<PAGE>
Page 1 of 16 Pages
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, 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 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 1, 1999 was $191,342,510.
------------
The number of shares outstanding of the registrant's common stock on
March 1, 1999 was 14,043,487 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, 1998
Proxy Statement dated March 8, 1999 Part III
furnished to Stockholders in connection with
registrant's Annual Meeting of Stockholders
<PAGE>
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.
The Company has reviewed the business activities of its divisions
and subsidiaries in accordance with the requirements of SFAS No. 131. The
Company has concluded that its business activities fall into one identifiable
core business segment as approximately 95% of all revenues are derived from
the distribution of its specialty metals products. These products are
purchased, warehoused, processed and sold using essentially the same systems,
facilities, sales-force and distribution network. In the last three years,
sales mix in the Company's core business was approximately as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Carbon and Stainless 75% 73% 74%
Non-Ferrous Metals 25% 27% 26%
--- --- ---
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,
Laser Burning, Water-Jet Cutting, 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 $700 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. Listed below are the
operating subsidiaries and divisions included in the Company's core business
segment, along with a brief summary of their business activities.
<PAGE>
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 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.
Beginning in 1996, Castle acquired several businesses whose activities
complement the Company's distribution and value-added focus. Total Plastics,
Inc. acquired in 1996 is a Midwest based distributor serving a wide variety of
users of industrial plastics. Cutter Precision Metals, Inc., acquired in 1996,
and merged into the Company in 1997 served to increase the Company's presence in
the Pacific Northwest and added highly specialized sawing and grinding
capabilities to the Company's range of processing services. In 1997 the company
added Keystone Tube Company, 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 expanded an
existing product line and served to broaden Castle's core specialty metals
business. Oliver Steel Plate Company, acquired in 1998, is an Ohio based
distributor and processor of heavy steel plate. This acquisition adds to
Castle's plate processing capacity in the East and strengthens the Company's
position in this target product.
The Company holds a one-third joint venture interest in Kreher Steel
Co., a Midwest distributor, focusing on customers whose primary need is for
immediate, reliable delivery of large quantities of alloy, SBQ and stainless
bars. In 1998, Castle also purchased a 50% joint venture interest in Energy
Alloys LLC, a Houston based metals distributor.
In general, the Company purchases metals from many producers.
Satisfactory alternative sources 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 1998 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>
PAGE 4 OF 16
The Company has approximately 1,900 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>
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 ................. 116,500
Chicago area -
Franklin Park, Illinois ................. 522,600
Cincinnati, Ohio .......................... 9,300 (1)
Cleveland area -
Bedford Heights, Ohio ................... 374,400
Dallas, Texas ............................. 78,000
Fairfield, Ohio ........................... 108,000 (1)
Houston, Texas ............................ 109,100
Kansas City, Missouri ..................... 170,000
Kent, Washington .......................... 24,000 (1)
Los Angeles area -
Paramount, California ................... 264,900
Milwaukee area -
Wauwatosa, Wisconsin .................... 98,000 (1)
Minneapolis, Minnesota .................... 60,000
Philadelphia, Pennsylvania ................ 71,600
Portland, Oregon .......................... 17,600 (1)
Salt Lake City, Utah ...................... 45,400 (1)
Santa Clara, California ................... 36,000 (1)
Stockton, California ...................... 60,000 (1)
Wichita, Kansas ........................... 22,500 (1)
Worcester, Massachusetts .................. 56,000
---------
Total Castle Metals ................ 2,279,000
HY-ALLOY STEELS CO
Chicago area--
Bedford Park, Illinois .................. 103,700
---------
H-A INDUSTRIES
Hammond, Indiana .......................... 243,000 (1)
---------
A. M. CASTLE & CO. (CANADA) INC
Edmonton, Alberta ......................... 38,300 (1)
Montreal, Quebec .......................... 26,100 (1)
Toronto area--
Mississauga, Ontario .................... 60,000 (1)
Etobicoke, Ontario ...................... 17,000 (1)
Winnipeg, Manitoba ........................ 50,000
---------
191,400
CASTLE METALS U.K. LTD
Blackburn, U.K ............................ 43,000 (1)
Christchurch, U.K ......................... 12,000 (1)
---------
55,000
KEYSTONE TUBE, INC
La Porte, Indiana ......................... 90,000
Riverdale, Illinois ....................... 115,000 (1)
Titusville, Pennsylvania .................. 92,000
---------
297,000
</TABLE>
<PAGE>
PAGE 6 of 16
<TABLE>
<CAPTION>
Approximate
Floor Area in
Locations Square Feet
--------- -------------
<S> <C>
TOTAL PLASTICS, INC
Baltimore, Maryland ...................... 24,000 (1)
Detroit, Michigan ........................ 31,000 (1)
Elk Grove Village, Illinois .............. 14,400 (1)
Fort Wayne, Indiana ...................... 9,600 (1)
Grand Rapids, Michigan ................... 42,500
Harrisburg, Pennsylvania ................. 24,000 (1)
Indianapolis, Indiana .................... 27,500 (1)
Kalamazoo, Michigan ...................... 53,500 (1)
South Bend, Indiana ...................... 7,500 (1)
---------
234,000
OLIVER STEEL PLATE COMPANY
Twinsburg, Ohio .......................... 120,000 (1)
GRAND TOTAL ......................... 3,523,100
---------
---------
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 1998 Annual Report to Stockholders,
incorporated herein by this specific reference, for information regarding
lease agreements.
<PAGE>
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>
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 1998 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 1998 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>
PAGE 9 OF 16
PART III
Item 10. Directors and Executive Officers of the Registrant.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
- -------------- --- -------------------
<S> <C> <C>
Michael Simpson 60 Mr. Simpson began his employment with the registrant in
Chairman of the Board 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 63 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
Alan D. Raney 47 Mr. Raney began his employment with the registrant in 1986.
Vice President-- Mr. Raney was elected Vice President--Midwest Region
Executive Vice President and during 1989, Vice President--Advanced Materials Group
Chief Operating Officer in 1990, and Executive Vice President and Chief Operating
Officer in 1998
Edward F. Culliton 57 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
Marc Biolchin 44 Mr. Biolchin began his employment with the registrant's
Vice President-- Keystone Tube Company (acquired in 1997) in 1977.
Tubular Group
Sven G. Ericsson 50 Mr. Ericsson began his employment with the registrant in
Vice President-- 1989. Mr. Ericsson was elected to the position of Vice
Business Development President--Eastern Region in 1989, Vice President--Plate
and Carbon Products Group in 1992, Vice President--
International in 1995, and Vice President--Business
Development in 1998.
M. Bruce Herron 53 Mr. Herron began his employment with the registrant in 1970.
Vice President-- Mr. Herron was elected to the position of Vice President--
Sales Western Region in 1989, and Vice President--Sales in 1998.
Stephen V. Hooks 47 Mr. Hooks began his employment with the registrant in 1972.
Vice President-- Mr. Hooks was elected to the position of Vice President--
Merchandising Midwest Region in 1993, and Vice President--Merchandising
in 1998
Tim N. Lafontaine 45 Mr. Lafontaine began his employment with the registrant
Vice President-- in 1975, and was elected Vice President--Alloy Group in 1998.
Alloy Group
John R. Nordin 42 Mr. Nordin began his employment with the registrant in 1998.
Vice President-- He was elected Vice President--Chief Information Officer
Chief Information Officer in 1998.
</TABLE>
<PAGE>
PAGE 10 OF 16
<TABLE>
<CAPTION>
NAME AND TITLE AGE BUSINESS EXPERIENCE
- -------------- --- -------------------
<S> <C> <C>
Fritz Oppenlander 46 Mr. Oppenlander began his employment with the registrant in
Vice President-- 1996 and was elected Vice President--Operations in 1996.
Operations
Robert A. Rosenow 45 Mr. Rosenow began his employment with the registrant in
Vice President-- 1977. In 1995, Mr. Rosenow was elected Vice President--Carbon Group
Carbon Group. Carbon Group
Gise Van Baren 67 Mr. Van Baren began his employment with the registrant's
Vice President Hy-Alloy Steels Co. (acquired in 1973) in 1954. He
and President-- Hy-Alloy became Vice President of Hy-Alloy in 1976 and President in
Steels Division 1979. He was elected Vice President--Alloy Products
Group in 1991.
Craig R. Wilson 47 Mr. Wilson began his employment with the registrant in
Vice President-- 1979. He was elected to the position of Vice President--
Business Process Eastern Region in 1997, and Vice President--Business
Improvement and Quality Improvement and Quality in 1998.
Paul J. Winsauer 47 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 56 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 56 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>
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 8,
1999 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 8, 1999, 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 8, 1999, 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>
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 1998 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 1998.
<PAGE>
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 1998 Annual Report to Stockholders of A. M. Castle & Co., included herein--
Consolidated Statements of Income--For the years ended December 31, 1998, 1997,
and 1996..................................................................................................... Page 17
Consolidated Statements of Reinvested Earnings--For the years ended December 31,
1998, 1997, and 1996......................................................................................... Page 17
Consolidated Balance Sheets--December 31, 1998, 1997, and 1996............................................... Page 18
Consolidated Statements of Cash Flows--For the years ended December 31,
1998, 1997, and 1996......................................................................................... Page 19
Notes to Consolidated Financial Statements................................................................... Pages 20-24
Report of Independent Public Accountants..................................................................... Page 24
</TABLE>
Exhibits:
<TABLE>
<S> <C>
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, 1997.
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>
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. 1998
Annual Report to Stockholders incorporated by reference in this Form 10-K, and
have issued our report thereon dated February 2, 1999. 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, 1999
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, 1999 included in this Annual
Report on Form 10-K for the year ended December 31, 1998; and
2. Our report dated February 2, 1999 incorporated by reference in this
Annual Report on Form 10-K for the year ended December 31, 1998.
Arthur Andersen LLP
Chicago, Illinois
March 15, 1999
<PAGE>
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, 1998, 1997, AND 1996
(Dollars in thousands)
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 620 $ 680 $ 600
Add -- Provision charged to income 418 281 245
-- Recoveries 186 238 223
-- From acquisitions -- 53 80
Less -- Uncollectible accounts charged
against allowance (586) (632) (468)
----- ----- -----
Balance, end of year $ 638 $ 620 $ 680
----- ----- -----
----- ----- -----
</TABLE>
<PAGE>
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 1, 1999
----------------
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 1, 1999 March 1, 1999
/S/ RICHARD G. MORK /S/ JOHN P. KELLER
- ------------------------------------- -----------------------------------
Richard G. Mork, President-- John P. Keller, Director
Chief Executive Officer, and Director March 1, 1999
March 1, 1999
/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 1, 1999
March 1, 1999
/S/ JOHN MCCARTNEY
-----------------------------------
John McCartney, Director
March 1, 1999
<PAGE>
CORPORATE PROFILE:
Founded in 1890, A.M. Castle & Co. provides highly engineered materials and
value added services to a wide range of industrial companies within the
nearly $700 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 over 50 locations throughout North America.
Our common stock is traded on the American and Chicago Stock Exchanges under
the ficker 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
Table of Contents
Financial Highlights
Letter to Shareholders
Our Commitment to Our Customers
Eleven-Year Financial & Operating Statements
Financial Review
Consolidated Statements and Notes
Management and Shareholder Information....Inside Back Cover
The Supplier of Choice
This year's annual report begins and ends with our focus on North America's
industrial equipment makers -- the most innovative and productive
manufacturing base in the world. On the pages that follow, we'll explain how
we add value to these great companies' products and processes with solutions
that deliver the highest quality at the lowest total unit cost. That is how
we've become our customers' supplier of choice for highly engineered metals
and services.
<PAGE>
THE YEAR IN BRIEF
<TABLE>
<CAPTION>
[PHOTO]
(DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
%
1998 1997 CHANGE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS Net sales $792,846 $754,865 5%
Gross profit on sales 233,762 214,579 9%
Operating profit 48,653 50,295 (3%)
Income before taxes 30,729 39,531 (22%)
Net income 18,522 23,845 (22%)
- ----------------------------------------------------------------------------------
PER SHARE OF
COMMON STOCK Net income (basic) 1.32 1.70 (22%)
Dividends .755 .66 14%
Stockholders' equity 10.25 9.74 5%
- ----------------------------------------------------------------------------------
BALANCE SHEET Total assets 459,963 366,375 26%
Total debt 176,078 93,423 88%
Total equity 144,012 136,709 5%
Working capital 181,213 119,770 51%
Cash flow* 27,008 30,426 (11%)
Average shares outstanding 14,043 14,026 --
- ----------------------------------------------------------------------------------
SELECTED RATIOS Return on sales 2.3% 3.2% (28%)
Return on assets 4.0% 6.5% (38%)
Return on opening equity 13.5% 19.6% (31%)
Current ratio 2.5 2.0 25%
Debt-to-capital ratio 55.0% 40.6% 35%
- ----------------------------------------------------------------------------------
*NET INCOME PLUS DEPRECIATION AND AMORTIZATION
</TABLE>
<TABLE>
<CAPTION>
NET SALES NET INCOME OPERATING PFT NET WORTH
------------- -------------- ----------------- -------------
($ IN MILLIONS) ($ IN MILLIONS) ($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C>
1994 537 15 33 82
1995 628 27 52 103
1996 673 26 51 122
1997 755 24 50 137
1998 793 19 49 144
</TABLE>
A. M. CASTLE & CO.
1998
Annual
Report
PAGE 1
<PAGE>
TO OUR SHAREHOLDERS:
- -------------------------------------------------------------------------------
"CASTLE CONTINUES TO BE NORTH
AMERICA'S SUPPLIER OF CHOICE FOR
HIGHLY ENGINEERED METALS AND
[PHOTO] SERVICES. IN 1998, WE INCREASED
MARKET SHARE DESPITE A GLOBAL
SLOWDOWN IN MANY OF OUR CUSTOMERS'
END-USE MARKETS, THEREBY REINFORCING
OUR STRATEGY TO BE THE MARKET LEADER
IN OUR CORE PRODUCTS. WITH OUR MAJOR
INVESTMENTS IN PROCESSING
TECHNOLOGIES AND NEW GROWTH PLATFORMS
SUBSTANTIALLY IN PLACE, WE ARE WELL
POSITIONED TO INCREASE SHAREHOLDER
VALUE AS THE CURRENT CYCLE MOVES INTO
POSITIVE TERRITORY."
Mike Simpson, STANDING
Dick Mork, SEATED
THE YEAR IN PERSPECTIVE. Even with the strongest and most competitive line-up
of products and services in our company's history, 1998 proved to be a
challenging year. Market conditions for highly engineered metals weakened
during the second half as our customers, North America's durable equipment
makers, became increasingly cautious with their purchases. This environment
continued into the fall reflecting the difficulties in Asia and its effect on
some of our customers' key markets. So, for much of 1998, we found ourselves
in a transitional period that we have seen before, characterized by excess
inventory in the overall market and unsustainably low pricing that, in
turn, puts considerable short-term pressure on our earnings.
Our market diversification strategy goes a long way toward
mitigating the impact of the business cycle on our performance and use of
capital. Our long-term financial goals are: to achieve a 15% return on
opening equity at the bottom of the cycle, and a 21% or better return at the
top. In 1998, our most difficult year since the early 1990s, our return came
in at 13.5%, a little more than a percentage point off our target. So while
we can't eliminate the business cycle, we are confident in our ability to not
only work through it, but to deliver a reasonably good return during its low
points.
Along with industry analysts, we are cautiously optimistic that
1999 will see a correction in the current imbalance between supply and demand,
together with a move towards a more stable balance between domestic and
import sources. This could provide substantial upside leverage should those
imbalances correct rapidly. In the meantime, we continue to strategically
invest in what we believe will be one of the world's most compelling markets
in the 21st Century: our customer base, the nearly $700 billion North American
producer durable equipment sector.
PAGE 2
<PAGE>
- -------------------------------------------------------------------------------
[Photo]
1998 RESULTS.
Net sales rose 5% to a record $793 million, reflecting contributions from two
acquisitions completed during the past two years. Gross margin increased 9%
to a record $234 million, reflecting the higher value-added contribution from
our recent acquisitions and investments in leading-edge processing
technologies. This gain, achieved within a highly competitive industry
environment, reflects the premium that our customers place on our
leading-edge capabilities and business solutions orientation.
Operating earnings fell 3% to $48.7 million with several factors
related to global uncertainty obscuring much of the impact of our
revenue-enhancing actions as well as the operating efficiencies which we
achieved in 1998. These factors included increased transaction-activity as
our customers ordered in smaller quantities with more frequent deliveries and
inflation in operating expenses of about 3% in the face of lower mill
pricing. Operating earnings were also affected by increased expenses
related to the start-up of new processing equipment and the integration of
recent acquisitions. These latter expenses are now largely behind us.
Net income decreased by 22% to $18.5 million, or $1.32 per diluted
share, reflecting higher interest, depreciation and amortization expenses
associated with the unprecedented level of investment during the 1995 through
1998 period. Looking ahead, we expect capital expenditures will moderate,
resulting in stronger cash flow performance as our markets move off the low
point of this cycle. We believe that the investments and infrastructure we
have put into place will enable us to grow to $1.5 billion in revenues within
the next five years.
Reflecting our long-standing growth and income orientation, we
returned $10.6 million in dividends to shareholders in 1998. Following a 15%
dividend increase in April, our fifth increase in the last five years, "CAS"
generated a 5% dividend yield, not only the highest in our peer group, but in
the top tier of all publicly held companies. Despite an increase in our
investors' annual income, Castle's total return to shareholders for the year
was down 32%, slightly better than the industry average. As a group, the
metals distribution-and-processing stocks declined 34 percent.
INVESTING IN THE FUTURE.
Our success in managing through past business cycles gives us a valuable
longer-term perspective of the current operating environment. In the early
1980s, while many were writing off the U.S. industrial sector, we took a very
different view, investing in a widespread restructuring of our product mix
and service capabilities. We emerged a much more competitive and focused
company and our customers were the beneficiaries.
In the 1990-1991 period, when American manufacturers went through a
second wave of restructuring, we again seized the opportunity to invest in
new services, new geographic markets and the realignment of our sales and
marketing organization. The result was revenue growth of 44% and a nearly
seven-times earnings increase in the four years following this downturn.
Today, our attention remains focused just as it did during the last
two cycles on building shareholder value. The past four years have marked an
unprecedented period of investment aimed at extending our expertise and
leadership in the industrial distribution of highly engineered metals and
value-added services. These investments fall into three major categories:
leading-edge processing capabilities that enhance the performance and cost
characteristics of our customers' production processes; acquisitions and
joint ventures that provide entree into new market niches and channels; and
business process improvement initiatives, designed to advance the efficiency
of every process that touches our customers toward near-perfect quality.
While diverse, these investments share the same strategic intent to provide
customers with innovative business solutions that deliver the highest quality
AND lowest total cost of production.
PROCESSING CAPABILITIES. Since 1993, we've invested more than $48
million in leading-edge processing capabilities which provide our customers
with a more comprehensive and cost-efficient way of solving their
metallurgical requirements. In 1998, key among these were: the ramping up of
several new lines at H-A Industries that doubled this facility's capacity;
the recently completed replacement of Keystone Services' chrome plated bar
line that quadruples its
A. M. CASTLE & CO.
1998
Annual
Report
PAGE 3
<PAGE>
- -------------------------------------------------------------------------------
capacity; and a company-wide expansion of plate processing capacity. All of
these projects are in place and ready to operate at optimum production levels
as we enter 1999.
ACQUISITIONS AND JOINT VENTURES. Another important growth engine is
acquisitions and joint ventures. In the last three years, we've completed
four platform acquisitions and established four joint ventures, all of which
were accretive to earnings and capable of growing at double-digit rates. In
1998, we acquired Oliver Steel, which further extends our lead in the quality
plate category; and Aerospace Alloys, which builds on the base that we've
established in Europe to support our customers who require local on-site
production support. We also entered a joint venture with Energy Alloys, which
takes us into the tubular business for the oil field industry, another highly
specialized market niche.
BUSINESS PROCESS IMPROVEMENT. While growth is an important part of our
business model, there are a number of other initiatives underway which
further reinforce our confidence about our future earnings potential. During
this year, we continued a comprehensive productivity improvement program
designed to achieve $4-$6 million in annual cost savings in three major
areas: transportation; warehouse management; and administrative overhead.
Considerable progress was made in each of these initiatives. First, by the
end of 1998, approximately 75% of the targeted savings associated with the
rationalization of our transportation supply base have been realized. Second,
our new automated warehouse management system, piloted in our flagship
Franklin Park facility, is now beginning to realize our expectations for
improvements in service, quality and productivity. Finally, our
administrative initiatives, which were aimed at achieving $1.5 million in
annual cost savings, have been substantially completed. Going forward, our
intention is to build on what we've learned to achieve even more significant
gains in the future.
STRENGTHENING OUR SENIOR MANAGEMENT TEAM. Along with investing in the
future, we have significantly enhanced our senior management team. These
changes reflect the fact that our industry has become much more challenging
and that Castle is a much larger, more complex and dynamic organization than
it was just a few years ago. To support our ambitious growth goals, we've
promoted Alan Raney to the newly created position of Chief Operating Officer.
Alan will be directly responsible for our core Castle Metals business,
enabling us to focus on the longer-term strategic issues involved with
leveraging our recently acquired growth platforms.
Several other new corporate positions have been created to support our
drive for the future. Effective January 1st, Bruce Herron has assumed the
position of Vice President--Sales; Steve Hooks has been named Vice
President--Merchandising; Fritz Oppenlander, Vice President--Operations; and
Craig Wilson, whose responsibilities as Vice President of Quality and
Business Process Improvement have been significantly expanded. We're excited
about these changes as they recognize the depth and quality of our Castle
team and its ability to take on new challenges and opportunities.
OUTLOOK FOR 1999.
We share the view of economists and industry experts who believe that market
imbalances will correct far more rapidly than they did in the past. Based on
their projections, we are looking for an inventory correction within a
six-to-nine month time frame as excess supply currently in the pipeline works
its way through the marketplace. Once this correction gets underway, supply
and demand will become more balanced, thereby creating modestly more
favorable pricing at the mill level. As these industry factors come into
play, the leverage which we've created in our business model during the last
several years will be highly apparent.
Our focus on the North American producer durable equipment market
continues to be the foundation of our strategy. Just like during the
slowdowns in the early 1980s and again in the early 1990s, there are
rumblings about the long-term 'health' of this sector. The truth is that,
even today with all the global uncertainty, capital spending on producer
durable equipment as a whole rose an estimated 9.5% in 1998. Remember, the
long-term impact of increased competition drives producers to invest in tools
and equipment that will make their businesses more efficient. Since our
customers are the ones who make those tools and equipment, this suggests
more, rather than less, capital investment over
PAGE 4
<PAGE>
- -------------------------------------------------------------------------------
[PHOTO]
time. So while there may be discretionary cutbacks in the short-term, the
long-term trend is that the more competitive the market, the more compelling
the need to make those investments that will strengthen a company's market
position.
For Castle, there are significant opportunities for growth and improved
profitability ahead. After spending the last four years in an
acquiring-and-assimilating mode, we are now moving into a new phase where we
will focus on achieving the maximum leverage from these investments.
Similarly, we expect to reap the benefits of several new processing
capabilities that were either not in place or operating at less than full
capacity in 1998. At Keystone Services, for example, we were literally
"off-line" for more than half of the year while we replaced existing
equipment with a state-of-the-art chrome plating line that quadruples our
capacity. In 1999, all of our new equipment will be running at optimal
levels, another factor that points to improved profitability.
Our business process improvement program is a cornerstone of our
long-term strategy to build shareholder value. While we made significant
progress in 1998, these improvements mark a good beginning rather than an
ending point. Our initiatives in this key area include: cycle time reduction;
first pass yield; and the elimination of non-productive operating activities.
As we reported last year, the "easy fixes" were made several years ago.
However, it will be incumbent upon us to identify new opportunities that will
enable us, at a minimum, to offset the annual inflation in operating expenses.
We also expect to be strong cash flow generators in 1999. First, with
our growth platforms now substantially in place, our capital requirements
will decline from $30 million in 1998 to between $10-$15 million in 1999.
Second, in this phase of the business cycle, we will be liquidating the
build-up of inventories that occurs in a downturn because we are in the
business of shouldering our customers' inventory risk. Based on our
expectations for positive cash flow, we have targeted a reduction in our
debt-to-total capital ratio from the present level of 55% to our target rate
of 45% by the end of the year.
As we assess our prospects, one of our most compelling strengths is our
ability to think and act "outside of the box" for our customers. More than
any other single factor, this is what has made us the first choice for highly
engineered metals and services in North America, and this is what will keep
us there in the future. On the following pages, you'll see images from an
award-winning ad campaign that we introduced in 1998, as well as a few of the
many industrial applications for our products and services. The message of
this campaign is that Castle is in the business of solving customer problems,
of seeing specific situations and going beyond traditional methods to create
a total value package of products, services and expertise. It also helps
create a line of sight between our customers and employees that strengthens
our relationship with them.
Throughout Castle, we are committed to the success of the 35,000
companies in the North American durable equipment sector who are our
customers, and we appreciate their loyalty. Similarly, we take great pride in
the exceptional commitment of our employees. We believe that we are better
positioned than at any point in our history to increase shareholder value
over the long term.
/s/ Richard G. Mork /s/ Michael Simpson
----------------------- ---------------------
Richard G. Mork Michael Simpson
President and Chairman of the Board
Chief Executive Officer
February 15, 1999
A. M. CASTLE & CO.
1998
Annual
Report
PAGE 5
<PAGE>
PEOPLE ARE THE KEY
[Photo]
[Photo]
MOST PEOPLE SEE
A MACHINE THAT
CUTS PLATE.
TODD SCHILL SEES
A MACHINE THAT
CUTS COSTS.
PAGE 6
<PAGE>
WHAT WE DO... [PHOTO]
To industrial America, the Castle name is widely recognized
for its leadership in innovation, quality, and customer care.
We continue to hold the position as North America's leading
metals supplier of carbon, alloy and stainless steels: nickel
alloys; aluminum; titanium; copper and brass. Yet to the
outside world, the products that we distribute and the
services we provide aren't very well known.
Look inside any of our CUSTOMERS' products and you'll get a strong sense
of our significance. Take jet aircraft for example. "We" are the titanium in
the nose, the alloy bar in the landing gear, and the aluminum in the frame.
We're also in such diverse components as the engines and propulsion systems,
and even the instrumentation. Given the critical nature of these aircraft
features, the selection of a metals supplier takes on great significance.
It's our unique package of product innovation, quality, and customer care
developed over many years that makes Castle more often than not the supplier
of choice for highly engineered metals. And our reach extends to virtually
ALL of the high-profile industries in the North American durable equipment
market.
Clearly, OUR PRODUCTS DON'T HAVE TO BE VISIBLE TO BE VALUABLE. In fact,
we're glad to take a back seat to many of our higher profile customers. But
understanding who our customers are and anticipating their needs has long
been a cornerstone of our strategy and culture. And it has largely been the
reason for our dominant market share in most of our product categories. We
hold the number one position in core products that generate over half of our
total sales. We are number two or three in an additional thirty percent.
Where we're number three, we're working hard to move up to number two. Where
we're second, we want to be first. And where we're first, we're working just
as hard to extend our lead.
How did we get there? It sounds simple, but the key has been anticipating
the kinds of products and services manufacturers want. Back in the early 80s,
we began to build a market franchise around highly engineered metals in which
we could create an unbeatable combination of inventory, services and
metallurgical expertise. By the mid-80s, we moved into customer solutions,
pioneering our industry's first comprehensive materials management program.
Because we started early and made significant investments, we've developed
what we believe to be the best industrial distribution network in our
industry. And we continue to leverage that network into complementary
products and services as we expand and strengthen our customer offerings.
Today, we're serving customers across an ever-increasing array of
applications and market channels. Going forward, we will stay on the
"leading-edge" in developing unique and proprietary products and processing
technology to deliver the highest level of value to our customers. Whatever
the need, whether it is a major world class manufacturer or an independent
job shop, we're determined to structure the right solution for every customer
that consumes highly engineered metals.
WHO OUR CUSTOMERS ARE...
It's frequently the first question asked when we meet with current and
prospective shareholders. We've long believed that market diversification
greatly mitigates our company's sensitivity to both overall and
industry-specific cyclicality. Rather than be dependent on one or two major
industries, we have proactively built and maintained a diversified portfolio
of customers within North America's durable equipment sector. As a whole, the
companies that comprise this sector generate nearly $700 billion in annual
revenues. They are in the aerospace business, the bearings business, chemical
processing, defense, hand tools, health care, machine tools, the oil patch,
transportation and more - with virtually every production process calling for
some application for highly engineered metals.
Despite intense foreign competition, our customers operate in what has
been THE dominant growth sector of our economy for most of this decade.
They've prevailed because they've demonstrated an incredible capacity for
restructuring, re-engineering and reinventing themselves time and again to
emerge as undisputed global leaders in manufacturing quality, innovation and
productivity. Capital investment has been a huge part of this story - over
the past five years alone, spending in our sector has increased at a
double-digit compound annual pace. And while the RATE of spending will likely
slow in 1999, the absolute level remains high, and the long-term trend clear.
To continue strengthening competitive
A.M. Castle & Co.
1998
Annual
Report
Page 7
<PAGE>
PEOPLE ARE THE KEY
[Photo]
[Photo]
MOST PEOPLE SEE
CHROME PLATED TUBING
JEFF TIMM SEES A
GOLDEN OPPORTUNITY
TO SIMPLIFY
PURCHASING
Page 8
<PAGE>
advantage, manufacturers worldwide will need to make larger
investments in the tools and equipment that will further
advance the quality and efficiency of their products. [PHOTO]
Unquestionably, Fortune 500-sized companies are a driving force in the
durable equipment business. And in fact, most of these companies are major
Castle customers across a wide range of industries and metals applications.
But, we have another level of diversity that creates an important balance to
our major accounts. We also effectively and productively serve thousands and
thousands of middle-sized manufacturers as well as an equally large number of
smaller job shops and independent businesses. In total, we serve over 35,000
companies with their highly engineered metals requirements, and have recently
developed programs to provide the right level of service for each category of
customer. In total, no one company represents more than 2% of our total
sales, and no one industry, more than 6%.
As for the future, from our perspective, the sheer size, strength and
diversity of our customer base continues to create untapped opportunities to
increase market share. Remember, we are our industry's leading supplier to a
customer base with nearly $700 billion in annual revenues.
HOW WE ADD VALUE...
At Castle, we have long viewed our customer relationships more as working
partnerships rather than as just a supplier of metals. Our mission, with
every one of our customers, is to add value and exceed our customers'
expectations by helping them reduce their unit costs: in Castle lingo, that's
cost per piece rather than price per pound.
Today, we're better positioned to create added value that at any point
in our history. The investments we've made in opening new market channels and
developing new processing technologies are a major part of our story. We've
spent over $80 million in the last five years to expand capacity while
introducing exciting and unique capabilities such as water jet cutting,
plasma bevel cutting and in-line quenching and tempering. The benefit of all
this isn't the technology, as impressive as it may be. It's in how we apply
it to create custom solutions that will significantly improve our customers'
end products and manufacturing processes. Let's look at some examples of this
approach.
SOMETIMES CUSTOMERS COME TO US WITH A VERY SPECIFIC PROBLEM.
For instance, recently, a major aerospace manufacturer invited us, along with
six other suppliers, to bid on a supply contract. The product was titanium.
Our competitors evaluated the inventory requirements and submitted their
bids. We took a different approach. We asked first how they planned to USE
the titanium. They told us they were going to cut it up into small pieces and
then heat treat it in two separate processes. Our solution? Using our
water-jet-cutting technology, we were able to deliver finished pieces that
required no further processing, thus eliminating a costly, non-core activity
for our customer. Unlike traditional thermal cutting, the beauty of
water-jet-cutting is that, by using water rather than heat, there is no
heat-effected zone. So the customer gets a higher quality finished product at
a lower total cost. We won the contract because, where other suppliers saw
simply a material requirement, we saw our customer's production process and
the opportunity to create a way to improve quality and reduce cycle time.
SOMETIMES WE FILL A NEED WITHIN AN INDUSTRY.
Take fluid power for example. It's not only a significant industry on its
own, it's also a subset of numerous other major industries. You'll find fluid
power in any application that requires absolute flexibility in motion;
agricultural equipment, machine tools, road construction, commercial
elevators, all sorts of automotive applications, the wing of an airplane.
With many of our customers dependent on fluid power, we have always had very
strong relationships in supplying the bars that make the pistons for
hydraulic cylinders. But we felt that we could do more: we wanted to supply
the tubes (or cylinders) as well.
Last year we addressed the opportunity with the acquisitions of Keystone
Tube and Keystone Honing, two independent companies that now represent a new
strategic core product group for us. Just as fluid power is essentially the
marriage of bar and tube to very precise tolerances of finish and
wearability, we believe the 'marriage' of Keystone and Castle will enable us
to emerge as the dominant supplier for fluid power applications. But we're
not standing still.
In 1998, we took another giant step forward in serving fluid power users
with the installation of a new chrome
A. M. Castle & Co.
1998
Annual
Report
Page 9
<PAGE>
PEOPLE ARE THE KEY
[Photo]
[Photo]
MOST PEOPLE SEE
20 FEET
OF ALLOY BAR
MARK DYKSTRA SEES
20 MORE PARTS
PER HOUR
Page 10
<PAGE>
plating line at Keystone Services that quadrupled the capacity
of our existing line. But capacity alone did not drive this
investment. We went ahead with the new line because it gives [PHOTO]
our customers a generational advance in surface finish and
consistency over anything else available on the market today.
And in fluid power applications, smoothness is critical: the
smoother the finish, the less friction. The less friction,
the less resistance and the greater the power of the equipment
to lift or move more weight. Again, our emphasis is on providing
customers with products and services that address critical
production issues. The end result for Castle: industry-leading
quality and productivity, while providing our employees with
the safest production environment in the business.
SOMETIMES WE BUILD SOLUTIONS THAT TAKE OUR CUSTOMERS' PRODUCTION PROCESSES TO
THE "NEXT LEVEL."
The evolution of H-A Industries provides an outstanding example of our
commitment to innovative solutions. Launched in 1993 with our first
computer-numerically-controlled quench and tempering line, H-A is a 250,000
square foot facility with seven different major bar processing lines. Every
single process performed at this facility represents a unique capability that
is not available elsewhere in the industry.
Our quench and tempering process clearly demonstrates our ability to
deliver high value-added quality at lower total cost. What does quench and
tempering do? It alters the original condition of alloy and other bars by
modifying the mechanical properties so that they become stronger and harder,
thus improving their performance in applications such as machine tools, gears
and bearings where these characteristics are critical.
Under conventional quench and temper processing, the bars are stacked in
a batch process to be heated and then cooled under controlled conditions that
alter their hardness. Because the bars are processed as a contiguous batch,
each one has a slightly different degree of hardness depending on its
position in the stack and at what point it was touching another bar.
Following conventional quench and tempering the bars normally undergo further
processing such as straightening to relieve stresses that are build up during
the heating and cooling processes.
At Castle, we heat treat alloy bars one at a time in a continuous
process that runs approximately half the length of a city block. Each bar
moves through series of adjacent heat chambers with computer controlled
temperatures, and is then cooled via various compartments incorporated into
the same line. Essentially, we've devised a way to take the "art" out of heat
treating, and, instead, turn it into a "science" in which every bar emerges
from the process exactly the same. Because the bars are constantly being
rotated during the quench and temper process, there is no build up of stress.
In fact, they actually emerge straighter than they were prior to processing.
Our solution to a critical processing application assures customers of
performance characteristics that are consistent across each bar, repeatable
from bar-to-bar and batch-to-batch. Unique to the industry, we alone can
guarantee that the bars will always be the same. For customers, this
translates into higher machining through-put and lower reject rates, thus
sharply raising productivity levels.
WHAT TO EXPECT GOING FORWARD...
More innovation, higher value added for our customers, improved productivity,
and an unswerving commitment to quality in everything we do. We're using new
information technology applications to better understand our customers'
requirements and react to them more quickly. We also have in place a
comprehensive program to lower our operating costs. It focuses on
reengineering many of our processes to reduce both response time and cost
per unit.
We will continue to be the dominant North American market leader in
highly engineered metals. We have strong and respected brands to leverage.
And we're only just beginning to see the benefits of the new processing
capabilities and platforms that were put in place during the past few years.
Seeing the world through our customers' eyes. Delivering great value.
That's A.M. Castle & Co. Great processes. Great products. Great ideas. North
America's first choice for highly engineered metals.
A.M. CASTLE & CO.
1998
Annual
Report
Page 11
<PAGE>
A. M. Castle & Co. and Subsidiaries
CONSOLIDATED ELEVEN - YEAR FINANCIAL AND OPERATING SUMMARY
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA - NOTE 7) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL Tons sold (in thousands) ........................... 394 378 331
SUMMARY OF Net sales .......................................... $ 792.8 $ 754.9 $ 672.6
EARNINGS Cost of sales ................................... 559.1 540.3 481.4
----------- ----------- -----------
Gross profit ....................................... 233.7 214.6 191.2
Operating expenses .............................. 185.1 164.3 139.9
----------- ----------- -----------
Operating profit ................................... 48.6 50.3 51.3
Depreciation and amortization ................... 8.5 6.6 5.3
Interest expense, net ........................... 9.4 4.2 2.9
----------- ----------- -----------
Income before income taxes ......................... 30.7 39.5 43.1
Income taxes .................................... 12.2 15.7 17.0
----------- ----------- -----------
Net income ......................................... 18.5 23.8 26.1
Cash dividends ..................................... 10.6 9.2 8.0
----------- ----------- -----------
Reinvested earnings ................................ $ 7.9 $ 14.6 $ 18.1
----------- ----------- -----------
----------- ----------- -----------
- -----------------------------------------------------------------------------------------------------------------
SHARE DATA Number of shares outstanding at year-end (in thousands) 14,043 14,041 14,008
(NOTE 7) Net income per share basic ......................... $ 1.32 $ 1.70 $ 1.86
Net income per share diluted ....................... $ 1.32 $ 1.69 $ 1.86
Cash dividends per share ........................... $ .755 $ .66 $ .57
Book value per share ............................... $ 10.25 $ 9.74 $ 8.70
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL Working capital .................................... $ 181.2 $ 119.8 $ 80.0
POSITION Property, plant and equipment, net ................. $ 94.6 $ 77.4 $ 62.7
AT YEAR-END Total assets ....................................... $ 460.0 $ 366.4 $ 261.4
Short-term debt .................................... $ -- $ -- $ --
Long-term debt ..................................... $ 172.3 $ 90.7 $ 40.9
Stockholders' equity ............................... $ 144.0 $ 136.7 $ 121.9
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL Return on sales .................................... 2.3% 3.2% 3.9%
RATIOS Asset turnover ..................................... 1.7 2.1 2.6
Return on assets ................................... 4.0% 6.5% 10.0%
Leverage factor .................................... 3.4 3.0 2.5
Return on opening stockholders' equity ............. 13.5% 19.6% 25.3%
Percent earnings reinvested ........................ 42.7% 61.3% 69.3%
Percent increase (decrease) in equity .............. 5.3% 12.1% 17.9%
- -----------------------------------------------------------------------------------------------------------------
OTHER DATA Additions to property, plant and equipment ......... $ 30.2 $ 16.2 $ 22.5
Stockholders at year-end ........................... 1,657 1,699 1,613
Employees at year-end .............................. 1,907 1,877 1,505
Per employee data (in thousands)
Net sales ........................................ $ 415.7 $ 402.2 $ 446.9
Gross profit ..................................... $ 122.6 $ 114.3 $ 127.0
Operating expenses ............................... $ 97.1 $ 87.5 $ 93.0
Profit from operations ........................... $ 25.5 $ 26.8 $ 34.0
Profit From Operations ........................... $ 25.5 $ 26.8 $ 34.0
- -----------------------------------------------------------------------------------------------------------------
</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.
Page 12
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL Tons sold (in thousands) .............................. 343 338 308 249
SUMMARY OF Net sales ............................................. $ 627.8 $ 536.6 $ 474.1 $ 423.9
EARNINGS Cost of sales ...................................... 454.4 391.4 351.8 313.7
---------- ---------- ---------- ----------
Gross profit .......................................... 173.4 145.2 122.3 110.2
Operating expenses ................................. 121.7 112.1 102.1 94.9
---------- ---------- ---------- ----------
Operating profit ...................................... 51.7 33.1 20.2 15.3
Depreciation and amortization ...................... 4.5 4.6 4.8 4.9
Interest expense, net .............................. 2.9 3.2 3.8 4.3
---------- ---------- ---------- ----------
Income before income taxes ............................ 44.3 25.3 11.6 6.1
Income taxes ....................................... 17.5 9.9 4.7 2.7
---------- ---------- ---------- ----------
Net income ............................................ 26.8 15.4 6.9 3.4
Cash dividends ........................................ 6.0 3.6 2.9 2.9
---------- ---------- ---------- ----------
Reinvested earnings ................................... $ 20.8 $ 11.8 $ 4.0 $ 0.5
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
SHARE DATA Number of shares outstanding at year-end (in thousands) 13,945 13,850 13,646 13,643
(NOTE 7) Net income per share basic ............................ $ 1.93 $ 1.12 $ .50 $ .25
Net income per share diluted .......................... $ 1.93 $ 1.11 $ .50 $ .25
Cash dividends per share .............................. $ .43 $ .26 $ .22 $ .22
Book value per share .................................. $ 7.41 $ 5.94 $ 5.10 $ 4.80
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL Working capital ....................................... $ 84.4 $ 76.0 $ 86.1 $ 75.3
POSITION Property, plant and equipment, net .................... $ 44.5 $ 41.2 $ 41.0 $ 43.2
AT YEAR-END Total assets .......................................... $ 222.5 $ 213.1 $ 204.2 $ 195.2
Short-term debt ....................................... $ -- $ -- $- $-
Long-term debt ........................................ $ 28.0 $ 38.5 $ 58.0 $ 53.0
Stockholders' equity .................................. $ 103.4 $ 82.2 $ 69.5 $ 65.5
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL Return on sales ....................................... 4.3% 2.9% 1.5% 0.8%
RATIOS Asset turnover ........................................ 2.8 2.5 2.3 2.2
Return on assets ...................................... 12.0% 7.2% 3.4% 1.7%
Leverage factor ....................................... 2.7 3.1 3.1 3.0
Return on opening stockholders' equity ................ 32.6% 22.2% 10.5% 5.2%
Percent earnings reinvested ........................... 77.6% 76.6% 58.0% 14.7%
Percent increase (decrease) in equity ................. 25.8% 18.3% 6.1% 1.2%
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA Additions to property, plant and equipment ............ $ 11.8 $ 7.9 $ 4.6 $ 1.8
Stockholders at year-end .............................. 1,618 1,639 1,625 1,670
Employees at year-end ................................. 1,231 1,185 1,204 1,196
Per employee data (in thousands)
Net sales ........................................... $ 510.0 $ 452.8 $ 393.8 $ 354.4
Gross profit ........................................ $ 140.8 $ 122.5 $ 101.6 $ 92.1
Operating expenses .................................. $ 98.9 $ 94.6 $ 84.8 $ 79.3
Profit from operations .............................. $ 41.9 $ 27.9 $ 16.8 $ 12.8
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL Tons sold (in thousands) ........................... 234 248 255 277
SUMMARY OF Net sales .......................................... $ 436.4 $ 478.9 $ 501.1 $ 499.3
EARNINGS Cost of sales ................................... 331.1 363.6 380.6 375.1
---------- ---------- ---------- ----------
Gross profit ....................................... 105.3 115.3 120.5 124.2
Operating expenses .............................. 92.8 97.5 96.7 92.6
---------- ---------- ---------- ----------
Operating profit ................................... 12.5 17.8 23.8 31.6
Depreciation and amortization ................... 5.3 5.2 4.4 3.9
Interest expense, net ........................... 6.8 6.8 5.1 5.1
---------- ---------- ---------- ----------
Income before income taxes ......................... .4 5.8 14.3 22.6
Income taxes .................................... .2 2.7 5.6 8.9
---------- ---------- ---------- ----------
Net income ......................................... .2 3.1 8.7 13.7
Cash dividends ..................................... 3.9 4.9 4.7 3.5
---------- ---------- ---------- ----------
Reinvested earnings ................................ $ (3.7) $ (1.8) $ 4.0 $ 10.2
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- -------------------------------------------------------------------------------------------------------------------------------
SHARE DATA Number of shares outstanding at year-end (in thousands) 13,643 13,616 13,538 13,481
(NOTE 7) Net income per share basic ......................... $ .02 $ .23 $ .64 $ 1.02
Net income per share diluted ....................... $ .02 $ .23 $ .64 $ 1.01
Cash dividends per share ........................... $ .29 $ .36 $ .34 $ .26
Book value per share ............................... $ 4.74 $ 5.02 $ 5.15 $ 4.86
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL Working capital .................................... $ 79.7 $ 89.9 $ 75.8 $ 89.0
POSITION Property, plant and equipment, net ................. $ 47.4 $ 54.8 $ 45.3 $ 39.4
AT YEAR-END Total assets ....................................... $ 190.4 $ 226.6 $ 202.3 $ 211.9
Short-term debt .................................... $ .2 $ 11.9 $ .5 $-
Long-term debt ..................................... $ 63.3 $ 76.7 $ 51.0 $ 61.0
Stockholders' equity ............................... $ 64.7 $ 68.3 $ 69.7 $ 65.5
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL Return on sales .................................... 0.1% 0.7% 1.7% 2.7%
RATIOS Asset turnover ..................................... 2.3 2.1 2.5 .4
Return on assets ................................... 0.1% 1.4% 4.3% 6.5%
Leverage factor .................................... 2.8 3.3 3.1 3.8
Return on opening stockholders' equity ............. 0.3% 4.5% 13.2% 24.7%
Percent earnings reinvested ........................ -% -% 46.3% 74.8%
Percent increase (decrease) in equity .............. (5.3%) (2.0%) 6.4% 18.5%
- -------------------------------------------------------------------------------------------------------------------------------
OTHER DATA Additions to property, plant and equipment ......... $ 3.3 $ 13.4 $ 10.4 $ 7.8
Stockholders at year-end ........................... 1,750 1,730 1,747 1,732
Employees at year-end .............................. 1,268 1,379 1,371 1,373
Per employee data (in thousands)
Net sales ........................................ $ 344.2 $ 347.3 $ 365.5 $ 363.7
Gross profit ..................................... $ 83.0 $ 83.6 $ 87.9 $ 90.5
Operating expenses ............................... $ 73.2 $ 70.7 $ 70.5 $ 67.5
Profit from operations ........................... $ 9.8 $ 12.9 $ 17.4 $ 23.0
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A. M. Castle & Co.
1998
Annual
Report
Page 13
<PAGE>
FINANCIAL REVIEW
This discussion should be read in conjunction with the information contained in
the Consolidated Financial Statements and Notes.
OVERVIEW
1998 results produced new records for total sales and gross profit, but lower
overall earnings due to the weakening in market demand and pricing that
occurred in the second half of the year. According to DRI-McGraw Hill's
preliminary figures, the total annual output of the Company's primary market
- -- the North American producer durable equipment sector -- amounted to $686
billion in 1998. On average, DRI estimates that the sub-sectors that Castle
serves grew about 9.5% during the past year. This supports the Company's
contention that there is a global need for continued investment in plant and
equipment to strengthen relative competitive position. However, in response
to the difficulties in Asia and their rippling effect on some key markets,
Castle's customers began liquidating inventories in the second half of the
year, which sharply curtailed their purchases of highly engineered metals.
Reflecting these economic conditions, activity levels at Castle were strong
in the first six months of the year, but considerably slower in the second
half, and particularly in the fourth quarter.
The record sales and gross profit levels were achieved primarily due to
contributions from recent acquisitions. Castle also continued to pursue internal
growth initiatives through aggressive expansion of existing locations and
processing capabilities. Operating earnings were strong during the first six
months of the year, outperforming 1997's first half. During the second half of
the year, weakened demand and pricing put considerable short-term pressure on
earnings which adversely impacted Castle's year-to-year operating results.
1998 COMPARED WITH 1997
Revenues for 1998 reached a record $792.8 million, a gain of 5.0% from 1997's
$754.9 million primarily due to acquisitions completed during the past two
years. Excluding sales generated from Castle's recent acquisitions, sales in
its core business were relatively flat, showing a slight decline of 0.6% from
1997. Carbon and stainless steels generated 75% of total sales, with the
balance provided by non-ferrous metals.
Gross profit rose 9% to a record $233.8 million as compared to the $214.6
million recorded in the prior year. The gross profit gain reflects the higher
value-added contribution from recent acquisitions and investments in
leading-edge processing technologies. Gross margin percentage was 29.5% versus
28.4% a year ago. Excluding gross margins generated from recent acquisitions,
total gross margin in its core business increased by 0.9% in spite of the slight
total sales decline noted above. Substantially all inventories are valued using
the LIFO (last-in, first-out) method. In 1998, LIFO had the effect of decreasing
Castle's cost of sales by $5.0 million, compared with what it would have been on
a FIFO basis.
Total operating expenses for 1998 were $185.1 million, as compared to
$164.3 million last year, a 12.7% increase. Excluding the expenses of the
acquired businesses, 1998 operating expenses were up 4.3% over last year's
levels, with the increase occurring primarily in the plant areas, due to higher
year to year transaction-activity. As a percentage of sales, consolidated
operating expenses rose to 23.3% in 1998 as compared to 21.8% in 1997.
Depreciation and amortization expense increased by $1.9 million or 28.9% over
the prior year, reflecting both internal and external expansion initiatives. Net
interest expense increased by $5.3 million over the 1997 level due to increased
borrowing used to fund investments and working capital requirements.
Castle's 1998 effective income tax rate, at 39.7%, remained relatively
unchanged from the prior year.
Net earnings totalled $18.5 million for 1998 as compared to last year's net
income of $23.8 million. Basic earnings per share declined 22% to $1.32 per
share for 1998 as compared to $1.70 in 1997.
1997 COMPARED WITH 1996
Net sales for 1997 totalled $754.9 million, an increase of 12.2% over 1996+s
$672.6 million. Excluding sales generated from its 1997 and 1996 acquisitions,
sales in Castle's core business increased by 5.0%. Carbon and stainless steels
generated 73% of total sales, with the balance provided by non-ferrous metals.
In 1997, gross margin percentage remained very strong at 28.4% as compared to
the same 28.4% for 1996. Castle's value-added service strategy continued to
yield positive results 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 its 1996 and 1997 acquisitions, total gross margin
increased by 4.2%. In 1997, LIFO had the effect of decreasing Castle's cost of
sales by $1.1 million as compared with what it would have been on a fifo basis.
Total operating expenses for 1997 were $164.3 million, compared with $139.9
million for the prior year, a 17.4% increase. Excluding the expenses of its
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 and amortization increased by
$1.3 million from 1996 primarily due to the expense associated with the acquired
companies. Net interest expense increased by $1.3 million due to higher average
borrowings in support of recent acquisitions.
The company's income tax rate at 39.7% was up slightly from the prior
year's effective rate of 39.5%.
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
Page 14
<PAGE>
environment. Earnings for the year totalled $23.8 million as compared to $26.1
million in 1996. Basic earnings per share for 1997 were $1.70 as compared to $
1.86 for 1996.
CAPITAL EXPENDITURES
Capital expenditures for 1998 totalled $30.2 million as compared to $16.2
million in 1997. The 1998 expenditures included approximately $11.5 million
expended for new or expanded facilities at subsidiary locations in Canada,
Michigan, and Indiana. The Company also expanded production capabilities at its
H-A Industries processing facility located in Hammond, Indiana and added
further processing capabilities in several other Company facilities including
its Franklin Park headquarters location.
The 1997 capital expenditures totalled $16.2 million as compared with $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.
During 1998 and 1997, Castle sold and leased back approximately $9.6
million and $2.4 million of fixed assets respectively, which added to cash flow
and reduced long-term borrowing.
LIQUIDITY AND CAPITAL RESOURCES
Castle strives to maintain a strong balance sheet and financial position. During
the past three years, Castle has invested close to $128 million in new
facilities, equipment, and acquired businesses. Earnings strength and cash flow
from operations, along with planned debt financing, have provided funds for this
strategic expansion. Long-term borrowings and debt ratios have generally been
maintained at, or below, the Company's target range, with the exception of the
second half of 1998.
Total borrowings were $176.1 million at year-end 1998 as compared to $93.4
million at 1997 year end. Its debt-to-capital ratio was 55.0% at year-end 1998
as compared to 40.6% at the end of 1997. Based on expectations for a strong
positive cash flow during 1999, management plans for a 10% reduction in its
debt-to-capital ratio down to the target ratio of 45%.
Working capital was $181.2 million as of December 31, 1998 as compared to
$119.8 million at 1997 year end. Accounts receivable declined by $2.8 million
from the prior year end. The number of days outstanding at the end of 1998 was
slightly increased from 1997, while collections remain strong and in line with
target levels. Management believes that the net accounts receivable at December
31, 1998 are of a very good quality. Inventory levels increased $65.1 million
from year end 1997. The increase has been the result of a combination of
acquisitions, increases designed to support market initiatives, and the adverse
effect of weaker than anticipated fourth quarter demand.
Castle had unused committed and uncommitted lines of bank credit of $137.9
million at December 31, 1998, compared with $109.5 million at December 31, 1997.
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.
Castle has not entered into any market risk agreements of a material
nature. Fixed interest rate debt outstanding as of December 31, 1998 totalled
$107.9 million with an average interest rate of 6.9%. Variable interest rate
debt outstanding as of December 31, 1998 totalled $68.2 million with an average
interest rate of 5.1%.
YEAR-2000 ISSUES
Castle and its subsidiaries are currently modifying their 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 third quarter 1999 with
no significant impact on its operations.
The Company identified its communications systems, financial systems, and
transactional systems as the major Year-2000 risk areas and began addressing
these issues starting in 1997. Year-2000 compliant communication software is
operational in Franklin Park, Illinois and will be installed in all other
locations over the next six months. The financial software upgrades are
progressing well and are nearing completion. As of this date, 40% of the 90,000
lines of transaction system code requiring changes have been modified, tested,
and put into production. The remaining 60% is scheduled for completion by the
third quarter. 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 results of operations, liquidity or financial condition.
The Company is in the process of reassessing its non-information technology
systems and identifying risks from third party relationships. Castle is well
diversified from a customer, product, and supplier standpoint and, consequently,
isolated disruptions in any one area, with the exception of prolonged power
interruptions at any of its four largest facilities, are not likely to have a
significant impact on total company results.
The Company's Year-2000 activities are expected to cost between $1.8 and
$2.0 million with approximately 33% being incurred as of year-end 1998.
A. M. Castle & Co.
1998
Annual
Report
Page 15
<PAGE>
COMMON STOCK INFORMATION
Symbol CAS
<TABLE>
<CAPTION>
DIVIDENDS STOCK PRICE RANGE
1998 1997 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter ....... $ .170 $ .150 21 1/2 24 7/8 17 1/4 20 7/8
Second Quarter ...... .195 .170 21 1/2 24 1/2 16 3/4 23 5/8
Third Quarter ....... .195 .170 14 3/4 22 21 3/4 26 1/2
Fourth Quarter ...... .195 .170 14 19 3/8 22 1/2 26 1/2
------ ------
$ .755 $ .660
------ ------
------ ------
</TABLE>
[GRAPHS]
COMPOUND RATE OF RETURN VS. INFLATION
<TABLE>
<CAPTION>
BASE CASTLE S&P500 INFLATION
<C> <C> <C> <C>
1984 1,000.0 1,000.0 1,000.0
1985 1,349.0 1,318.0 1,036.0
1986 1,098.1 1,564,5 1,055.7
1987 1,392.4 1,647.4 1,093.7
1988 2,248.7 1,920.8 1,138.5
1989 2,293.7 2,529.8 1,193.2
1990 2,082.6 2,451.3 1,257.6
1991 2,136,8 3,199.0 1,310.4
1992 2,391.1 3,445.3 1,349.7
1993 3,629.6 3,789.8 1,390.2
1994 4,483,3 3,839.1 1,428.4
1995 9,262.1 5,282.6 1,466.3
1996 8,159.0 6,497.6 1,510.3
1997 9,688.0 8,854.8 1,545.0
1998 6,675.0 11,104.2 1,569.8
</TABLE>
CASTLE'S DIVIDEND RECORD
<TABLE>
<CAPTION>
Castle S&P
<C> <C> <C>
84 100.00 100.00
85 137.63 104.78
86 150.32 109.96
87 150.13 116.73
88 168.73 129.46
89 226.48 146.22
90 239.29 160.48
91 190.20 161.75
92 140.95 164.54
93 140.98 166.93
94 173.71 175.30
95 284.64 183.27
96 276.33 198.01
97 435.78 205.84
98 498.88 215.07
</TABLE>
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) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets
Cash ................................... $123.0 $122.8 $121.8
Accounts receivable, net ............... 85.7 88.5 68.8
Inventories, at latest cost ............ 269.2 209.1 152.1
------ ------ ------
Total current assets ................. 357.9 300.4 222.7
Less-current liabilities ............... (145.4) (146.4) (107.4)
------ ------ ------
Net current assets ....................... 212.5 154.0 115.3
Fixed and other assets, net .............. 154.2 123.1 97.4
Total assets, less current liabilities 366.7 277.1 212.7
Long-term debt ........................... (172.3) (90.7) (40.9)
Deferred income taxes .................... (15.1) (12.5) (11.4)
Other liabilities ........................ (4.0) (2.9) (3.2)
Unrecognized inventory gain, net of taxes (31.3) (34.3) (35.3)
------ ------ ------
Stockholders' equity ..................... $144.0 $136.7 $121.9
------ ------ ------
------ ------ ------
- -----------------------------------------------------------------------------
</TABLE>
Page 16
<PAGE>
A. M. Castle & Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales .................................... $792,846 $754,865 $672,617
Cost of material sold ........................ 559,084 540,286 481,451
-------- -------- --------
Gross profit on sales ...................... 233,762 214,579 191,166
-------- -------- --------
Operating expenses ........................... 185,109 164,284 139,904
-------- -------- --------
Operating profit ............................. 48,653 50,295 51,262
-------- -------- --------
Depreciation and amortization expense (Note 1) 8,486 6,581 5,248
Interest expense, net (Notes 2 and 4) ........ 9,438 4,183 2,878
-------- -------- --------
Income before income taxes ................... 30,729 39,531 43,136
-------- -------- --------
Income taxes (Notes 1 and 3)
Federal - currently payable .................. 7,517 10,152 12,845
- deferred ........................... 2,420 2,469 934
State ...................................... 2,270 3,065 3,253
-------- -------- --------
12,207 15,686 17,032
-------- -------- --------
Net income ................................. $ 18,522 $ 23,845 $ 26,104
-------- -------- --------
-------- -------- --------
Basic income per share (Notes 1 and 7) ..... $ 1.32 $ 1.70 $ 1.86
-------- -------- --------
-------- -------- --------
Diluted income per share (Notes 1 and 7) ... $ 1.32 $ 1.69 $ 1.86
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year .................................................. $ 114,709 $ 100,124 $ 81,998
Net income .................................................................... 18,522 23,845 26,104
Cash dividends-$.755 in 1998, $.66 in 1997, and $.57 per share in 1996 (Note 7) (10,602) (9,260) (7,978)
--------- --------- ---------
Balance at end of year ........................................................ $ 122,629 $ 114,709 $ 100,124
--------- --------- ---------
--------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
A. M. Castle & Co.
1998
Annual
Report
Page 17
<PAGE>
A. M. Castle & Co. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Years Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSAND) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash (Note 1) ............................................................... $ 2,954 $ 2,775 $ 1,805
Accounts receivable, less allowances of $600 in 1998, $600 in 1997,
and $700 in 1996 .......................................................... 85,688 88,478 68,791
Inventories - principally on last-in, first-out basis (latest cost higher by
approximately $52,100 in 1998, $57,100 in 1997 and $58,800 in 1996)(Note 1) 217,152 152,028 93,315
--------- --------- ---------
Total current assets .................................................... 305,794 243,281 163,911
--------- --------- ---------
Other assets (Note 1) ......................................................... 59,547 45,684 34,742
--------- --------- ---------
Property, plant and equipment, at cost (Notes 1 and 5)
Land ........................................................................ 5,955 5,915 5,775
Buildings ................................................................... 51,323 48,366 40,817
Machinery and equipment ..................................................... 120,502 99,359 82,265
--------- --------- ---------
177,780 153,640 128,857
Less - accumulated depreciation ........................................... 83,158 76,230 66,140
--------- --------- ---------
94,622 77,410 62,717
--------- --------- ---------
Total assets .................................................................. $ 459,963 $ 366,375 $ 261,370
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................ $ 98,835 $ 98,813 $ 63,860
Accrued payroll and employee benefits (Note 6) .............................. 11,199 12,554 10,663
Accrued liabilities ......................................................... 7,337 5,522 4,442
Current and deferred income taxes (Notes 1 and 3) ........................... 3,445 3,934 2,455
Current portion of long-term debt (Note 4) .................................. 3,765 2,688 2,482
--------- --------- ---------
Total current liabilities ............................................... 124,581 123,511 83,902
--------- --------- ---------
Long-term debt, less current portion (Note 4) ................................. 172,313 90,735 40,934
--------- --------- ---------
Deferred income taxes (Notes 1 and 3) ......................................... 15,105 12,543 11,427
--------- --------- ---------
Other liabilities (Notes 1 and 6) ............................................. 3,952 2,877 3,181
--------- --------- ---------
Stockholders' equity (Notes 1 and 7)
Common stock, without par value-authorized 30,000,000 shares;
issued and outstanding 14,043,505 in 1998, 14,040,924 in 1997
and 14,008,792 in 1996 ................................................... 27,465 27,293 26,681
Earnings reinvested in the business ......................................... 122,629 114,709 100,124
Other ....................................................................... (681) 85 257
Treasury stock, at cost (845,938 shares in 1998, 845,019 shares in 1997
and 834,439 shares in 1996) ................................................ (5,401) (5,378) (5,136)
--------- --------- ---------
Total stockholders' equity ............................................. 144,012 136,709 121,926
--------- --------- ---------
Total liabilities and stockholders' equity .................................... $ 459,963 $ 366,375 $ 261,370
--------- --------- ---------
--------- --------- ---------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
Page 18
<PAGE>
A. M. Castle & Co. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSAND) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ..................................................................... $ 18,522 $ 23,845 $ 26,104
Adjustments to reconcile net income to net cash provided from operating activities
Depreciation and amortization ................................................ 8,486 6,581 5,248
Gain) loss on sale of facilities/equipment ................................... (47) 22 (112)
Increase in deferred taxes ................................................... 2,562 670 458
Increase) in prepaid expenses and other assets ............................... (3,593) (438) (3,628)
Increase (decrease) in other liabilities ..................................... 78 (1,187) 362
Other ........................................................................ (25) 207 198
-------- -------- --------
Cash provided from operating activities before changes in current accounts ....... 25,983 29,700 28,630
-------- -------- --------
Increase (decrease) from changes in:
Accounts receivable .......................................................... 9,437 (12,590) 2,619
Inventories .................................................................. (54,467) (43,507) 10,835
Accounts payable ............................................................. (3,850) 28,787 (8,727)
Accrued payroll and employee benefits ........................................ (1,669) 1,300 160
Accrued liabilities .......................................................... 1,527 188 216
Current and deferred income taxes ............................................ (489) 1,287 1,182
-------- -------- --------
Net increase (decrease) from changes in current accounts ......................... (49,511) (24,535) 6,285
-------- -------- --------
Net cash provided from (used by) operating activities ............................ (23,528) 5,165 34,915
-------- -------- --------
Cash flows from investing activities
Investments and acquisitions (Note 9) .......................................... (26,171) (29,265) (17,984)
Proceeds from sales of facilities/equipment (Note 5) ........................... 9,640 2,470 2,521
Capital expenditures ........................................................... (30,236) (16,182) (22,544)
-------- -------- --------
Net cash from investing activities ............................................... (46,767) (42,977) (38,007)
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of long-term debt ....................................... 84,639 50,838 23,060
Repayments of long-term debt ................................................... (2,944) (2,787 (11,091)
Dividends paid ................................................................. (10,602) (9,260) (7,978)
Net proceeds from issuance of stock ............................................ 43 161 211
Other .......................................................................... (662) (170) 28
-------- -------- --------
Net cash provided from (used by) financing activities ............................ 70,474 38,782 4,230
-------- -------- --------
Net increase (decrease) in cash .................................................. 179 970 1,138
Cash - beginning of year ......................................................... 2,775 1,805 667
-------- -------- --------
Cash - end of year ............................................................... $ 2,954 $ 2,775 $ 1,805
-------- -------- --------
-------- -------- --------
Supplemental disclosures of cash flow information
Cash paid during the year for-
Interest ..................................................................... $ 7,987 $ 4,209 $ 2,997
-------- -------- --------
Income taxes ................................................................. $ 10,134 $ 13,729 $ 15,268
-------- -------- --------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
A. M. Castle & Co.
1998
Annual
Report
Page 19
<PAGE>
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.
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>
- -----------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Net income ........................ $18,522 $23,845 $26,104
Weighted average common
shares outstanding ................ 14,043 14,026 14,000
Dilutive effect of outstanding
employee and directors'
common stock options .............. 40 49 68
------- ------- -------
Diluted common shares outstanding . 14,083 14,075 14,068
Basic earnings per share .......... $ 1.32 $ 1.70 $ 1.86
------- ------- -------
------- ------- -------
Diluted earnings per share ........ $ 1.32 $ 1.69 $ 1.86
------- ------- -------
------- ------- -------
Outstanding employee and directors'
common stock options having
no dilutive effect ................ 140 8 8
------- ------- -------
------- ------- -------
- -----------------------------------------------------------------------
</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. Net book value of goodwill included in other assets as of December
31, 1998, 1997, and 1996 was $29.7 million, $20.1 million, and $11.0 million
respectively. Accumulated amortization at December 31, 1998, 1997, and 1996
was $1.7 million, $0.9 million, and $0.4 million.
NEW ACCOUNTING STANDARD - The company has reviewed the business activities of
its divisions and subsidiaries in accordance with the requirements of SFAS
No. 131. The Company has concluded that its business activities fall into one
identifiable business segment as approximately 95% of all revenues are
derived from the distribution of its specialty metal products. These products
are purchased, warehoused, processed, and sold using essentially the same
systems, facilities, sales force, and distribution network. Approximately 75%
of current year revenues from these products came from the sale of carbon and
stainless steel, with the balance provided from the sale of non-ferrous metal
products.
(2) SHORT-TERM DEBT
Short-term borrowing activity was as follows (in thousands):
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Maximum borrowed .... $22,000 $ 8,500 $ 5,000
Average borrowed .... 4,979 1,003 884
Average interest rate
During the year ... 5.8% 5.8% 5.5%
- -----------------------------------------------------------
</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
Page 20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
used for income tax purposes. Significant components of the Company's Federal
and state deferred tax liabilities and assets as of December 31, 1998, 1997
and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Depreciation ................. $ 9,790 $ 7,688 $ 6,547
Inventory, net ............... 6,566 4,912 2,858
Pension ...................... 5,793 5,608 5,743
Other, net ................... (950) (1,173) (1,612)
-------- -------- --------
Net deferred liabilities ... 21,199 17,035 13,536
Deferred tax assets:
Postretirement benefits ...... 952 937 1,426
-------- -------- --------
Net deferred tax liabilities $ 20,247 $ 16,098 $ 12,110
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------
</TABLE>
The components of the provision (benefit) for deferred Federal income tax for
the years ended December 31, 1998, 1997 and 1996, are as follows (in
thousands):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Depreciation .................. $ 1,526 $ 257 $ 537
Inventory, net ................ 1,424 1,753 125
Pension/Postretirement benefits 157 428 621
Other, net .................... (687) 31 (349)
------- ------- -------
$ 2,420 $ 2,469 $ 934
------- ------- -------
------- ------- -------
- --------------------------------------------------------------------
</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>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rates ... $ 10,755 $ 13,836 $ 15,098
State income taxes, net of Federal income
tax benefits ............................ 1,448 1,864 2,103
Other ................................... 4 (14) (169)
-------- -------- --------
$ 12,207 $ 15,686 $ 17,032
-------- -------- --------
-------- -------- --------
- --------------------------------------------------------------------------------
</TABLE>
(4) LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1998, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Revolving credit agreement (a) (c) .. $ 49,179 $ 25,838 $ --
6.49% insurance company term loan,
due in equal installments from
2004 through 2008 ................. 20,000 20,000 20,000
9.3% insurance company term loan,
due in equal installments
through 2000 ...................... 3,310 4,980 6,650
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) ...... 16,225 10,791 11,058
7.54% insurance company loan due in
equal installments from 2005
through 2009 ...................... 25,000 25,000 --
6.54% average rate insurance company
loan due in varying installments
from 2001 through 2012 ............ 55,000 -- --
Other ............................... 2,764 2,214 1,108
--------- --------- ---------
Total ............................... 176,078 93,423 43,416
Less-current portion ................ (3,765) (2,688) (2,482)
--------- --------- ---------
Total long-term portion ............. $ 172,313 $ 90,735 $ 40,934
--------- --------- ---------
--------- --------- ---------
- ---------------------------------------------------------------------------------
</TABLE>
The carrying value of long term debt does not differ materially from their
estimated fair value as of December 31, 1998.
(a) The Company has revolving credit agreements of $100.0 million
domestically and $26.4 million with foreign (primarily Canadian) banks. 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 .22% 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, 1998, 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):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
2000 $3,179 2001 $3,425 2002 $3,321 2003 $3,299
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Total net book value of assets collateralized under financing
arrangements approximated $1.8 million at December 31, 1998.
Net interest expense reported on the accompanying Consolidated
Statements of Income was reduced by interest income of $0.1 million in 1998,
$0.2 million in 1997, and $0.3 million in 1996.
(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, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
- -------------------------------------------------
Year ending December 31,
- -------------------------------------------------
<S> <C>
1999 $ 6,921
2000 5,348
2001 4,533
2002 3,811
2003 3,492
Later years 15,474
-------
Total minimum payments required $39,579
-------
-------
- -------------------------------------------------
</TABLE>
A. M. Castle & Co.
1998
Annual
Report
Page 21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(d) Rental expense - Total rental payments charged to expense were $9.8
million in 1998, $9.5 million in 1997 and $8.9 million in 1996.
(e) Sale and leaseback of assets - During 1998, 1997 and 1996 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 $9.6, $2.4 and $2.5 million respectively. The 1998 leases allow
for a purchase option at the end of the lease term of $2.6 million. The 1997
and 1996 leases allow for a purchase option at the end of the lease term of
$0.7 and $0.8 million respectively. Annual rentals are $1.3 million for the
1998 leases, $0.3 million for the 1997 lease and $0.3 million for the 1996
leases.
(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.
Components of net pension benefit cost for 1998, 1997, and 1996 (in
thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost ........................ $ 1,769 $ 1,475 $ 1,798
Interest cost ....................... 4,497 4,327 4,261
Expected return on assets ........... (6,832) (5,964) (5,599)
Amortization of transition assets ... -- -- (976)
Amortization of prior service cost .. 69 60 206
Amortization of actuarial loss (gain) 80 112 568
------- ------- -------
Net periodic benefit cost ........... $ (417) $ 10 $ 258
------- ------- -------
------- ------- -------
- ---------------------------------------------------------------------------
</TABLE>
Status of the plans at December 31, 1998, 1997, and 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning
of year ................................... $ 63,969 $ 56,575 $ 58,106
Service cost ................................ 1,769 1,475 1,798
Interest cost ............................... 4,497 4,327 4,261
Benefit payments ............................ (3,338) (3,229) (3,171)
Actuarial losses/(gains) .................... 2,142 5,748 (4,419)
Plan amendments ............................. 96 (927) --
-------- -------- --------
Benefit obligation at end of year ........... $ 69,135 $ 63,969 $ 56,575
-------- -------- --------
-------- -------- --------
Change in plan assets:
Fair value of assets at beginning
of year ................................... $ 77,957 $ 65,511 $ 57,058
Actual return on assets ..................... 15,372 15,662 7,332
Employer contributions ...................... 13 13 4,292
Benefit payments ............................ (3,338) (3,229) (3,171)
-------- -------- --------
Fair value of plan assets at
year end ................................. $ 90,004 $ 77,957 $ 65,511
-------- -------- --------
-------- -------- --------
Reconciliation of funded status:
Funded status ............................... $ 20,869 $ 13,988 $ 8,936
Unrecognized prior service cost ............. (91) (119) 942
Unrecognized actuarial loss/(gain) .......... (5,989) 489 4,477
-------- -------- --------
Net amount recognized ....................... $ 14,789 $ 14,358 $ 14,355
-------- -------- --------
-------- -------- --------
Amounts recognized in balance sheet consist of:
Prepaid benefit cost ........................ $ 16,964 $ 16,013 $ 15,501
Accrued benefit liability ................... (2,994) (2,133) (1,379)
Intangible assets ........................... 236 304 233
Accumulated comprehensive
income ...................................... 583 174 --
-------- -------- --------
Net amount recognized ....................... $ 14,789 $ 14,358 $ 14,355
-------- -------- --------
-------- -------- --------
- ----------------------------------------------------------------------------------------
</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>
- ------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate ...................... 7.00% 7.25% 8.00%
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>
- ---------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Profit sharing and 401-K $1,211 $2,304 $2,469
Management incentive ... $1,360 $2,670 $2,664
- ---------------------------------------------------------
</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. During 1997 the Company recognized a pre-tax gain of
$1,449,000 as a result of this curtailment in coverage.
Page 22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of net postretirement benefit cost for 1998, 1997, and 1996 (in
thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Service ............................. $ 79 $ 169 $ 214
Interest cost ....................... 150 283 311
Amortization of prior service cost .. 22 21 22
Amortization of actuarial loss/(gain) (35) (3) 25
----- ----- -----
Net periodic benefit cost ........... $ 216 $ 470 $ 572
----- ----- -----
----- ----- -----
- ---------------------------------------------------------------------
</TABLE>
The status of the plans at December 31, 1998, 1997, and 1996 is as follows
(in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in projected benefit obligations:
Benefit obligation at beginning
of year ............................ $ 2,750 $ 4,486 $ 5,238
Service cost ......................... 79 169 214
Interest cost ........................ 150 283 311
Benefit payments ..................... (180) (224) (210)
Actuarial losses/(gains) ............. (506) (516) (1,067)
Curtailments ......................... -- (1,449) --
------- ------- -------
Benefit obligation at end of year .... $(2,293) $(2,749) $(4,486)
------- ------- -------
------- ------- -------
Change in plan assets:
Fair value of assets at beginning
of year ............................ $- $- $-
Employer contributions ............... 180 224 210
Benefit payments ..................... (180) (224) (210)
------- ------- -------
Fair value of plan assets at
year end ........................... $- $- $-
------- ------- -------
------- ------- -------
Reconciliation of funded status:
Funded status ........................ $(2,293) $(2,750) $(4,486)
Unrecognized prior service cost ...... 441 437 459
Unrecognized actuarial loss/(gain) ... (578) (81) 431
------- ------- -------
Net amount recognized ................ $(2,430) $(2,394) $(3,596)
------- ------- -------
------- ------- -------
Amounts recognized in balance sheet
consist of:
Accrued benefit liabilities .......... $(2,430) $(2,393) $(3,597)
------- ------- -------
Net amount recognized ................ $(2,430) $(2,393) $(3,597)
------- ------- -------
------- ------- -------
- ------------------------------------------------------------------------------
</TABLE>
Future benefit costs were estimated assuming medical costs would
increase at a 10.75% annual rate for the current year, with annual increases
decreasing by 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, 1998 by $117,000 with no significant effect on the 1998 postretirement
benefit expense. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.00% in 1998, 7.25% in
1997 and 8.00% in 1996.
(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 1998, 1997 and
1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Common Stock Treasury Stock
- ------------------------------------------------------------------------------------
Shares
Issued Amount Shares Amount
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Stock options exercised 3,500 65 918 23
Other ............... -- 107 1 --
---------- ---------- -------- ----------
December 31, 1998 ..... 14,889,443 $ 27,465 845,938 $ 5,401
- ------------------------------------------------------------------------------------
</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
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Compensation expense $190,000 $362,000 $330,000
Shares awarded ..... -- 11,070 8,945
- -----------------------------------------------------------
</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, 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
Granted ....... 270,610 20.51 20.25-23.13
Forfeitures ... (3,869) 6.60 6.60
Exercised ..... (3,500) 18.52 12.07-18.75
------- ----- ----------
December 31, 1998 587,925 19.58 12.07-23.38
- -------------------------------------------------------------
</TABLE>
As of December 31, 1998, 317,315 of the 587,925 options outstanding, were
currently exercisable and had a weighted average contractual life of 2.52
years with a weighted average exercise price of $18.79. The remaining 270,610
shares were not exercisable and had a weighted average contractual life of
4.5 years, with a weighted average exercise price of $20.51. The weighted
average fair value of the current year's option grant is estimated to be
$5.12 per share. The fair value has been estimated on the
A. M. Castle & Co.
1998
Annual
Report
Page 23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
day of the grant using the Black Scholes option pricing model with the
following assumptions, risk free interest rate of 4.65%, 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 1998 net income would have been reduced by
approximately $1.0 million or $0.07 per share, 1997 net income would have
been reduced by approximately $0.8 million or $0.06 per share, and 1996 net
income would have been reduced by approximately $0.5 million or $0.03 per
share.
(8) CONTINGENT LIABILITIES
At December 31, 1998 total exposure under guarantees issued for banking
facilities of unconsolidated affiliates was $12.5 million. The Company was
contingently liable as endorser on discounted trade acceptances aggregating
$7.5 million at December 31, 1998. Also, the Company has $1.3 million of
irrevocable letters of credit outstanding to comply with the insurance
reserve requirements of its workers+ compensation insurance carrier.
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 1998 the Company and its subsidiaries purchased three distribution
businesses and acquired a 50% interest in another metals distributor. The
aggregate cash consideration paid was $26.2 million including certain
transaction costs. The acquisitions have been accounted for as purchases and
are included in the financial statements from the date of acquisition. The
company's interest in the joint venture has been accounted for using the
equity method and the company's share of the operating results of the joint
venture has been included in the company's financials since 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 1998 and 1997
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>
1998 quarters
Net sales .... $211,728 $205,068 $195,512 $180,538
Gross profit . 61,635 60,570 58,027 53,530
Net income ... 7,133 6,319 3,779 1,291
Net income per
share basic .. $ .51 $ .45 $ .27 $ .09
Net income per
share diluted $ .51 $ .45 $ .27 $ .09
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
- --------------------------------------------------------------------
</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, 1998, 1997
and 1996, 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, 1998, 1997 and 1996, 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, 1999.
Page 24
<PAGE>
DIRECTORS
DANIEL T. CARROLL
Chairman
The Carroll Group, Inc.
a management consulting firm
EDWARD F. CULLITON
Vice President and Chief Financial Officer
WILLIAM K. HALL
President & 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. MCCARTER, JR.
President
The Field Museum
a natural history museum
JOHN MCCARTNEY
Vice Chairman
Datatec, Ltd.
RICHARD G. MORK
President and Chief Executive Officer
JOHN PUTH
Principle
J.W. Puth Associates
a consulting firm
MICHAEL SIMPSON
Chairman of the Board
OFFICERS
MICHAEL SIMPSON
Chairman of the Board
RICHARD G. MORK
President and Chief Executive Officer
ALAN D. RANEY
Executive Vice President and Chief Operating Officer
MARC BIOLCHEN
Vice President-
Tubular Group
EDWARD F. CULLITON
Vice President and Chief Financial Officer
SVEN G. ERICSSON
Vice President-
Business Development
M. BRUCE HERRON
Vice President-
Sales
STEPHEN V. HOOKS
Vice President-
Merchandising
TIM N. LAFONTAINE
Vice President-
Alloy Group
JOHN NORDIN
Vice President and
Chief Information Officer
FRITZ OPPENLANDER
Vice President-
Operations
ROBERT A. ROSCNOW
Vice President-
Carbon Group
GISE VAN BAREN
Vice President-
H-A Industries
CRAIG R. WILSON
Vice President-
Business Process Improvement and Quality
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
KEYSTONE TUBE COMPANY
MARC BIOLCHIN
President
OLIVER STEEL PLATE COMPANY
JAMES M. FLEMING
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 that is 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 22, 1999 at 10 a.m. Central
Daylight Savings Time. 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.
A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995, THE COMPANY CAUTIONS INVESTORS THAT ANY FORWARD-LOOKING
STATEMENTS OR PROJECTIONS, INCLUDING THOSE MADE IN THIS DOCUMENT, ARE SUBJECT
TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE EXPECTED.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 4-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 2,887 2,887
<SECURITIES> 67 67
<RECEIVABLES> 86,326 86,326
<ALLOWANCES> (638) (638)
<INVENTORY> 217,152 217,152
<CURRENT-ASSETS> 305,794 305,794
<PP&E> 177,780 177,780
<DEPRECIATION> (83,158) (83,158)
<TOTAL-ASSETS> 459,963 459,963
<CURRENT-LIABILITIES> 124,581 124,581
<BONDS> 172,313 172,313
0 0
0 0
<COMMON> 27,465 27,465
<OTHER-SE> 116,547 116,547
<TOTAL-LIABILITY-AND-EQUITY> 459,963 459,963
<SALES> 180,538 792,846
<TOTAL-REVENUES> 180,538 792,846
<CGS> (127,008) (559,084)
<TOTAL-COSTS> (48,136) (192,991)
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (396) (604)
<INTEREST-EXPENSE> (2,910) (9,438)
<INCOME-PRETAX> 2,088 30,729
<INCOME-TAX> (797) (12,207)
<INCOME-CONTINUING> 1,291 18,522
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,291 18,522
<EPS-PRIMARY> 0.09 1.32
<EPS-DILUTED> 0.09 1.32
</TABLE>
