.1 $423.9 $436.4 $478.9 $501.1 $499.3 $376.1
391.4 351.8 313.7 331.1 363.6 380.6 375.1 282.1
------- ------- -------- -------- -------- -------- -------- --------
145.2 122.3 110.2 105.3 115.3 120.5 124.2 94.0
112.1 102.1 94.9 92.8 97.5 96.7 92.6 74.9
4.6 4.8 4.9 5.3 5.2 4.4 3.9 3.7
------- ------- -------- -------- -------- -------- -------- --------
28.5 15.4 10.4 7.2 12.6 19.4 27.7 15.4
3.2 3.8 4.3 6.8 6.8 5.1 5.1 3.3
------- ------- -------- -------- -------- -------- -------- --------
25.3 11.6 6.1 .4 5.8 14.3 22.6 12.1
9.9 4.7 2.7 .2 2.7 5.6 8.9 5.5
------- ------- -------- -------- -------- -------- -------- --------
15.4 6.9 3.4 .2 3.1 8.7 13.7 6.6
3.6 2.9 2.9 3.9 4.9 4.7 3.5 3.0
------- ------- -------- -------- -------- -------- -------- --------
$ 11.8 $ 4.0 $ 0.5 $(3.7) $(1.8) $ 4.0 $ 10.2 $ 3.6
======= ======= ======== ======== ======== ======== ======== ========
------------------------------------------------------------------------------------------
13,850 13,646 13,643 13,643 13,616 13,538 13,481 13,381
$ 1.12 $ .50 $ .25 $ .02 $ .23 $ .64 $ 1.02 $ .50
$ 1.11 $ .50 $ .25 $ .02 $ .23 $ .64 $ 1.01 $ .49
$ .26 $ .22 $ .22 $ .29 $ .36 $ .34 $ .26 $ .22
$ 5.94 $ 5.10 $ 4.80 $ 4.74 $ 5.02 $ 5.15 $ 4.86 $ 4.14
------------------------------------------------------------------------------------------
$ 76.0 $ 86.1 $ 75.3 $ 79.7 $ 89.9 $ 75.8 $ 89.0 $ 47.9
$ 41.2 $ 41.0 $ 43.2 $ 47.4 $ 54.8 $ 45.3 $ 39.4 $ 35.7
$213.1 $204.2 $195.2 $190.4 $226.6 $202.3 $211.9 $158.7
$ -- $ -- $ -- $ 0.2 $ 11.9 $ 0.5 $ -- $ 6.0
$ 38.5 $ 58.0 $ 53.0 $ 63.3 $ 76.7 $ 51.0 $ 61.0 $ 27.8
$ 82.2 $ 69.5 $ 65.5 $ 64.7 $ 68.3 $ 69.7 $ 65.5 $ 55.3
------------------------------------------------------------------------------------------
2.9% 1.5% 0.8% 0.1% 0.7% 1.7% 2.7% 1.8%
2.5 2.3 2.2 2.3 2.1 2.5 2.4 2.3
7.2% 3.4% 1.7% 0.1% 1.4% 4.3% 6.5% 4.2%
3.1 3.1 3.0 2.8 3.3 3.1 3.8 3.1
22.2% 10.5% 5.2% 0.3% 4.5% 13.2% 24.7% 12.9%
76.6% 58.0% 14.7% -% -% 46.3% 74.8% 54.0%
18.3% 6.1% 1.2% (5.3%) (2.0%) 6.4% 18.5% 7.3%
------------------------------------------------------------------------------------------
$ 7.9 $ 4.6 $ 1.8 $ 3.3 $ 13.4 $ 10.4 $ 7.8 $ 2.6
1,639 1,625 1,670 1,750 1,730 1,747 1,732 1,750
1,185 1,204 1,196 1,268 1,379 1,371 1,373 1,232
$452.8 $393.8 $354.4 $344.2 $347.3 $365.5 $363.7 $305.3
$122.5 $101.6 $ 92.1 $ 83.0 $ 83.6 $ 87.9 $ 90.5 $ 76.3
$ 98.5 $ 88.8 $ 83.4 $ 77.4 $ 74.5 $ 73.7 $ 70.3 $ 63.8
$ 24.0 $ 12.8 $ 8.7 $ 5.6 $ 9.1 $ 14.2 $ 20.2 $ 12.5
------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------------------------------------------------
1997 ANNUAL REPORT 13
<PAGE> 16
- ------------------------------------------------------------------------------
A. M. CASTLE & CO.
FINANCIAL REVIEW
This discussion should be read in conjunction with the information contained in
the Consolidated Financial Statements and Notes.
OVERVIEW
1997 marked another year of significant growth for A. M. Castle & Co. The
Company's primary market -- the North American producer durable equipment
market -- continued to grow at historically healthy and stable rates. While
final figures are not yet available, the latest Commerce Department data
estimates 12% annual growth for this sector versus 4% growth for the economy as
a whole. Activity levels at Castle remained strong throughout the year. In
fact, the months of November and December, which normally reflect a seasonal
holiday slowdown, showed surprising strength, providing a good finish to the
year.
Sales were again the highest in Company history, breaking the previous
record set last year. Earnings also remained strong, down slightly from the
record-setting years in 1996 and 1995. The past year also marked a period of
aggressive expansion through internal growth and acquisitions into new markets
and complementary lines of business. As in the prior year, the new ventures
contributed to record sales levels and helped offset some of the earnings
erosion caused by flat pricing and inflationary pressures occurring in the
Company's core business environment.
1997 COMPARED WITH 1996
Net sales for 1997 totaled $754.9 million, an increase of 12.2% over 1996's
$672.6 million. Excluding sales generated from our 1996 and 1997 acquisitions,
sales in our core business increased by 5.0%. Carbon and stainless steels
generated 73% of total sales, with the balance provided by non-ferrous metals.
Castle continued to concentrate on gross margin improvement as a component
of long term profitability. In 1997, gross margin percentage remained very
strong at 28.4%, the same percentage achieved in 1996. The Company's
value-added service strategy continues to yield a positive effect on overall
gross margins. Total gross profit was $214.6 million in 1997, up 12.2% from
1996's level of $191.2 million. Excluding gross margins generated from our 1996
and 1997 acquisitions, total gross margin increased by 4.2%.
Substantially all inventories are valued using the LIFO method (last-in,
first-out) method. This method had the effect of decreasing Castle's cost of
sales by $1.1 million in 1997, compared with what it would have been on a FIFO
basis.
Total operating expenses for 1997 were $164.7 million, compared with
$140.1 million last year, a 17.6% increase. Excluding the expenses of our
acquired businesses, 1997 operating expenses were up 9.8% as compared to 1996.
As a percentage of sales, consolidated operating expenses were 21.8% in 1997 as
compared to 20.8% of sales in 1996. Depreciation expense increased by $1.2
million from 1996 primarily due to the depreciation expense associated with the
acquired companies. Net interest expense increased by $1.3 million due to
higher average borrowings in support of the Company's recent acquisitions.
The Company's effective income tax rate at 39.7% was relatively unchanged
from the previous year.
Increased sales and earnings contributions from recently acquired
businesses helped offset some of the earnings erosion experienced due to
inflationary pressures in a relatively flat pricing environment. Earnings for
the year totaled $23.8 million as compared to $26.1 million in 1996. Basic
earnings per share were $1.70 for the year as compared to $1.86 per share last
year.
1996 COMPARED WITH 1995
Net sales for 1996 totaled $672.6 million, an increase of 7.1% over 1995's
$627.8 million. Excluding sales generated from our acquisitions, sales declined
by 0.4%, with unit volume decreasing by 3.1%. Carbon and stainless steels
generated 74% of total sales, with the balance provided by non-ferrous metals.
In 1996, cost of sales as a percentage of total sales decreased. Gross
margin percentage increased to 28.4% compared to 27.6% for 1995. The Company's
emphasis on providing value-added services contributed to the improved margin
performance over the previous year. Total gross profit was $191.2 million in
1996, up 10.3% from 1995's level of $173.4 million. Excluding gross margins
generated from our acquisitions, gross margin increased slightly by 0.6%. In
1996, LIFO had the effect of decreasing Castle's cost of sales by $8.8 million
as compared with a $14.6 million increase in cost of sales due to LIFO in 1995.
Total operating expenses for 1996 were $140.1 million, compared with
$121.7 million in the preceding year, a 15.1% increase. Excluding the expenses
of our acquired businesses, 1996 operating expenses were up by 3.3% as compared
to 1995. As a percentage of sales, expenses were 20.8% in 1996 as compared to
19.4% of sales in 1995. Depreciation expense increased by $0.5 million from
1995 primarily due to the additional depreciation expense associated with the
acquired companies. Net interest expense declined 2.5% due to lower average
borrowings.
The Company's effective income tax rate at 39.5% remained
- -----------------------------------------------------------------------------
14 1997 ANNUAL REPORT
<PAGE> 17
- -----------------------------------------------------------------------------
A.M. CASTLE & CO.
FINANCIAL REVIEW
unchanged from the previous year.
The increased revenues and the effect of the Company's operating leverage
on incremental sales helped to offset some of the softness in the economy and
provide a strong earnings year for Castle. Continuing focus on gross margins
and operating expenses also contributed to the strong earnings performance.
Earnings for the year totaled $26.1 million, or $1.86 per share, versus $26.8
million or $1.93, a share in 1995.
CAPITAL EXPENDITURES
Capital expenditures during 1997 totaled $16.2 million as compared with the
$22.5 million expended in 1996. Capital expenditures in 1997 included
approximately $4.1 million for additional processing equipment at H-A
Industries along with $8.3 million expended for processing and material
handling equipment throughout the rest of the Company. The remaining
expenditures were aimed at enhancing existing facilities and maintaining
property and equipment in good working order. In 1996, capital expenditures
included approximately $10.5 million for construction of new facilities in
Minneapolis, Minnesota, which opened in mid 1996, and Charlotte, North
Carolina, which opened in January of 1997. An additional
$3.0 million was spent to expand H-A Industries' processing capabilities along
with an additional $4.5 million expended for processing and material handling
equipment throughout the company. The balance of 1996 expenditures were aimed
at enhancing existing facilities and maintaining property and equipment in good
working order.
During 1997 and 1996, the Company sold and leased back approximately $2.4
million and $2.5 million of fixed assets, respectively, which added to cash
flow and reduced long-term borrowing.
LIQUIDITY AND CAPITAL RESOURCES
Castle places a great emphasis on maintaining a strong balance sheet and
financial position. Continued earnings strength and cash flow over the past
three years have provided funds for capital expansion and acquisitions, while
long-term borrowings and debt ratios have been maintained at, or below, the
Company's target range.
At year end 1997, stockholders' equity had increased 12.1% over the prior
year to $136.7 million, or $9.74 per share. The previous strong earnings
achieved in 1996 and 1995 added 47% to stockholders' equity, resulting in a
three-year increase in total net worth of 66%. Total borrowings were $93.4
million at year end 1997 as compared to $43.4 million at 1996 year end. Our
debt-to-capital ratio was 40.6% at year end 1997 as compared to 26.3% at the
end of 1996 and 22.9% at the end of 1995.
Accounts receivable rose in 1997 reflecting the increase in sales levels.
The number of days outstanding at the end of 1997 was slightly decreased from
1996. Collections remain strong and in line with target levels. Management
believes that the net accounts receivable at December 31, 1997 are of a very
good quality. Inventory levels increased $58.7 million from 1996. Of that
amount, $20.8 million can be attributed to our acquisitions; $7.2 million was
the result of discontinuing a consignment program; and $29.8 million was due to
increases designed to support certain market initiatives and the higher level
of business activity.
Working capital was $119.8 million at December 31, 1997, compared with
$80.0 million at December 31, 1996.
Castle had unused committed and uncommitted lines of bank credit of $109.5
million at December 31, 1997, compared with $181.0 million at December 31,
1996. Management believes that funds generated from operations, existing lines
of credit and additional borrowing capacity should provide adequate funding for
current and anticipated business operations.
YEAR 2000
The Company is currently modifying its computer systems in order to properly
process transactions in the year 2000. Expenditures for these modifications are
being expensed as incurred. The Company expects to have substantially all
necessary modifications completed by late 1998 with no significant impact on
the Company's ongoing results of operations.
COMMON STOCK INFORMATION
Symbol CAS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Dividends Stock Price Range
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First quarter $.15 $.12 17 1/4 20 7/8 20 3/8 25
Second quarter .17 .15 16 3/4 23 5/8 23 1/2 30 7/8
Third quarter .17 .15 21 3/4 26 1/2 16 3/4 23 1/4
Fourth quarter .17 .15 22 1/2 26 1/2 16 1/8 20
-----------
$.66 $.57
===========
</TABLE>
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT 15
<PAGE> 18
- --------------------------------------------------------------------------------
A. M. CASTLE & CO.
SUPPLEMENTARY SCHEDULES
The Company's LIFO inventory system charges cost of material sold at the
inventory costs of its most recent purchases. The LIFO method matches current
revenues with current costs of inventory. This method more fairly presents
results of operations, whether in periods of inflation or deflation.
The Supplementary Statements of Consolidated Financial Position are
presented for analytical and comparative purposes. They are intended to display
the Company's financial position as if the Company were on a FIFO-based
inventory system rather than the LIFO-based inventory system the Company
actually uses. The statements reflect taxes on the unrecognized inventory gain
at statutory Federal rates and the Company's historical average state tax rates
and give no effect to any supplemental expenses.
Supplementary Statements Of Consolidated Financial Position
<TABLE>
<CAPTION>
December 31,
================================================================================================
(Dollars in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets
Cash ......................................................... $ 2.8 $ 1.8 $ 0.7
Accounts receivable, net...................................... 88.5 68.8 63.4
Inventories, at latest cost .................................. 209.1 152.1 164.1
-------------------------------
Total current assets ........................................ 300.4 222.7 228.2
Less--current liabilities .................................... (146.4) (107.4) (104.0)
-------------------------------
Net current assets ........................................... 154.0 115.3 124.2
Fixed and other assets, net ................................... 123.1 97.4 60.7
-------------------------------
Total assets, less current liabilities....................... 277.1 212.7 184.9
Long-term debt ................................................ (90.7) (40.9) (28.0)
Deferred income taxes ......................................... (12.5) (11.4) (10.9)
Other liabilities ............................................. (2.9) (3.2) (2.8)
Unrecognized inventory gain, net of taxes ..................... (34.3) (35.3) (39.8)
-------------------------------
Stockholders' equity .......................................... $136.7 $121.9 $103.4
===============================
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
16 1997 ANNUAL REPORT
<PAGE> 19
- --------------------------------------------------------------------------------
A. M. CASTLE & CO.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
=========================================================================================
(Dollars in thousands, except per share data) 1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ............................................. $754,865 $672,617 $627,826
Cost of material sold.................................. 540,286 481,451 454,428
-------------------------------
Gross profit on sales................................. 214,579 191,166 173,398
-------------------------------
Expenses
Operating expenses.................................... 164,659 140,144 121,652
Depreciation (Note 1)................................. 6,206 5,008 4,459
Interest expense, net (Notes 2 and 4) ................ 4,183 2,878 2,953
-------------------------------
175,048 148,030 129,064
-------------------------------
Income before income taxes............................. 39,531 43,136 44,334
-------------------------------
Income taxes (Notes 1 and 3)
Federal-currently payable............................. 10,152 12,845 14,114
-deferred ..................................... 2,469 934 (72)
State................................................. 3,065 3,253 3,466
-------------------------------
15,686 17,032 17,508
-------------------------------
Net income............................................. $ 23,845 $ 26,104 $ 26,826
===============================
Basic income per share (Notes 1 and 7)................. $ 1.70 $ 1.86 $ 1.93
===============================
Diluted income per share (Notes 1 and 7)............... $ 1.69 $ 1.86 $ 1.93
===============================
- --------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31,
======================================================================================
(Dollars in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year............................. $100,124 $ 81,998 $ 61,178
Net income .............................................. 23,845 26,104 26,826
Cash dividends--$.66 in 1997, $.57 per share in 1996 and
$.43 per share in 1995 (Note 7)......................... (9,260) (7,978) (6,006)
----------------------------
Balance at end of year................................... $114,709 $100,124 $ 81,998
============================
- --------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT 17
<PAGE> 20
- --------------------------------------------------------------------------------
A. M. CASTLE & CO.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years Ended December 31,
==============================================================================================================================
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash (Note 1) ................................................................................. $ 2,775 $ 1,805 $ 667
Accounts receivable, less allowances of $600 in 1997, $700 in 1996,
and $600 in 1995 ............................................................................. 88,478 68,791 63,408
Inventories--principally on last-in, first-out basis
(latest cost higher by approximately $57,100 in 1997, $58,800 in 1996,
and $66,300 in 1995) (Note 1)................................................................... 152,028 93,315 97,766
----------------------------
Total current assets.......................................................................... 243,281 163,911 161,841
----------------------------
Prepaid expenses and other assets (Note 1)...................................................... 45,684 34,742 16,245
----------------------------
Property, plant and equipment, at cost (Notes 1 and 5)
Land .......................................................................................... 5,915 5,775 4,955
Buildings...................................................................................... 48,366 40,817 35,485
Machinery and equipment........................................................................ 99,359 82,265 64,535
----------------------------
153,640 128,857 104,975
Less--accumulated depreciation ................................................................. 76,230 66,140 60,512
----------------------------
77,410 62,717 44,463
----------------------------
Total assets.................................................................................... $366,375 $261,370 $222,549
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable .............................................................................. $ 98,813 $ 63,860 $ 60,969
Accrued payroll and employee benefits (Note 6)................................................. 12,554 10,663 8,681
Accrued liabilities ........................................................................... 5,522 4,442 4,095
Current and deferred income taxes (Notes 1 and 3).............................................. 3,934 2,455 958
Current portion of long-term debt (Note 4) .................................................... 2,688 2,482 2,756
----------------------------
Total current liabilities..................................................................... 123,511 83,902 77,459
----------------------------
Long-term debt, less current portion (Note 4) .................................................. 90,735 40,934 28,015
----------------------------
Deferred income taxes (Notes 1 and 3)........................................................... 12,543 11,427 10,893
----------------------------
Other liabilities (Notes 1 and 6)............................................................... 2,877 3,181 2,819
----------------------------
Stockholders' equity (Notes 1 and 7)
Common stock, without par value--authorized 30,000,000 shares;
issued and outstanding 14,040,924 in 1997, 14,008,792 in 1996 and
13,944,705 in 1995............................................................................. 27,293 26,681 25,441
Earnings reinvested in the business............................................................ 114,709 100,124 81,998
Other ......................................................................................... 85 257 229
Treasury stock, at cost (845,019 shares in 1997, 834,439 shares in 1996
and 799,268 shares in 1995).................................................................... (5,378) (5,136) (4,305)
----------------------------
Total stockholders' equity ................................................................... 136,709 121,926 103,363
----------------------------
Total liabilities and stockholders' equity ..................................................... $366,375 $261,370 $222,549
============================
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
- --------------------------------------------------------------------------------
18 1997 ANNUAL REPORT
<PAGE> 21
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
===============================================================================
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income...................................... $ 23,845 $ 26,104 $ 26,826
Adjustments to reconcile net income to net
cash provided from operating activities
Depreciation.................................... 6,206 5,008 4,459
(Gain) loss on sale of facilities/equipment..... 22 (112) (90)
Increase in deferred taxes...................... 670 458 3,121
(Increase) in prepaid expenses and other assets. (63) (3,388) (2,391)
Vested portion of restricted stock awards....... 207 198 161
Increase (decrease) in other liabilities........ (1,187) 362 294
----------------------------
Cash provided from operating activities before
changes in current accounts..................... 29,700 28,630 32,380
----------------------------
Increase (decrease) from changes in:
Accounts receivable........................... (12,590) 2,619 (4,516)
Inventories................................... (43,507) 10,835 449
Accounts payable.............................. 28,787 (8,727) (313)
Accrued payroll and employee benefits......... 1,300 160 (1,162)
Accrued liabilities........................... 188 216 (766)
Current and deferred income taxes............. 1,287 1,182 (1,363)
----------------------------
Net increase (decrease) from changes
in current accounts............................. (24,535) 6,285 (7,671)
----------------------------
Net cash provided from operating activities....... 5,165 34,915 24,709
----------------------------
Cash flows from investing activities
Investments and acquisitions (Note 9)........... (29,265) (17,984) --
Proceeds from sales of
facilities/equipment (Note 5)................. 2,470 2,521 4,140
----------------------------
Capital expenditures............................ (16,182) (22,544) (11,782)
----------------------------
Net cash used by investing activities............. (42,977) (38,007) (7,642)
----------------------------
Cash flows from financing activities
Proceeds from issuance of long-term debt........ 50,838 23,060 4,685
Repayments of long-term debt.................... (2,787) (11,091) (16,276)
Dividends paid.................................. (9,260) (7,978) (6,006)
Net proceeds from issuance of stock............. 161 211 236
Other........................................... (170) 28 (15)
----------------------------
Net cash provided from (used by)
financing activities............................ 38,782 4,230 (17,376)
----------------------------
Net increase (decrease) in cash................... 970 1,138 (309)
Cash--beginning of year........................... 1,805 667 976
----------------------------
Cash--end of year................................. $ 2,775 $ 1,805 $ 667
============================
Supplemental disclosures of cash flow information
Cash paid during the year for--
Interest...................................... $ 4,209 $ 2,997 $ 3,045
----------------------------
Income taxes.................................. $ 13,729 $ 15,268 $ 15,750
----------------------------
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT 19
<PAGE> 22
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) PRINCIPAL ACCOUNTING POLICIES AND BUSINESS DESCRIPTION
Nature of operations -- The Company is an industrial distributor of specialty
metals including carbon, alloy, and stainless steels; nickel alloys; aluminum;
titanium; copper and brass; throughout the United States and Canada. The
customer base includes many Fortune 500 companies as well as thousands of
medium and smaller sized ones in various industries primarily within the
producer durable equipment sector. The Company also distributes industrial
plastics through its subsidiary Total Plastics, Inc.
Basis of presentation -- The financial statements include A. M. Castle & Co.
(the Company) and its subsidiaries. All intercompany accounts and transactions
have been eliminated.
Use of estimates -- The financial statements have been prepared in accordance
with generally accepted accounting principles which necessarily include amounts
based on estimates and assumptions by management. Actual results could differ
from those amounts.
Cash -- For the purposes of these statements, short-term investments which have
a maturity of 90 days or less are considered cash equivalents.
Inventories -- Substantially all inventories are stated at the lower of
last-in, first-out (LIFO) cost or market. The Company values its LIFO
increments using the costs of its latest purchases during the years reported.
Property, plant and equipment -- Property, plant and equipment are stated at
cost and include assets held under capitalized leases. Major renewals and
betterments are capitalized, while maintenance and repairs which do not
substantially improve or extend the useful lives of the respective assets are
expensed currently. When properties are disposed of, the related costs and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in income.
The Company provides for depreciation of plant and equipment by charging
against income amounts sufficient to amortize the cost of properties over their
estimated useful lives (buildings--12 to 40 years; machinery and equipment--5
to 20 years). Depreciation is provided using the straight-line method for
financial reporting purposes and accelerated methods for tax purposes. Included
in depreciation expense is the amortization of assets under capital leases.
Other liabilities -- Includes postretirement benefit obligations along with the
minority interest in consolidated subsidiaries.
Income taxes -- Income tax provisions are based on income reported for
financial statement purposes.
Retirement plan costs -- The Company accrues and funds its retirement plans
based on amounts, as determined by an independent actuary, necessary to
maintain the plans on an actuarially sound basis. The Company also provides
certain health care and life insurance benefits for retired employees. The cost
of these benefits are recognized in the financial statements during the
employee's active working career.
Earnings per share -- In accordance with SFAS No. 128 "Earnings per Share"
below is a reconciliation of the basic and diluted earnings per share
calculations for the three year reporting period. (dollars and shares in
thousands)
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income........................................ $23,845 $26,104 $26,826
Weighted average common shares outstanding........ 14,026 14,000 13,894
Dilutive effect of outstanding employee
and directors' common stock options............. 49 68 33
----------------------------
Diluted common shares outstanding................. 14,075 14,068 13,927
Basic earnings per share.......................... $ 1.70 $ 1.86 $ 1.93
============================
Diluted earnings per share........................ $ 1.69 $ 1.86 $ 1.93
============================
Outstanding employee and directors' common
stock options having no dilutive effect......... 8 8 0
============================
- -------------------------------------------------------------------------------
</TABLE>
Goodwill -- Cost in excess of net assets of acquired companies is amortized on
a straight-line basis over a 40 year period. As required, the Company
continually evaluates whether later events or circumstances warrant a revision
in the remaining useful life and recoverability of the unamortized balance.
(2) SHORT-TERM DEBT
Short-term borrowing activity was as follows (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum borrowed.................................. $ 8,500 $ 5,000 $ 7,450
Average borrowed.................................. 1,003 884 1,947
Average interest rate
During the year................................. 5.8% 5.5% 6.1%
- -------------------------------------------------------------------------------
</TABLE>
(3) INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's Federal and state deferred tax liabilities and assets as of
December 31, 1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation.................................... $ 7,688 $ 6,547 $ 5,666
Inventory, net.................................. 4,912 2,858 2,799
Pension......................................... 5,608 5,743 5,030
Other, net...................................... (1,173) (1,612) (59)
----------------------------
Net deferred liabilities...................... 17,035 13,536 13,436
Deferred tax assets:
Postretirement benefits......................... 937 1,426 1,271
----------------------------
Net deferred tax liabilities.................. $ 16,098 $ 12,110 $ 12,165
============================
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
20 1997 ANNUAL REPORT
<PAGE> 23
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the provision (benefit) for deferred Federal income tax
for the years ended December 31, 1997, 1996 and 1995, are as follows (in
thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation...................................... $ 257 $ 537 $ 415
Inventory, net.................................... 1,753 125 (1,124)
Pension/Postretirement benefits................... 428 621 963
Other, net........................................ 31 (349) (326)
----------------------------
$ 2,469 $ 934 $ (72)
============================
- -------------------------------------------------------------------------------
</TABLE>
A reconciliation between the statutory Federal income tax amount
and the effective amounts at which taxes were actually provided is as
follows (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rates............. $ 13,836 $ 15,098 $ 15,517
State income taxes, net of Federal
income tax benefits............................. 1,864 2,103 2,248
Net operating loss carry-forward.................. -- -- (296)
Other............................................. (14) (169) 39
----------------------------
$ 15,686 $ 17,032 $ 17,508
============================
- -------------------------------------------------------------------------------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1997, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revolving credit agreement (a) (c)................ $ 25,838 $ -- $ 7,640
6.49% insurance company term loan, due in equal
installments from 2004 through 2008............. 20,000 20,000 --
9.3% insurance company term loan, due in equal
installments through 2000....................... 4,980 6,650 8,320
7.53% insurance company term loan due in equal
installments from 1999 through 2005............. 4,600 4,600 4,600
Industrial development revenue bonds at variable
rates, due in varying amounts through
2010 (b) (c).................................... 10,791 11,058 8,700
7.54% insurance company loan due in equal
installments from 2005 through 2009............. 25,000 -- --
Other............................................. 2,214 1,108 1,511
----------------------------
Total............................................. 93,423 43,416 30,771
Less -- current portion........................... (2,688) (2,482) (2,756)
----------------------------
Total long-term portion........................... $ 90,735 $ 40,934 $ 28,015
============================
- -------------------------------------------------------------------------------
</TABLE>
The carrying value of long term debt does not differ materially from their
estimated fair value as of December 31, 1997.
(a) The Company has revolving credit agreements of $70.0 million domestically
and $7.4 million with a Canadian bank. The credit facilities are five-year
revolvers, extended annually by mutual agreement. Under these credit
arrangements all borrowings are considered to be long-term debt for balance
sheet presentation purposes.
Interest rate options on the domestic facility are based on Eurodollar
Interbank Rates, Reference Rates or competitive Bid Rates from five
participating banks. A commitment fee of .2% of the unused portion of the
commitment is required on the domestic facility.
(b) The industrial revenue bonds are based on a variable rate demand bond
structure and are backed by a letter of credit.
(c) The most restrictive provisions of the loan agreements require the Company
to maintain minimum funded debt to total capitalization ratios. At December 31,
1997, the Company was in compliance with all restrictive covenants.
(d) Aggregate annual principal payments required on the noncurrent portion of
long-term debt (including obligations under capital leases) are due as follows
(in thousands):
1999 $2,834 2000 $2,778 2001 $1,149 2002 $1,046
====== ====== ====== ======
Total net book value of assets collateralized under financing arrangements
approximated $1.9 million at December 31, 1997.
Net interest expense reported on the accompanying Consolidated Statements
of Income was reduced by interest income of $0.2 million in 1997, $0.3 million
in 1996 and $ 0.1 million in 1995.
(5) LEASE AGREEMENTS
(a) Description of leasing arrangements--The Company has capital and operating
leases covering certain warehouse facilities, equipment, automobiles and
trucks, with lapse of time as the basis for all rental payments plus a mileage
factor included in the truck rentals.
(b) Capital leases--Obligations under capitalization of leases are not
significant.
(c) Operating leases--Future minimum rental payments under operating leases
that have initial or remaining noncancelable lease terms in excess of one year
as of December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
===============================================================================
Year ending December 31,
- -------------------------------------------------------------------------------
<S> <C>
1998............................................................... $ 6,161
1999............................................................... 4,808
2000............................................................... 3,329
2001............................................................... 2,526
2002............................................................... 1,545
Later years........................................................ 9,768
-------
Total minimum payments required....................................... $28,137
=======
- -------------------------------------------------------------------------------
</TABLE>
(d) Rental expense--Total rental payments charged to expense were $9.5 million
in 1997, $8.9 million in 1996 and $7.8 million in 1995.
(e) Sale and leaseback of assets--During 1997, 1996 and 1995 the Company sold
and leased back equipment under operating leases with terms ranging from five
to eight years. The assets sold at approximately net book value for proceeds of
$2,421,000, $2,473,000 and $4,059,000 respectively. The 1997 lease allows for a
purchase option at the end of the lease term of $738,000. The 1996 and 1995
leases allow for a purchase option at the end of the lease term of $779,000 and
$1,349,000 respectively. Annual rentals are $326,000 for the 1997 lease,
$336,000 for the 1996 lease, and $615,000 for the 1995 leases.
- -------------------------------------------------------------------------------
1997 ANNUAL REPORT 21
<PAGE> 24
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) RETIREMENT, PROFIT-SHARING AND INCENTIVE PLANS
Substantially all employees who meet certain requirements of age, length of
service and hours worked per year are covered by Company-sponsored retirement
plans. These retirement plans are defined benefit, noncontributory plans.
Benefits paid to retirees are based upon age at retirement, years of credited
service and average earnings.
The assets of the Company-sponsored plans are maintained in a single trust
account. The majority of the trust assets are invested in common stock mutual
funds, insurance contracts, real estate funds and corporate bonds. The
Company's funding policy is to satisfy the minimum funding requirements of
ERISA.
The net pension expense/(credits) in 1997, 1996 and 1995 were composed of
the following (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Normal service cost............................... $ 1,475 $ 1,798 $ 1,302
Interest cost on projected benefit obligation..... 4,327 4,261 3,929
Actual return on plan assets...................... (14,399) (7,373) (10,314)
Net amortization and deferral..................... 8,607 1,572 4,866
----------------------------
Net pension expense (credit)...................... $ 10 $ 258 $ (217)
============================
- -------------------------------------------------------------------------------
</TABLE>
The status of the plans at December 31, 1997, 1996 and 1995, was as follows:
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of vested
benefit obligation.............................. $50,877 $44,011 $45,519
Plus--Nonvested benefit obligation.............. 2,057 2,670 3,180
----------------------------
Vested and nonvested accumulated
benefit obligation............................ 52,934 46,681 48,699
Plus--Projected salary increases
benefit obligation............................ 11,035 9,894 9,407
----------------------------
Projected benefit obligation.................... 63,969 56,575 58,106
Plan assets at fair market value................. 77,957 65,511 57,222
----------------------------
Plan assets in excess of (less than) projected
benefit obligation.............................. 13,988 8,936 (884)
Items not yet recognized in earnings
Unrecognized net transitional assets............ -- -- (976)
Unrecognized net loss........................... 488 4,477 10,649
Unrecognized prior-service cost................. (118) 942 1,148
----------------------------
Pension prepaid recognized on the consolidated
balance sheets at December 31................... $14,358 $14,355 $ 9,937
============================
- -------------------------------------------------------------------------------
</TABLE>
The assumptions used to measure the projected benefit obligations, future
salary increases, and to compute the expected long-term return on assets for
the Company's defined benefit pension plans are as follows:
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate..................................... 7.25% 8.00% 7.25%
Projected annual salary increases................. 4.75 4.75 4.75
Expected long-term rate of return on plan assets.. 9.50 9.50 9.50
- -------------------------------------------------------------------------------
</TABLE>
The Company has profit sharing plans for the benefit of salaried and other
eligible employees (including officers). The Company's profit sharing plan
includes features under Section 401(k) of the Internal Revenue Code. The plan
includes a provision whereby the Company partially matches employee
contributions up to a maximum of 6% of the employees' salary. The plan also
includes a supplemental contribution feature whereby a Company contribution
would be made to all eligible employees upon achievement of specific return on
investment goals as defined by the plan.
The Company has a management incentive bonus plan for the benefit of its
officers and key employees. Incentives are paid to line managers based on
performance, against objective, of their respective operating units. Incentives
are paid to corporate officers on the basis of total Company performance
against objective. Amounts accrued and charged to income under each plan are
included as part of accrued payroll and employee benefits at each respective
year end. The amounts charged to income are summarized below (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit sharing and 401-K.......................... $2,304 $2,469 $2,258
============================
Management incentive.............................. $2,670 $2,664 $2,966
============================
- -------------------------------------------------------------------------------
</TABLE>
The Company also provides declining value life insurance to its retirees
and a maximum of three years of medical coverage to qualified individuals who
retire between the ages of 62 and 65. The Company does not fund these plans.
During 1997, the Company elected to terminate the plan providing medical
coverage to non-union employees who retire between the ages of 62 and 65 after
March 31, 1998. The Company recognized a pre-tax gain of $1,449,000 as a result
of this curtailment in coverage.
Net postretirement benefit cost for 1997, 1996 and 1995 includes the following
components (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost...................................... $169 $214 $154
Interest cost on accumulated postretirement
benefit obligation............................... 283 311 313
Amortization of unrecognized prior service cost... 21 22 (26)
Amortization of unrecognized net (gain) or loss... (3) 25 49
----------------------------
Net periodic postretirement benefit cost.......... $470 $572 $490
============================
- -------------------------------------------------------------------------------
</TABLE>
The following is a reconciliation between the plan's funded status and the
accrued postretirement benefit obligation as reflected on the balance sheet as
of December 31, 1997, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................ $1,382 $1,528 $2,003
Fully eligible active plan participants......... 189 133 147
Other active plan participants.................. 1,179 2,825 3,088
----------------------------
2,750 4,486 5,238
Unrecognized prior service cost................. (437) (459) (480)
Unrecognized net (gain) or loss................. 81 (431) (1,523)
----------------------------
Accrued postretirement benefit obligation....... $2,394 $3,596 $3,235
============================
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
22 1997 ANNUAL REPORT
<PAGE> 25
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future benefit costs were estimated assuming medical costs would increase
at a 11.25% annual rate for the current year, with annual increases decreasing
by 0.5% per year for one year, and 1% per year thereafter until an ultimate
trend rate of 5.75% is reached. A 1% increase in the health care cost trend
rate assumptions would have increased the accumulated postretirement benefit
obligation at December 31, 1997 by $170,000 -with no significant effect on the
1997 postretirement benefit expense. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25% in
1997, 8.00% in 1996 and 7.25% in 1995.
(7) COMMON STOCK
On April 23, 1996, the Company declared a 25% stock dividend which was
accounted for as a 5-for-4 stock split and had no effect on common stock or
reinvested earnings. All per share amounts presented reflect the effect of the
25% stock dividend on a retroactive basis.
Changes in the common and treasury stock accounts during 1997, 1996 and
1995 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
===============================================================================
Common Stock Treasury Stock
- -------------------------------------------------------------------------------
Shares
Issued Amount Shares Amount
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1994................... 14,595,107 $24,114 745,551 $3,375
Stock options exercised........... 132,055 1,166 53,691 930
Other............................. 16,810 161 25 --
------------------------------------------
December 31, 1995................... 14,743,972 $25,441 799,267 $4,305
Stock options exercised........... 90,944 1,064 35,141 831
Other............................. 8,225 176 (59) --
------------------------------------------
December 31, 1996................... 14,843,141 $26,681 834,349 $5,136
Stock options exercised........... 31,732 405 10,639 242
Other............................. 11,070 207 31 --
------------------------------------------
DECEMBER 31, 1997................... 14,885,943 $27,293 845,019 $5,378
==========================================
- -------------------------------------------------------------------------------
</TABLE>
The Company has long-term stock incentive and stock option plans for the
benefit of officers, directors, and key management employees. The plans and
related activity are summarized below.
The 1989 Long-Term Incentive Plan authorized up to 421,875 shares of
common stock for use under the plan. Compensation expense is recognized ratably
over the vesting period as determined by the plan. Activity under the plan for
1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
===============================================================================
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Compensation expense.............................. $362,000 $330,000 $275,000
============================
Shares awarded.................................... 11,070 8,945 16,810
============================
- -------------------------------------------------------------------------------
</TABLE>
The Company currently has three stock option plans in effect. The 1990
Restricted Stock and Stock Option Plan authorizes up to 656,250 shares of
common stock for use under the plan; the 1995 Directors Stock Option Plan
authorizes up to 187,500 shares; and the 1996 Restricted Stock and Stock Option
Plan authorizes 937,500 shares for use under the plan. A summary of the
activity under the plans is shown below:
<TABLE>
<CAPTION>
===============================================================================
Option Wtd. Avg.
Shares Exercise Price Range
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1994 307,798 10.33 6.27 - 12.07
Granted 8,000 12.10 12.10
Forfeitures (2,625) 7.07 7.07
Exercised (132,055) 8.83 6.27 - 12.07
----------------------------------------
December 31, 1995 181,118 11.53 6.27 - 12.07
Granted 184,255 18.95 18.75 - 23.38
Exercised (90,944) 11.70 6.27 - 12.07
----------------------------------------
December 31, 1996 274,429 16.44 6.27 - 23.38
Granted 111,400 21.88 21.88
Forfeitures (23,625) 15.79 6.27 - 21.88
Exercised (37,520) 13.95 6.60 - 18.75
----------------------------------------
DECEMBER 31, 1997 324,684 18.64 6.60 - 21.88
========================================
- -------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, 220,384 of the 324,684 options outstanding, were
currently exercisable and had a weighted average contractual life of 3.01 years
with a weighted average exercise price of $17.11. The remaining 104,300 shares
were not exercisable and had a weighted average contractual life of 4.5 years,
with a weighted average exercise price of $21.88. The weighted average fair
value of the current year's option grant is estimated to be $5.76 per share.
The fair value has been estimated on the day of the grant using the Black
Scholes option pricing model with the following assumptions, risk free interest
rate of 5.5%, expected dividend yield of 3.0%, option life of 5 years, and
expected volatility of 30 percent.
The Company has chosen to account for the stock option plans in accordance
with APB Opinion No. 25 under which no compensation expense has been
recognized. Had compensation cost for these plans been determined under SFAS
No. 123, the Company's 1997 net income would have been reduced by approximately
$811,000 or $0.06 per share, and 1996 net income would have been reduced by
approximately $490,000 or $0.03 per share. The effect on 1995 income was
immaterial.
(8) CONTINGENT LIABILITIES
At December 31, 1997 total exposure under guarantees issued for banking
facilities of unconsolidated affiliates was $15.5 million. The Company was
contingently liable as endorser on discounted trade acceptances aggregating
$6.5 million at December 31, 1997. Also, the Company has $1.6 million of
irrevocable letters of credit outstanding to comply with the insurance reserve
requirements of its workers' compensation insurance carrier.
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT 23
<PAGE> 26
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is the defendant in several lawsuits arising out of the
conduct of its business. These lawsuits are incidental and occur in the normal
course of the Company's business affairs. It is the opinion of counsel that no
significant uninsured liability will result from the outcome of the litigation,
and thus there is no material financial exposure to the Company.
(9) ACQUISITIONS
During 1997 the Company purchased four distribution businesses. The aggregate
cash consideration paid was $29,265,000 including certain transaction costs.
The acquisitions have been accounted for as purchases and are included in the
financial statements from the date of acquisition. Pro-forma results are not
presented as the amounts do not significantly differ from historical results.
(10) SELECTED QUARTERLY DATA (UNAUDITED)
The unaudited quarterly results of operations for 1997 and 1996 are as follows
(dollars in thousands, except per share data--Note 7):
<TABLE>
<CAPTION>
===============================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 QUARTERS
NET SALES............................ $177,326 $187,981 $192,735 $196,823
GROSS PROFIT......................... 50,931 53,445 54,836 55,367
NET INCOME........................... 6,182 6,136 5,734 5,793
NET INCOME PER SHARE BASIC........... $ .44 $ .44 $ .41 $ .41
NET INCOME PER SHARE
DILUTED............................ $ .44 $ .44 $ .41 $ .41
1996 quarters
Net sales............................ $175,047 $174,797 $162,322 $160,451
Gross profit......................... 49,005 49,322 45,490 47,349
Net income........................... 7,622 7,025 5,258 6,199
Net income per share basic........... $ .54 $ .50 $ .38 $ .44
Net income per share diluted......... $ .54 $ .50 $ .37 $ .44
- -------------------------------------------------------------------------------
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of A.M. Castle & Co.:
We have audited the accompanying consolidated balance sheets of A.M. Castle &
Co. (a Delaware corporation) and Subsidiaries as of December 31, 1997, 1996 and
1995, and the related consolidated statements of income, reinvested earnings
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of A.M. Castle & Co. and
Subsidiaries as of December 31, 1997, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 2, 1998.
- --------------------------------------------------------------------------------
24 1997 ANNUAL REPORT
<PAGE> 27
- -------------------------------------------------------------------------------
A. M. CASTLE & CO.
DIRECTORS
DANIEL T. CARROLL
Chairman
The Carroll Group
a management consulting firm
EDWARD F. CULLITON
Vice President and
Chief Financial Officer
WILLIAM K. HALL
Chairman & Chief Executive Officer
Falcon Building Products, Inc.
a diversified manufacturing
company
ROBERT S. HAMADA
Dean
Graduate School of Business
University of Chicago
PATRICK J. HERBERT, III
President
Simpson Estates, Inc.
a private management firm
JOHN P. KELLER
President
Keller Group
an industrial manufacturing & coal
mining company
JOHN W. MCARTER, JR.
President
The Field Museum
a natural history museum
RICHARD G. MORK
President and
Chief Executive Officer
JOHN PUTH
Principle
J.W. Puth Associates
a consulting firm
MICHAEL SIMPSON
Chairman of the Board
RICHARD A. VIRZI
Retired President and
Chief Executive Officer
A. M. Castle & Co.
OFFICERS
MICHAEL SIMPSON
Chairman of the Board
RICHARD G. MORK
President and
Chief Executive Officer
EDWARD F. CULLITON
Vice President and
Chief Financial Officer
SVEN G. ERICSSON
Vice President-
International
M. BRUCE HERRON
Vice President-
Western Region
STEPHEN V. HOOKS
Vice President-
Midwest Region
FRITZ OPPENLANDER
Vice President-
Operations
ALAN D. RANEY
Vice President-
Advanced Materials Group
ROBERT A. ROSENOW
Vice President-
Plate & Carbon Products Group
GISE VAN BAREN
Vice President-
Alloy Products Group
CRAIG R. WILSON
Vice President-
Eastern Region
PAUL J. WINSAUER
Vice President-
Human Resources
JAMES A. PODOJIL
Treasurer-Controller
JERRY M. AUFOX
Secretary-
Legal Counsel
HY-ALLOY STEELS CO.
GISE VAN BAREN
President and General Manager
TOTAL PLASTICS, INC.
JOHN A. KOZACKI
President
CUTTER PRECISION METALS
KIRKLAN VOLL
President
KEYSTONE TUBE COMPANY
MARC BIOLCHIN
President
GENERAL OFFICES
3400 North Wolf Road
Franklin Park, IL 60131
847/455-7111
GENERAL COUNSEL
Mayer, Brown & Platt
TRANSFER AGENT & REGISTRAR
American Stock Transfer
and Trust Company
COMMON STOCK TRADED
American Stock Exchange
Chicago Stock Exchange
INDEPENDENT AUDITORS
Arthur Andersen LLP
DIVIDEND REINVESTMENT PLAN
All registered holders of A. M. Castle & Co. common stock are eligible to
participate in a convenient and economical Dividend Reinvestment Plan.
Participants may also make voluntary cash payments. The company pays all
commissions and fees associated with stock purchased under the Plan. If you own
Castle common stock in "street name" (no certificates), please contact your
brokerage firm for further information.
DIVIDEND PAYMENT DATES
Dividends are paid approximately four weeks following the regular Board meeting
which are held on the fourth Thursday of January, April, July and October.
ANNUAL MEETING
The Annual Meeting of the Company's shareholders will be held at our corporate
headquarters on Thursday, April 23, 1998 at 10 a.m. Our corporate headquarters
address is 3400 North Wolf Road, Franklin Park, Illinois 60131.
FORM 10-K
A. M. Castle & Co. will be pleased to make its annual report on Form 10-K,
filed with the Securities and Exchange Commission, available at no cost to
interested stockholders on written request to the corporate secretary.
<PAGE> 28
A. M. CASTLE & CO.
Castle Metals Locations
Atlanta, Buffalo, Charlotte, Chicago, Cincinnati, Cleveland, Dallas,
Detroit, Houston, Kansas City, Los Angeles, Milwaukee, Minneapolis,
Philadelphia, Phoenix, Pittsburgh, Portland, Salt Lake City, San Diego,
Stockton, Tulsa, Wichita, Worcester
Divisions
Cutter Precision Metals - Minneapolis, Santa Clara, Seattle
Hy-Alloy Steels Co. - Chicago
H-A Industries - Hammond
Subsidiaries
A. M. Castle & Co. (Canada), Inc. - Edmonton, Montreal, Toronto, Winnipeg
Total Plastics, Inc. - Chicago, Detroit, Fort Wayne, Grand Rapids,
Indianapolis, Kalamazoo
A. M. Castle & Co. Limited - Blackburn, Great Britain
Keystone Tube Company - LaPorte, Riverdale, Titusville
Joint Ventures
Castle de Mexico, S.A. de C.V. - Monterrey
Kreher Steel Company, L.L.C. - Chicago, Dallas, Detroit, Houston
A. M. Castle & Co.
3400 North Wolf Road
Franklin Park, IL 60131
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