[CAPTION]10-Q/A
10-Q\A Page 1 of 11
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 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 of organization)
3400 North Wolf Road, Franklin Park, Illinois 60131
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone, including area code 847/455-7111
None
(Former name, former address and former fiscal year, if changed since last
year)
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1998
Common Stock, No Par Value 14,043,505 shares
Page 2 of 11
A. M. CASTLE & CO.
Part I. FINANCIAL INFORMATION
Page
Number
Part I. Financial Information
Item 1. Financial Statements . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets . . . . . . . . . . . . . . . 3
Comparative Statements of Cash Flows . . . . . . . . . 3
Comparative Statements of Income . . . . . . . . . . . 4
Notes to Condensed Financial Statements. . . . . . . . 5 - 6
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . . . . 6 - 9
Part II. Other Information
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 10
<PAGE>
Page 3 of 11
A. M. CASTLE & CO.
CONDENSED BALANCE SHEETS
(Dollars in thousands except per share data)
(unaudited) Sept. 30, Dec. 31, Sept. 30,
ASSETS 1998 1997 1997
Cash . . . . . . . . . . . . . . . . $ 5,497 $ 2,775 $ 2,244
Accounts receivable, net . . . . . . 97,617 88,478 87,965
Inventories (principally on last-in,
first-out basis) . . . . . . . . . 228,167 152,028 144,266
Total current assets . . . . . . . $331,281 $243,281 $234,475
Prepaid expenses and other assets. . 59,688 45,684 46,450
Fixed assets, net. . . . . . . . . . 96,444 77,410 72,856
Total assets . . . . . . . . . . . $487,413 $366,375 $353,781
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable . . . . . . . . . . $114,483 $ 98,813 $100,068
Accrued liabilities. . . . . . . . . 18,351 18,076 17,411
Income taxes payable . . . . . . . . 4,628 3,934 1,740
Current portion of long-term debt. . 3,803 2,688 2,673
Total current liabilities. . . . . $141,265 $123,511 $121,892
Long-term debt, less current portion 182,653 90,735 82,769
Deferred income taxes. . . . . . . . 13,500 12,543 12,326
Other liabilities .. . . . . . . . . 3,951 2,877 3,434
Stockholders' equity . . . . . . . . 146,044 136,709 133,360
Total liabilities and stockholders'
equity . . . . . . . . . . . . . . $487,413 $366,375 $353,781
SHARES OUTSTANDING . . . . . . . . . 14,044 14,041 14,038
BOOK VALUE PER SHARE . . . . . . . . $ 10.40 $ 9.74 $ 9.50
WORKING CAPITAL. . . . . . . . . . . $190,016 $119,770 $112,583
WORKING CAPITAL PER SHARE. . . . . . $ 13.53 $ 8.53 $ 8.02
DEBT TO CAPITAL. . . . . . . . . . . 56.1% 40.6% 39.0%
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands) For the Nine Months
Ended September 30,
Cash flows from operating activities: 1998 1997
Net income . . . . . . . . . . . . . . . . . . $ 17,231 $ 18,052
Depreciation and amortization. . . . . . . . . 6,209 4,731
Other. . . . . . . . . . . . . . . . . . . . . (2,930) 509
Cash provided from operating activities before
working capital changes. . . . . . . . . . . . 20,510 23,292
(Increase) decrease in working capital . . . . (56,133) (21,000)
Net cash provided from (used by) operating activities (35,623) 2,292
Cash flows from investing activities:
Investments and acquisitions . . . . . . . . . (25,392) (25,425)
Capital expenditures, net of sales proceeds. . (20,440) (9,880)
Net cash provided from (used by) investing activities (45,832) (35,305)
Cash flows from financing activities:
Long-term borrowings, net. . . . . . . . . . . 92,073 40,070
Dividends paid . . . . . . . . . . . . . . . . . (7,864) (6,873)
Other. . . . . . . . . . . . . . . . . . . . . (32) 255
Net cash provided from (used by) financing activities 84,177 33,452
Net increase (decrease) in cash. . . . . . . . . 2,722 439
Cash - beginning of year . . . . . . . . . . . $ 2,775 $ 1,805
Cash - end of period . . . . . . . . . . . . . $ 5,497 $ 2,244
Supplemental cash disclosures
Cash paid (received) during period:
Interest . . . . . . . . . . . . . . . . . . $ 5,984 $ 2,156
Income taxes . . . . . . . . . . . . . . . . $ 9,759 $ 11,890
<PAGE>
Page 4 of 11
A.M. CASTLE & CO.
COMPARATIVE STATEMENTS OF INCOME
(Dollars in thousands, except tonnage and per share data)
For the Three For the Nine
Months Ended Months Ended
(Unaudited) Sept. 30, Sept. 30,
1998 1997 1998 1997
Net sales. . . . . . . . . . . . . . . $195,512 $192,735 $612,308 $558,042
Cost of material sold. . . . . . . . . 137,485 137,899 432,076 398,830
Gross profit on sales. . . . . . . . 58,027 54,836 180,232 159,212
Operating expense. . . . . . . . . . . 46,868 42,335 138,854 121,655
Operating profit . . . . . . . . . . . $ 11,159 $ 12,501 $ 41,378 $ 37,557
Depreciation and amortization expense. 2,196 1,754 6,209 4,731
Interest expense, net. . . . . . . . . 2,662 1,228 6,528 2,700
Income before taxes. . . . . . . . . . 6,301 9,519 28,641 30,126
Income Taxes:
Federal. . . . . . . . . . . . . . . 2,056 3,056 9,251 9,741
State. . . . . . . . . . . . . . . . 466 729 2,159 2,333
2,522 3,785 11,410 12,074
Net income . . . . . . . . . . . . . . $ 3,779 $ 5,734 $ 17,231 $ 18,052
Basic net income per share . . . . . . $ .27 $ .41 $ 1.23 $ 1.29
Diluted income per share . . . . . . . $ .27 $ .41 $ 1.22 $ 1.29
Financial Ratios:
Return on sales. . . . . . . . . . . 1.93% 2.98% 2.81% 3.23%
Asset turnover . . . . . . . . . . . 1.60 2.18 1.67 2.10
Return on assets . . . . . . . . . . 3.10% 6.48% 4.71% 6.80%
Leverage factor. . . . . . . . . . . 3.57 2.90 3.57 2.90
Return on opening stockholders' equity 11.06% 18.81% 16.81% 19.74%
Other Data:
Cash dividends paid. . . . . . . . . $2,738 $2,386 $7,864 $6,873
Dividends per share. . . . . . . . . $ .195 $ .170 $ .560 $ .490
Average number of shares outstanding 14,044 14,032 14,043 14,016
Inventory determination under the LIFO method can only be made at the end
of each fiscal year based on the inventory levels and costs at that time.
Accordingly, interim LIFO determinations, including those at September 30,
1998, and September 30, 1997, must necessarily be based on management's
estimates of expected year end inventory levels and costs. Since future
estimates of inventory levels and costs are subject to certain forces beyond
the control of management, interim financial results are subject to fiscal
year end LIFO inventory valuations.
Current replacement cost of inventories exceeds book value by $54.2 million,
$57.1 million, and $58.2 million at September 30, 1998, December 31, 1997,
and September 30, 1997, respectively. Taxes on income would become payable
on any realization of this excess from reductions in the level of inventories.
<PAGE>
Page 5 of 11
A. M. CASTLE & CO.
Notes to Condensed Financial Statements
1. Condensed Financial Statements
The condensed financial statements included herein are unaudited, except for
the balance sheet at December 31, 1997, which is condensed from the audited
financial statements at that date. The Company believes that the disclosures
are adequate to make the information not misleading; however, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the unaudited statements, included herein, contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position, the cash flows, and the results
of operations for the periods then ended. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report on Form 10-K. The 1998 interim results reported herein may not
necessarily be indicative of the results of operations for the full year 1998.
2. Common Stock and Per Share Information.
Basic net income per share computations are based on the weighted average
number of shares of common stock outstanding during the respective periods.
Diluted earnings per share calculations include the dilutive effect of
outstanding employee and directors' common stock options.
3. Acquisitions
The Company's United Kingdom subsidiary A. M. Castle & Co., Ltd., acquired
the net assets of Aerospace Metals, Ltd. As of May 1, 1998. The acquisition
has been accounted for as a purchase and accordingly the results of
operations of Aerospace Metals have been included in the Company's
consolidated financial statements as of May 1, 1998. Pro-forma results are
not required as the amounts do not significantly differ from historical
results.
On May 1, 1998 the Company acquired a 50% interest in Energy Alloys L.P., a
Houston based metals distributor. The Company's interest in this joint
venture has been accounted for using the equity method and the Company's
share of the operating results of the joint venture have been included in
the Company's consolidated financial statements commencing May 1, 1998.
On August 1, 1998 the Company acquired Oliver Steel Plate Corporation; an
Ohio based distributor and processor of plate products. The acquisition has
been accounted for as a purchase and accordingly, the results of operations
have been included in the Company's consolidated financial statements
commencing August 1, 1998. Pro-forma results are not warranted as the
amounts do not significantly differ from historical results.
Page 6 of 11
Also, as of August 1, 1998 the Company's subsidiary, Total Plastics, Inc.
acquired Garron Plastics Corporation, a Maryland and Pennsylvania based
distributor of industrial plastics. The acquisition has been accounted for
as a purchase and accordingly, the results of operation have been included
in the Company's consolidated financial statements commencing August 1, 1998.
Pro-forma results are not required as the amounts do not significantly
differ from historical results.
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations.
Results of Operations
Net earnings for the third quarter of 1998 were down by 34% as compared to
1997's third quarter. The Company earned $3.8 million ($0.27 per share) as
compared to the $5.7 million ($0.41 per share) earned in the year earlier
quarter. Operating results were adversely impacted by a pronounced summer
slowdown in the manufacturing sector, which resulted in an 8% decrease in
sales volume in the Company's core business from the second quarter of this
year. Earnings through the first nine months of $17.2 million ($1.23 per
share) were down by 5% from last year's nine month earnings of $18.1 million
($1.29 per share).
Third quarter sales totaled $195.5 million, posting a 1% increase over the
third quarter of 1997 sales of $192.7 million. The slight sales increase
was provided by contributions from the Company's recent acquisitions.
Excluding the effect of these acquisitions, core business sales for the
quarter were down by $4.5 million or 3%. The decrease in sales was due
primarily to a 4% decrease in average sales prices, along with a slight
shift in sales mix, which offset a modest increase in physical volume.
For the first nine months of 1998, total revenues were $612.3 million as
compared to $558.0 million for the first nine months of 1997, a 10% increase.
Excluding the effect of acquisitions, nine month sales were up 4% over the
prior year's nine month period.
Gross profit for the quarter rose $3.2 million or 6% to $58.0 million.
The increase was attributable to gross profit contributions from the
Company's recent acquisitions and the Company's continuing focus on
increasing processing capabilities. Looking at the Company's core business,
quarterly gross profit decreased slightly (0.3%), as an improved margin
percentage offset some of the sales price decrease. Total gross margin
percentage for the quarter was 29.7% as compared to 28.5% for the third
quarter of 1997. The Company's expansion of value added services and
processing capabilities continue to have a positive effect on gross margin
performance. For the nine months of 1998, total gross profit rose 13% to
$180.2 million. Increased sales volume, as well as an improved margin
percentage contributed to these gross profit gains. Year to date gross
margin percentage was 29.4% as of September 30, 1998 vs. 28.5% through the
first nine months of 1997.
Third quarter operating expenses were up by $4.5 million (11%) over the
comparable period last year. Excluding the expenses of the acquired
companies, Castle's operating expenses increased by approximately $1.5
million (4%) over the third quarter of 1997. <PAGE>
Page 7 of 11
Cost increases were experienced primarily in the areas of payroll,
maintenance, repairs, and operating supplies. Higher transactional activity
and increased shipments were factors behind these expense increases, while
productivity improvements served to offset some of these costs. Several cost
saving initiatives continue to be pursued which are aimed at reducing the
expense pressures arising from increased activity levels. Year to date,
operating expenses were up by 14% as compared to the first nine months of
1997. Excluding expenses of the acquired companies, year to date operating
expenses were up by $5.6 million (5%).
Third quarter depreciation and amortization expense increased by $0.44
million (25%) over the prior year's comparable period. Excluding expense
associated with the acquired companies, depreciation and amortization
increased by $0.07 million (6%) over the third quarter of 1997. Year to
date, this expense increased by $1.5 million (31%) over the prior year.
Excluding expenses associated with acquired companies, this expense category
increased by $0.40 million (11%). This increase was primarily the result of
depreciation associated with new facilities and equipment.
Net interest expense for the third quarter increased by approximately
$1.4 million (117%) as compared to the third quarter of 1997. Higher
average borrowing levels were primarily responsible for the expense increase.
The additional borrowing is being used to finance the Company's growth and
acquisitions strategy. Year to date, this expense increased by $3.8 million
(142%) over the comparable period last year.
Liquidity and Capital Resources
Accounts receivable increased by $9.7 million, and net inventory has
increased by $83.9 million as compared to the balances as of September 30,
1997. Acquisitions and higher sales volume contributed to the receivable
increase. The inventory increase has been the result of a combination of
acquisitions, higher sales volume, and increases designed to support market
initiatives and growth strategy. Inventory levels were also adversely
affected by the pronounced slowdown in business experienced in July and
August which resulted in short term increases in inventory levels. The
Company is focusing on bringing inventory levels back in line with demand.
Total bank and long term borrowing as of September 30, 1998 increased by
$101.0 million as compared to the balance at September 30, 1997 due to long
term borrowing used to finance the company's growth and acquisition strategy
along with higher working capital needs. The Company's debt to capital ratio
was 56% as of September 30, 1998 which is over the Company's target range.
Over the next 12 to18 months, the company will be focusing on leveraging
operating and marketing synergies with its existing subsidiary and joint
venture businesses. The Company expects to generate sufficient cash flow
from operations to reduce debt down to a target range of 40 to 45% of total
capital. Net worth has increased by $12.7 million, (10%), over the prior
year's quarter reflecting the continued strong earnings performance.
The Company is currently working with its lending group to revise certain
covenants that are not compatible with its strategic growth initiatives.
It expects to have the new <PAGE>
Page 8 of 11
covenants in place by year end. The Company has unused committed and
uncommitted lines of bank credit of $104.0 million as of September 30, 1998
vs. $132.2 million at September 30, 1997.
Year 2000 Issues
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 mid 1999 with no significant impact
on the Company's ongoing results of operations. Below is a more detailed
analysis of the Company's year 2000 efforts.
The Company has identified its communications systems, financial systems, and
transactional systems as the major year 2000 risk areas. The Company began
to address these issues starting in late 1997.
In the area of communications, the Company has installed year 2000 compliant
software in its main location in Franklin Park, Illinois. The balance of
Company locations requiring modifications will be completed over the next
eight months.
The financial software system upgrades and modifications are progressing well
and are nearing completion. The accounts receivable system upgrade has been
installed and system interfaces are currently being modified. The project,
including testing, should be completed in early 1999. The accounts payable
system upgrade has been installed and the Company is set to begin extensive
testing. Completion of this project should also occur in early 1999. The
general ledger system upgrade has also been installed. Conversion and
testing is scheduled for first quarter 1999 with completion estimated by
mid-year.
The Company's transactional systems (purchasing, order processing, history)
are the current main focus. The Company has identified 90,000 lines of
program code which are date effected. Of these lines 32,000 have been
identified as affecting core business processes. As of this date, 69% of
these lines have been modified, tested, and put into production. The
remaining 31% are scheduled to be completed and into production by
year end 1998. The non-core changes which support areas such as transaction
history and reports will be completed by the third quarter of 1999. The
Company believes that its targeted early completion date (12/98) on core
processes, combined with the ability to increase resources from our outside
vendor, provides assurance that any unknown events can be resolved at an
early date.
From a cost perspective, the Company's year 2000 activities are expected to
total between $500,000 and $750,000 with approximately 35% being incurred
through 1998.
The Company believes that the "most reasonably likely worst case Year 2000
scenarios" would involve a partial failure in one or more of the above
systems requiring that the particular transaction or process be handled
manually until the problem is corrected. The impact of this type of problem
would not be likely to have a material effect on the Company's results of
operations, liquidity or financial condition.
Page 9 of 11
The Company has examined its non-information technology systems for Year 2000
issues. The Company has not identified any significant Year 2000 risk in its
non-IT systems. The Company is also in the process of identifying risks from
third party relationships. The Company has made the assumption that its
"most reasonably likely worst case scenario" does not include the failure of
service from its public utility providers. The Company is well-diversified
from a customer, product, and vendor standpoint. A year 2000 disruption in
business caused by a significant customer could impact earnings at a
given business location but not likely at the total company level. The
Company's customer base includes thousands of customers with no single
industry accounting for more than 6% of the Company's revenues, and no
single customer more than 2%. The Company purchases its products from
several alternative suppliers, with the exception of nickel alloys which are
single sourced. The Company is generally able to switch suppliers if
necessary to meet customer requirements. The Company is monitoring the
progress of key vendors and will provide for alternative sources where
necessary.
<PAGE>
Page 10 of 11
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings other than ordinary
routine litigation incidental to the business of the Registrant.
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K have been filed during the quarter
for which this report is filed.<PAGE>
Page 11 of 11
SIGNATURES
Pursuant to the requirements 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)
Date: October 31, 1998 By: / ss/J.A. Podojil
J. A. Podojil - Treasurer/Controller
(Mr. Podojil is the Chief Accounting
Officer and has been authorized to
sign on behalf of the Registrant.)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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