-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L4KPFJmj24Qkh5zvAzs9heo+s8vL4w4oxRwfkaHP16jrsCxVHYW829sZ9h4hFURc w2bRBf9CU6WiAHbYZwAkvQ== 0000912057-97-010397.txt : 19970328 0000912057-97-010397.hdr.sgml : 19970328 ACCESSION NUMBER: 0000912057-97-010397 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961228 FILED AS OF DATE: 19970327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASTLE A M & CO CENTRAL INDEX KEY: 0000018172 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-METALS SERVICE CENTERS & OFFICES [5051] IRS NUMBER: 360879160 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05415 FILM NUMBER: 97564603 BUSINESS ADDRESS: STREET 1: 3400 N WOLF RD CITY: FRANKLIN PARK STATE: IL ZIP: 60131 BUSINESS PHONE: 7084557111 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 COMMISSION FILE NUMBER: DECEMBER 31, 1996 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, 60131 FRANKLIN PARK, ILLINOIS (Address of principal executive (Zip Code) offices) ------------------------ Registrant's telephone number, including area code (847) 455-7111 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON 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, 1997 was $292,747,000. The number of shares outstanding of the registrant's common stock on March 1, 1997 was 14,023,797 shares. DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS INCORPORATED BY REFERENCE APPLICABLE PART OF FORM 10-K Annual Report to Stockholders for Parts I, II and IV the year ended December 31, 1996 Proxy Statement dated March 10, Part III 1997 furnished to Stockholders in connection with registrant's Annual Meeting of Stockholders - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. A. M. Castle & Co. is one of North America's largest, independent metals service center companies. The registrant (Company) provides a complete range of inventories as well as preprocessing services to a wide variety of customers. In the last three years, sales mix in the Company's core business was approximately as follows:
1996 1995 1994 ----- ----- ----- Carbon and Stainless..................................................... 74% 77% 78% Non-Ferrous Metals....................................................... 26% 23% 22% --- --- --- 100% 100% 100%
These metals are inventoried in many forms including round, hexagon, square and flat bars; plates; tubing; shapes; and sheet and coil. Depending on the size of the facility and the nature of the markets it serves, each of the Company's service centers is equipped as needed with Bar Saws, Close Tolerance Plate Saws, Oxygen and Plasma Arc Flame Cutting Machinery, Stress Relieving and Annealing Furnaces, Surface Grinding Equipment, Edge Conditioning Equipment, Sheet Shears and Coil Processing Equipment. The Company also does specialized fabrications for customers through pre-qualified subcontractors. Emphasis on the more highly engineered grades and alloys of metals, supported by strong service commitments, has earned the Company a leadership role in filling the needs of users of those metals. The Company has its main office, and largest distribution center, in Franklin Park, Illinois. This center serves metropolitan Chicago and, approximately, a nine state area. In addition, there are distribution centers in various other cities (see Item 2). The Chicago, Los Angeles and Cleveland distribution centers together account for approximately one-half of all sales. In the United States, the Company serves the wide range of industrial companies within the $600 billion producer durable equipment sector of the economy. The customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized ones spread across the entire spectrum of metals using industries. The Company's customer base is well diversified with no single industry accounting for more than 6% of the Company's total business and, no one customer, more than 2%. The Company's coast-to-coast network of metals service centers provides next day delivery to over 90% of the markets it serves, and two day delivery to virtually all of the rest. 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 d 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 location, and starting in late 1996, the Company's new United Kingdom based subsidiary, A. M. Castle & Co. Limited, a U.K. Corporation. The Company's Hy-Alloy Steels Co. division, located in Bedford Park, Illinois, a Chicago suburb, is a distributor of alloy bars stocked as rounds, squares, hexes, and flats; and of alloy tubing. In 1993 a value-added bar processing center, H-A Industries, was added. From this facility, the Company operates a heat treat line producing quench and tempered alloy bar product, an annealing line, and a bar turning and straightening line producing cold finished bars. 2 The Company also operates two subsidiaries acquired in 1996 whose businesses complement the Company's distribution and value added focus. Total Plastics, Inc., acquired in January 1996, is a Midwest based distributor serving a wide variety of users of industrial plastics. Cutter Precision Metals, Inc., acquired in April 1996, is a Pacific Northwest based metals distributor which has added highly specialized sawing and grinding capabilities to the Company's range of processing services. The Company also holds a one-third joint venture interest in Kreher Steel Co., a midwest based distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, SBQ and stainless bars. In general, the Company purchases metals from many producers. In the case of nickel alloys, it is single sourced. Satisfactory alternative sources, however, are available for all metals that the Company buys and its business would not be materially adversely affected by the loss of any one supplier. Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities. The Company's ability to provide quick delivery, frequently overnight, of a wide variety of metal products allows customers to reduce inventory investment because they do not need to order the large quantities required by producing mills. The major portion of 1996 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. The Company has approximately 1500 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:
APPROXIMATE FLOOR AREA IN LOCATIONS SQUARE FEET - ------------------------------------------------------------------------------ -------------- CASTLE METALS Atlanta, Georgia.............................................................. 35,100(1) Charlotte, North Carolina..................................................... 93,000 Chicago area - Franklin Park, Illinois..................................................... 533,600 Cincinnati, Ohio.............................................................. 9,300(1) Cleveland area - Bedford Heights, Ohio....................................................... 381,400 Dallas, Texas................................................................. 78,000 Fairfield, Ohio............................................................... 72,000(1) Houston, Texas................................................................ 109,100 Kansas City, Missouri......................................................... 170,000 Los Angeles area - Paramount, California....................................................... 264,900
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APPROXIMATE FLOOR AREA IN LOCATIONS SQUARE FEET - ------------------------------------------------------------------------------ -------------- Milwaukee area - Wauwatosa, Wisconsin........................................................ 98,000(1) Minneapolis, Minnesota........................................................ 60,000 Philadelphia, Pennsylvania.................................................... 71,600 Salt Lake City, Utah.......................................................... 45,400(1) Stockton, California.......................................................... 60,000(1) Wichita, Kansas............................................................... 26,500(1) Worcester, Massachusetts...................................................... 60,000 -------------- Total Castle Metals....................................................... 2,167,900 HY-ALLOY STEELS CO. Chicago area - Bedford Park, Illinois...................................................... 103,700 -------------- H-A INDUSTRIES Hammond, Indiana.............................................................. 124,000(1) -------------- A. M. CASTLE & CO. (CANADA) INC. Edmonton, Alberta............................................................. 36,600(1) Montreal, Quebec.............................................................. 25,600(1) Toronto area - Mississauga, Ontario........................................................ 57,100(1) Etobicoke, Ontario.......................................................... 8,000(1) Winnipeg, Manitoba............................................................ 28,900(1) -------------- 156,200 CUTTER PRECISION METALS, INC. Kent, Washington.............................................................. 24,000(1) Santa Clara, California....................................................... 20,000(1) -------------- 44,000 CASTLE METALS U.K. LTD. Manchester, U.K............................................................... 12,000(1) -------------- TOTAL PLASTICS, INC. Detroit, Michigan............................................................. 32,000(1) Elk Grove Village, Illinois................................................... 15,000(1) Fort Wayne, Indiana........................................................... 15,000(1) Grand Rapids, Michigan........................................................ 22,000(1) Kalamazoo, Michigan........................................................... 50,000(1) -------------- 134,000 GRAND TOTAL 2,741,800 -------------- -------------- SALES OFFICES (LEASED) Buffalo, New York............................................................. Detroit, Michigan............................................................. Pittsburgh, Pennsylvania...................................................... Phoenix, Arizona.............................................................. San Diego, California......................................................... Tulsa, Oklahoma...............................................................
- ------------------------ (1) Leased: See Note 5 in the 1996 Annual Report to Stockholders, incorporated herein by this specific reference, for information regarding lease agreements. 4 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. 5 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 1996 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 1996 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. 6 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AND TITLE AGE BUSINESS EXPERIENCE - ------------------------------------ --- --------------------------------------------------------------------- Michael Simpson 58 Mr. Simpson began his employment with the registrant in 1968. In 1974 Chairman of the Board 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 61 Mr. Mork began his employment with the registrant in 1957. In 1977 President and Chief Executive Mr. Mork was elected to the position of Vice President--Eastern Officer Region and in 1988 to the position of Senior Vice President and Chief Operating Officer. In 1990 Mr. Mork was made President and Chief Executive Officer. Edward F. Culliton 55 Mr. Culliton began his employment with the registrant in 1965. Mr. Vice President and Chief Financial Culliton was elected Corporate Secretary in 1972 and Treasurer in Officer 1975. In 1977 he was elected Vice President of Finance. He is the Chief Financial Officer. Sven G. Ericsson 48 Mr. Ericsson began his employment with the registrant in 1989. Mr. Vice President--International Ericsson was elected to the position of Vice President--Eastern Region in 1989, Vice President--Plate and Carbon Products Group in 1992, and Vice President-- International in 1995. M. Bruce Herron 51 Mr. Herron began his employment with the registrant in 1970. Mr. Vice President--Western Region Herron was elected to the position of Vice President-- Western Region in 1989. Stephen V. Hooks 45 Mr. Hooks began his employment with the registrant in 1972. Mr. Hooks Vice President--Midwest Region was elected to the position of Vice President-- Midwest Region in 1993. Fritz Oppenlander 44 Mr. Oppenlander began his employment with the registrant in 1996 and Vice President--Operations was elected Vice President--Operations in 1996. Richard G. Phifer 52 Mr. Phifer began his employment with the registrant in 1990. Mr. Vice President--Eastern Region Phifer was elected to the position of Vice President-- Plate and Carbon Products Group in 1991, and Vice President--Eastern Region in 1992. Alan D. Raney 45 Mr. Raney began his employment with the registrant in 1986. Mr. Raney Vice President--Advanced Materials was elected Vice President--Midwest Region during 1989, and Vice Group President--Advanced Materials Group in 1990. Robert A. Rosenow 43 Mr. Rosenow began his employment with the registrant in 1977. In Vice President--Plate and Carbon 1995, Mr. Rosenow was elected Vice President--Plate and Carbon Group Products Group.
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NAME AND TITLE AGE BUSINESS EXPERIENCE - ------------------------------------ --- --------------------------------------------------------------------- Gise Van Baren 65 Mr. Van Baren began his employment with the registrant's Hy-Alloy Vice President--Alloy Products Group Steels Co. (acquired in 1973) in 1954. He became Vice President of and President--Hy-Alloy Steels Hy-Alloy in 1976 and President in 1979. He was elected Vice Division President--Alloy Products Group in 1991. Paul J. Winsauer 45 Mr. Winsauer began his employment with the registrant in 1981. In Vice President--Human Resources 1996, Mr. Winsauer was elected to the position of Vice President--Human Resources. James A. Podojil 54 Mr. Podojil began his employment with the registrant in 1968. In 1977 Chief Accounting Officer and he was elected to the position of Controller and in 1985 was elected Treasurer/Controller to the additional post of Treasurer. Jerry M. Aufox 54 Mr. Aufox began his employment with the registrant in 1977. In 1985 Secretary and Corporate Counsel he was elected to the position of Secretary and Corporate Counsel. He is responsible for all legal affairs of the registrant.
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 10, 1997 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 10, 1997, 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 10, 1997, 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 10q-K pursuant to Regulation 14A, which involves the election of Directors. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Financial statements (incorporated by reference to the 1996 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 1996. 9 A. M. CASTLE & CO. INDEX TO FINANCIAL STATEMENTS AND SCHEDULES 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 1996 Annual Report to Stockholders of A. M. Castle & Co., included herein-- Consolidated Statements of Income--For the years ended December 31, 1996, 1995, and 1994............................................................. Page 17 Consolidated Statements of Reinvested Earnings--For the years ended December 31, 1996, 1995, and 1994................................................... Page 17 Consolidated Balance Sheets--December 31, 1996, 1995, and 1994............... Page 18 Consolidated Statements of Cash Flows--For the years ended December 31, 1996, 1995, and 1994............................................................. Page 19 Notes to Consolidated Financial Statements................................... Pages 20-24 Report of Independent Public Accountants..................................... Page 24 Exhibits: 20--Report furnished to security holders..................................... Exhibit A 3--Articles of Incorporation and amendments.................................. Exhibit B 3--By laws of the Company.................................................... Exhibit C 10--Long term incentive compensation plan.................................... Exhibit D 10--1990 restricted stock and stock option plan.............................. Exhibit E 10--Description of management incentive plan................................. Exhibit F 10--1996 restricted stock and stock option plan.............................. Exhibit G
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, 1995. 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. 10 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. 1996 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 3, 1997. 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. [/S/ ARTHUR ANDERSEN LLP] Arthur Andersen LLP Chicago, Illinois, February 3, 1997 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 3, 1997 included in this Annual Report on Form 10-K for the year ended December 31, 1996; and 2. Our report dated February 3, 1997 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1996. [/S/ ARTHUR ANDERSEN LLP] Arthur Andersen LLP Chicago, Illinois March 15, 1997 11 SCHEDULE II A. M. CASTLE & CO. ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 --------- --------- --------- Balance, beginning of year $ 600 $ 600 $ 600 Add--Provision charged to income 245 530 345 --Recoveries 223 86 154 --From acquisitions 80 Less--Uncollectible accounts charged against allowance................ (468) (616) (499) --------- --------- --------- Balance, end of year.................................................. $ 680 $ 600 $ 600 --------- --------- --------- --------- --------- ---------
12 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, 1997 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. SIGNATURE TITLE DATE - ------------------------------ ------------------------- -------------------- /s/ MICHAEL SIMPSON - ------------------------------ Chairman of the Board March 1, 1997 Michael Simpson /s/ RICHARD G. MORK President--Chief - ------------------------------ Executive Officer, and March 1, 1997 Richard G. Mork Director /s/ EDWARD F. CULLITON Vice President--Chief - ------------------------------ Financial Officer, and March 1, 1997 Edward F. Culliton Director /s/ WILLIAM K. HALL - ------------------------------ Director March 1, 1997 William K. Hall /s/ ROBERT S. HAMADA - ------------------------------ Director; Chairman, Audit March 1, 1997 Robert S. Hamada Committee /s/ JOHN W. MCCARTER, JR. - ------------------------------ Director March 1, 1997 John W. McCarter, Jr. /s/ WILLIAM J. MCDERMOTT - ------------------------------ Director March 1, 1997 William J. McDermott II-1 EX-13 2 EXHIBIT 13 1996 ANNUAL REPORT A. M. CASTLE & CO. [LOGO] BUILDING VALUE FOR OUR CUSTOMERS AND SHAREHOLDERS CORPORATE PROFILE Founded in 1890, A. M. Castle & Co. provides highly engineered materials and value-added processing services to a wide range of industrial companies within the $600 billion producer durable equipment sector of the economy. Our customer base includes many Fortune 500 companies as well as thousands of medium and smaller-sized ones spread across the entire spectrum of metals-using industries. Within our core specialty metals business, we are recognized as North America's largest industrial distributor of carbon, alloy and stainless steels; nickel alloys; aluminum; titanium; copper and brass; as well as the industry pioneer and premier provider of materials management programs that are designed to reduce our customers' total costs. Through our subsidiary, Total Plastics, Inc., we also distribute a broad range of value-added industrial plastics. Together, Castle and its affiliated companiesoperate 41 locations throughout North America. Our common stock is traded on the American Stock Exchange under the ticker symbol CAS. OUR CORPORATE GOALS - Market Leadership in all Core Products - Supplier of Choice to Our Customers - World Class Quality Process - Consistently Competitive Returns on Capital - Superior Long-Term Total Returns to Shareholders ABOUT THE COVER The twin towers have been Castle's signature for decades, symbolizing a dual commitment to building value for customers and shareholders that dates back more than a century. Simply stated, this commitment is the unifying strategy of Castle. It defines our product and service offering. It drives our investments in new processes, technologies and equipment. It inspires our people to set stretch targets for themselves -- some well beyond what seem realistically doable. And it fuels our ability to achieve profitable growth. In this Annual Report, we present our long-term strategy to provide increased value to both our customers and our shareholders. TABLE OF CONTENTS Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . .Page 1 Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . .Page 2 Investment Report. . . . . . . . . . . . . . . . . . . . . . . . . . .Page 5 Senior Management Answers Questions from the Financial Community . . . . . . . . . . . . . . . .Page 6 Eleven-Year Financial & Operating Statements . . . . . . . . . . . . .Page 12 Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . .Page 14 Consolidated Statements and Notes. . . . . . . . . . . . . . . . . . .Page 17 Management and Shareholder Information . . . . . . . . . .Inside Back Cover THE YEAR IN BRIEF (dollars and shares in thousands except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- % 1996 1995 Change - ----------------------------------------------------------------------------------------------------------------------------------- Operating Results Net sales. . . . . . . . . . . . . . . . . . . . . $672,617 $ 627,826 7% Gross profit on sales. . . . . . . . . . . . . . . 191,166 173,398 10% Income before taxes. . . . . . . . . . . . . . . . 43,136 44,334 (3%) Net income . . . . . . . . . . . . . . . . . . . . 26,104 26,826 (3%) Per Share of Common Stock Net income . . . . . . . . . . . . . . . . . . . . 1.86 1.93 (3%) Dividends. . . . . . . . . . . . . . . . . . . . . .57 .43 32% Stockholders' equity . . . . . . . . . . . . . . . 8.70 7.41 17% Balance Sheet Total assets . . . . . . . . . . . . . . . . . . . 261,370 222,549 17% Total debt . . . . . . . . . . . . . . . . . . . . 43,416 30,771 41% Total equity . . . . . . . . . . . . . . . . . . . 121,926 103,363 18% Working capital. . . . . . . . . . . . . . . . . . 80,009 84,382 (5%) Cash flow* . . . . . . . . . . . . . . . . . . . . 31,112 31,285 (1%) Average shares outstanding . . . . . . . . . . . . 13,999 13,894 1% Selected Ratios Return on sales. . . . . . . . . . . . . . . . . . 3.9% 4.3% (9%) Return on assets . . . . . . . . . . . . . . . . . 10.0% 12.0% (17%) Return on opening equity . . . . . . . . . . . . . 25.3% 32.6% (22%) Current ratio. . . . . . . . . . . . . . . . . . . 2.0 2.1 (5%) Debt-to-capital ratio. . . . . . . . . . . . . . . 26.3% 22.9% 15% - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
* NET INCOME PLUS DEPRECIATION ALL PER SHARE FIGURES HAVE BEEN RESTATED TO REFLECT A 5 FOR 4 STOCK SPLIT DECLARED IN APRIL 1996. [3 BAR CHARTS] On page 1, there are 3 bar charts on the bottom third of the page. The bar chart to the far left shows on net sales in millions of dollars, the horizontal access being the years 1992, 1993, 1994, 1995 and 1996; the vertical access being dollars in millions running from $200 million to $800 million. The 5 bars that appear on the chart show net sales for 1992 at $424 million; for 1993 at $474 million; for 1994 at $537 million; for 1995 at $628 million; for 1996 at $673 million. The middle bar chart in the center shows net income for the same five years in millions of dollars. The 5 bars show mid-income for 1992 at $3.6 million; for 1993 at $6.9 million; for 1994 at $15.4 million; for 1995 at $26.8 million; and for 1996 at $26.1 million. The last bar chart on the bottom of page 1 on the far right shows cash flows from operations for the same 5 years in millions of dollars. That chart indicates for 1992 at $8.5 million; for 1993 at $11.7 million; for 1994 at $20.0 million; for 1995 at $31.3 million; and for 1996 at $31.1 million. PAGE 1 TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In 1996, Castle produced a 25% return on shareholders' equity, resulting in a three-year average annual return of 27% -- not only the highest in our industry, but among the very top tier of publicly traded companies. More than any other single measure, this is indicative of the quality of our earnings as well as our ability to effectively utilize our shareholders' capital. It is also reflective of the "new Castle" that we talked about in last year's annual report. Our competitive market position, our service capabilities and our targets have all been moved to a higher plane than those of the company you invested in just a few years ago. We are raising the bar of performance in virtually every aspect of our business. AND WE ARE WORKING WITH ONE OVERRIDING OBJECTIVE IN MIND: TO ACHIEVE A CONSISTENT SUPERIOR RETURN ON OUR SHAREHOLDERS' CAPITAL IN ANY ECONOMIC ENVIRONMENT. 1996 FINANCIAL HIGHLIGHTS Our 1996 numbers confirm the value of our approach. With market growth slowing from the double-digit pace of the past several years, we still posted record revenues of $672.6 million. Our net income of $26.1 million, or $1.86 per share, was the second highest earnings in a company history that stretches back more than a century. We generated cash flow from operating activities of $34.9 million and ended the year with a debt-to-total capital ratio of 26% -- and that's after acquiring three new platform businesses with exciting growth potential and investing over $22 million in new plant and equipment. While much has changed at Castle, OUR BASIC MISSION -- TO BUILD AND DISTRIBUTE SHAREHOLDER VALUE -- IS STILL VERY MUCH INTACT. Always mindful of our positioning as a long-term growth and current income investment vehicle, we distributed $8 million to shareholders in dividends during 1996. This amount reflects both a five-for-four stock split in the form of a 25% stock dividend, and a 25% cash dividend increase on the larger number of shares outstanding after the stock distribution. Over the past three years, we have raised our dividend three times, more than doubling the cash payout -- THE STRONGEST CONFIRMATION OF OUR ABILITY TO DISTRIBUTE SHAREHOLDER VALUE. In fact, while it is not widely recognized, Castle's dividend yield of 3% is significantly higher than the 1.8% yield offered by the benchmark S&P 500 index. COMPETITIVE STRENGTHS FOR THE LONG TERM That said, the balance of this Annual Report will focus on the ways in which we intend to continue building the long-term value of your investment in our company. This begins with a sound business strategy, and, over the past decade, we have laid the foundation for sustained competitive advantage. We've targeted the North American producer durable equipment market -- which offers a winning combination of above average long-term growth potential, excellent risk diversification and significant export opportunity. We've focused on highly engineered materials in which we have achieved industry-leading market positions. We've invested aggressively in leading-edge, value-added processing capabilities and service concepts that leverage our core strengths in materials management and logistics. And we've made sustainable improvements in our gross margins, operating expense ratios and inventory "turn and earn" -- the key performance measures that drive our bottom line. In short, WE'VE CREATED WHAT WE BELIEVE TO BE ONE OF THE STRONGEST AND BEST POSITIONED FRANCHISES IN INDUSTRIAL DISTRIBUTION TODAY. BUILDING VALUE THROUGH DIVIDENDS [BAR CHART] On page 2 there is a bar chart on the lower right quarter of the page showing cash dividends in millions of dollars paid for the years 1994, 1995 and 1996. The chart indicates that for 1994 at $3.6 million; for 1995 at $6.0 million; and for 1996 $8.0 million. PAGE 2 - -------------------------------------------------------------------------------- [PHOTO] Richard G. Mork, PRESIDENT AND CHIEF EXECUTIVE OFFICER Michael Simpson, CHAIRMAN On page 3 in the upper right hand corner of the page, there is a picture showing Mr. Richard G. Mork, President and Chief Executive Officer and Mr. Michael Simpson, Chairman, standing; Mr. Mork being on the left and Mr. Simpson being on the right and the background is the Castle logo. With our major investments in service capabilities and infrastructure largely in place, the "up-side" earnings leverage in our core business is very significant. But to further strengthen our competitive advantage, we continue to invest aggressively in the long-term growth of our business in order to extend our market reach, enhance operations and increase service levels. During 1997, our major capital expenditures will include: - - opening a 100,000 square foot facility in Charlotte, North Carolina, a "geo" center capable of serving an extended geography with a wide range of value-added processing capabilities -- many unique to this rapidly growing market; - - doubling the size of H-A Industries, our state-of-the-art Hammond, Indiana, based bar processing center to 240,000 square feet to accommodate an expanded range of high value-added heat-treating, straightening and centerless grinding operations; - - introducing other innovative plate processing systems including water-jet; plasma bevel cutting; and the most advanced laser cutting equipment in the industry; and - - installing automated warehouse management systems in Chicago and Cleveland to reduce cycle time and improve customer service levels, while enhancing warehouse productivity. IN ADDITION TO CONTINUED EXPANSION OF OUR CORE BUSINESS, RECENT ACQUISITIONS HAVE OPENED THE DOORS TO NEW MARKETS AND DISTRIBUTION CHANNELS. Both Total Plastics, Inc. ("TPI") and Cutter Precision Metals, Inc. are actively seeking acquisitions and/or startup operations that will expand their top-line growth and geographic reach. And through our joint venture operation with Kreher Steel Co., we've gained instant entree to a major market channel for our core products that we had not previously served. These new "platform" companies are yet another indication of how much we've changed. The strength of our balance sheet allows us to pursue opportunities such as these and still maintain an investment-grade rating on our debt. PLATFORM FOR THE LATE 90S So what is our outlook for the balance of this decade? From a pure market perspective, we have a convergence of three positive forces -- a less volatile business cycle; a balanced, albeit slowing, economic expansion; and a significant export opportunity -- all of which create the backdrop for a positive operating environment for our customers, and therefore, a favorable climate for Castle. On the internal side of the equation, we are moving on many fronts to strengthen our leadership within the industrial distribution business. We are vigorously growing our core specialty metals business -- which we believe can achieve significant average annual top-line growth and positive operating leverage. We are enriching our bottom-line growth potential through new "platform" companies such as TPI and Cutter PAGE 3 Precision Metals. We are fine-tuning our operations to further improve efficiency and productivity. MOST COMPELLING OF ALL, WE ARE RAISING THE THRESHOLDS FOR EXPECTED RETURN ON OUR SHAREHOLDERS' CAPITAL RANGING FROM 15% AT THE BOTTOM OF THE CYCLE TO 25% AND MORE IN PEAK PERIODS -- A VAST IMPROVEMENT OVER THE HISTORICAL PERFORMANCE ACHIEVED IN OUR INDUSTRY. During 1996, we also spent considerable time communicating our enhanced outlook to the investment community. Reflecting our commitment to provide our shareholders with the same depth and quality of information as the analysts, fund managers and retail brokers who follow our company, we present excerpts from our ongoing dialog with investors beginning on page 6 of this report. VALUING OUR FRANCHISE Putting all this together, what is the impact on the real bottom line, our long- term total return to shareholders? Over the last three years, our total annual return, buoyed by 1995's 106% performance, averaged a strong 31% versus 20% for the S&P 500 index: over the last five years it also averaged 31% versus 15% for the S&P 500 index. IN FACT, MEASURED OVER VIRTUALLY ANY LONG-TERM TIME FRAME, CASTLE HAS OUTPERFORMED THE S&P 500 BENCHMARK. Going forward, while we can't make any predictions or forecasts, we believe that, based on the favorable long-term outlook for our target market, our dominant competitive position, and superior dividend yield, Castle represents a compelling investment vehicle. In essence, we offer investors an opportunity to participate in the growth of a wide range of companies across the entire spectrum of metals-using industries through a single investment. Of the more than 35,000 companies that make up this "customer portfolio" the majority are growing at a rate above GDP. The result: a dynamic and highly diversified investment in a world class industrial base; with a reliable and above average income component; and a shareholder-oriented management team with a proven track record of delivering superior long-term total returns. Such encouraging facts make us confident custodians of your investment, and we appreciate your continued support. More than ever, we are also grateful for the opportunity to work with our customers, our suppliers and our business partners in creating value. In 1996, we were pleased to welcome 265 people from TPI and Cutter Precision into the Castle organization. They join a work force of 1,230 highly motivated professionals, proud of our past, excited by our future, viewing change as opportunity, and most importantly, convinced that our best years are ahead of us. /s/ Michael Simpson /s/ Richard G. Mork Michael Simpson Richard G. Mork Chairman President and Chief Executive Officer February 17, 1997 BUILDING VALUE THROUGH SUPERIOR RETURNS ON SHAREHOLDERS' CAPITAL [BAR CHART] Page 4 shows a bar chart in the lower left quarter of the page. It depicts return on opening shareholder's equity in percents for the years 1994, 1995 and 1996. The points on that chart show for 1994 at 22.2%; for 1995 at 32.6%; and for 1996 at $25.3%. PAGE 4 INVESTMENT REPORT - -------------------------------------------------------------------------------- After achieving a 106.6% total return on investment in 1995, we "gave back" a small portion of this extraordinary performance in 1996, producing a negative 11.9% total return (stock appreciation plus reinvestment of dividends) for the twelve-month period ended December 31, 1996. Needless to say, we are dissatisfied with this result. However, as emphasized in last year's report, we believe that the real test of any equity is how well it does over the long haul, meaning periods of at least three years. Measured over virtually any long-term time frame, we have outperformed the benchmark S&P 500 index; the Lipper Growth & Income index, which reflects the performance of over 380 mutual funds with a similar long-term growth and current income orientation; and the inflation rate, as measured by the Consumer Price Index. The charts presented on this page offer several different perspectives on our investment performance. CASTLE VERSUS S&P 500 AND LIPPER GROWTH & INCOME INDICES The table below compares Castle's stock performance with the S&P 500 and the Lipper Growth & Income Indices. The results confirm that, measured over any long-term time frame, we have outperformed our benchmark indices.
COMPOUND TOTAL RETURNS 1 Year 3 Year 5 Year 10 Year 15 Year - ---------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------- Castle (11.9%) 31.1% 30.7% 22.2% 18.4% - ---------------------------------------------------------------------------------------------- S&P 500 23.0% 19.7% 15.2% 15.3% 16.8% - ---------------------------------------------------------------------------------------------- Lipper Growth & Income 20.7% 16.9% 14.6% 13.6% 15.4% - ----------------------------------------------------------------------------------------------
[BAR CHART] On page 5, there are 2 graphs. The first is in the lower left hand quarter of the page showing the total return on an investment in Castle versus the S&P 500 versus inflation. The graph runs on the horizontal access from 1982 through 1996 and on the vertical access from $100 to $1,500. The points of the graph are as follows: Year Castle S&P 500 Inflation 1982 99.2 121.5 103.9 1983 152.3 148.9 107.8 1984 155.3 158.2 112.5 1985 209.5 208.5 116.4 1986 170.6 247.4 118.6 1987 216.3 260.5 123.9 1988 349.3 303.7 129.3 1989 356.2 399.9 135.5 1990 323.5 387.5 143.8 1991 331.9 505.6 148.2 1992 371.4 544.5 152.7 1993 563.7 598.9 157.1 1994 696.3 606.7 161.4 1995 1,438.6 834.6 165.5 1996 1,267.4 1,026.5 172.5 TOTAL RETURN ON AN INVESTMENT IN CASTLE This graphs shows the relative value of a $100 initial investment in Castle stock compared with the Standard and Poor's 500 Index and the inflation rate. During 1996, a $100 investment produced a negative total return of 11.9% compared with 23.0% for the S&P 500 Index and an inflation rate of 3.0%. However, over the 15-year period ended December 31, 1996, Castle generated an 18.4% compound annual rate of return versus 16.8% for the S&P 500 and an annual inflation rate of 4.2%. [BAR CHART] The second graph on page 5 in the lower right hand quarter illustrates Castle's dividend record compared to the S&P 500 with the assumption that you are receiving $100 of dividends in 1982 and how that would have grown through 1996. The points on the graph are as follows: Year Castle S&P 1982 100.00 100.00 1983 59.57 103.20 1984 79.79 113.97 1985 110.64 114.99 1986 122.34 120.52 1987 117.02 128.24 1988 138.30 141.63 1989 180.85 160.84 1990 191.49 176.13 1991 154.26 177.58 1992 117.02 180.20 1993 117.02 183.11 1994 138.30 191.85 1995 228.72 200.73 1996 303.19 216.89 CASTLE'S DIVIDEND RECORD During 1996, Castle continued its 63-year record of consecutive quarterly cash dividend payments with payouts approximating $8 million, or 57 cents per share. As illustrated, during the 15-year period ended December 31, 1996, Castle's dividends rose at a compound annual rate of 8.7%, versus a 5.5% rate for the S&P 500 Index. PAGE 5 SENIOR MANAGEMENT ANSWERS QUESTIONS FROM THE FINANCIAL COMMUNITY How do we build value for customers and shareholders? For Castle it starts with an unwavering adherence to five fundamentals of business success: - - CUSTOMER FOCUS: Our success will be measured by our ability to help customers improve the performance of their businesses by providing superior value that sets us apart from other suppliers and promotes long-term relationships. - - CONTINUOUS IMPROVEMENT: We will be distinguished by our agility at seizing emerging market opportunities, anticipating customer needs and providing innovative solutions, and enhancing performance in all aspects of our business. - - INSPIRED PEOPLE: Our achievement-focused environment will provide demanding performance standards, recognition and reward for accomplishments, and significant opportunities for personal growth and advancement. - - PERFORMANCE STANDARDS: Our hallmark will be success in every market we pursue, every product we provide, and every service we offer in order to build and return value to both customers and shareholders. - - INTEGRITY: Our reputation is our single most important asset: it will be identified with the uncompromised commitment and integrity with which we pursue our business. PAGE 6 On page 7, in the upper border of the page, there is a picture of Richard G. Mork, President and Chief Executive Officer sitting at a desk. [PHOTO] Dick Mork PRESIDENT AND CHIEF EXECUTIVE OFFICER - -------------------------------------------------------------------------------- In a series of questions and answers, senior management describe the vision, strategy, and accomplishments which will lead Castle into the 21st century Q. WE KNOW YOU'VE SUCCESSFULLY SERVED THE PRODUCER DURABLE EQUIPMENT SECTOR OF THE ECONOMY. HOW IS THIS MARKET FARING AND HOW DO YOU SEE IT EVOLVING OVER THE NEXT SEVERAL YEARS? A. Dick Mork: The "rust belt renaissance" is one of the great under-reported stories of the past several years. It wasn't all that long ago that America's industrial companies were being written off completely. Today, they are the acknowledged global leaders in building the capital equipment that drives the world economy. From 1992 through 1995, we saw a tremendous growth spurt in our sector with consecutive annual double-digit growth. In 1996, the rate of growth in our market has understandably slowed, but -- and we can't emphasize this enough -- with very few exceptions, it is running at healthy and historically high levels of activity. In fact, if you look at the diverse range of industries which comprise the producer durable equipment market, virtually all are growing at rates which exceed the GDP as a whole. Q. WHAT ARE SOME OF THE KEY INDUSTRIES THAT YOU SERVE? A. Mike Simpson: First, let me point out that, within what is over a $600 billion target market, no single industry accounts for more than 6% of our total business and, no one customer, more than 2%. Second, over the long haul -- and that's not quarter-to-quarter or even necessarily year-by-year -- we are very confident that all of the industries that comprise the producer durable equipment sector will continue to outperform the U.S. economy as a whole. That said, some of the sectors that are presently well ahead of the curve include the oil field tool and equipment, commercial aviation and aerospace industries. Their buoyancy counters some of the current volatility in electronics and computer manufacturing, which, as important as they are to us, still represent, in aggregate, only 2% of our total business. This is the beauty of our risk diversification strategy: we've created a market portfolio with above average secular growth potential; and a highly diversified range of industries, customers and geographic markets that, on balance, mitigate our exposure to the cyclicality of any one sector. Q. WHAT OTHER FACTORS WILL AFFECT YOUR GROWTH IN SPECIALTY METALS OVER THE LONG TERM? A. Ed Culliton: We are benefiting from a very favorable environment for the metals service center industry. Spurred by increasing customer demand for advanced materials management concepts like just-in-time delivery systems, sole-sourcing relationships, outsourcing, quality assurance and cycle-time reduction -- the very things which Castle is ideally equipped to provide, our industry's share of market for highly engineered metals has climbed to approximately 40%. And according to industry analysts, who are quite "bullish" on the long-term prospects, our industry's participation could reach 45% by the year 2000 and 50% within ten years. BUILDING VALUE THROUGH MARKET DIVERSIFICATION - ----------------------------------------------------------------------------- INDUSTRIES PRODUCT APPLICATIONS - ----------------------------------------------------------------------------- Aerospace Nickel Alloys, Aluminum & Titanium - ----------------------------------------------------------------------------- Bearings Alloy Bars - ----------------------------------------------------------------------------- Specialized Machinery Heavy Processed Plate, Carbon & Alloy Bar - ----------------------------------------------------------------------------- Oil Patch Alloy Bar & Plate - ----------------------------------------------------------------------------- Chemicals Corrosion Resistant Nickels & Stainless Steels - ----------------------------------------------------------------------------- Hand Tools Alloy Bar - ----------------------------------------------------------------------------- Defense Beveled Plate, Aerospace Nickel, Stainless and Aluminum - ----------------------------------------------------------------------------- Machine Tools Heavy Plate & Alloy Bar - ----------------------------------------------------------------------------- Healthcare Titanium - ----------------------------------------------------------------------------- Transportation Cold Finished & Alloy Bar - ----------------------------------------------------------------------------- Recreation Alloy Bar - ----------------------------------------------------------------------------- CASTLE SERVES LITERALLY HUNDREDS OF SIC CODES. THE PRODUCTS AND INDUSTRIES SHOWN IN THIS MATRIX ARE THEREFORE ONLY REPRESENTATIVE OF THE DIVERSIFIED RANGE OF INDUSTRIES SERVED. PAGE 7 On page 8, there is a picture in the upper border of the page towards the left showing Michael Simpson, Chairman of the Board, sitting at a desk. [PHOTO] Mike Simpson CHAIRMAN - -------------------------------------------------------------------------------- Q. HOW DOES CASTLE DIFFERENTIATE ITSELF TO MEET ITS CUSTOMERS' NEEDS? A. Mork: One of our most important strengths lies in providing our customers with the latest equipment, technologies and processes -- well in advance of our competition. Our early lead in attaining ISO 9002 certification is a great example of this approach. Back in 1992, we anticipated that ISO 9000 -- the international quality standard -- would ultimately become a prerequisite for competing in a global market. With as much as 30% of our customers' production destined for export markets, we initiated this process at our Hy-Alloy Steels facility. Not because our competitors were doing so. In fact, none of our major competitors had begun this painstaking process. But we went ahead because we spotted a window of opportunity to provide our customers with a standard of quality that was not available elsewhere in the industry. We're proud to add that, in 1996, we completed this certification process throughout our North American distribution network. With quality already equal to or better than our competitors, ISO took us to world-leading levels and provided us with yet another competitive advantage. Q. WHAT ELSE GIVES YOU A COMPETITIVE EDGE IN THE SPECIALTY METALS BUSINESS? A. Simpson: Perhaps the biggest edge comes from leveraging our singular focus on highly engineered materials such as carbon, alloy and stainless steels; nickel alloys; aluminum and titanium across the entire spectrum of North American metals-using industries. Within our core markets, we provide a full range of value-added processing and materials management services that raise the value of our total performance to the highest level possible. Our objective is not to simply keep pace with the market, but to get ahead of it with innovative, leading-edge capabilities such as heat-treating, straightening and centerless grinding -- product finishing operations previously performed at the producer level, and value-added information and communication systems that are designed to drive down our customers' total costs. Q. THE SPECIALTY METALS SEGMENTS THAT CASTLE FOCUSES ON IS ONLY A $6.0 BILLION SUBSET OF THE LARGER OVERALL METALS MARKET. DO YOU HAVE ANY PLANS TO PENETRATE THE COMMODITY SECTOR OF THE BUSINESS? A. Culliton: The commodity segment of our market is the right answer for some companies in our industry, but the wrong answer for us. Back in the early 80s, we made the decision to exit the commodity market. Our plan was simple: to concentrate exclusively on highly engineered materials which offer higher, more stable gross margins. In these markets, where there are more than 15,000 specific items, sophisticated inventory management processes are critical. Our vision was to develop a unique package of capabilities including: inventory depth and breadth; a full range of pre-processing services; a certified quality process; advanced computer and customer communication systems; and technical expertise in the production and application of the metals we sell that would propel us to an industry-leading market position in all of our core products. We've spent more than a decade at this, making major improvements every year. And the results have more than justified that effort. Today we're number one in more than half of our core product markets and number two or three in an additional 25%, but we're still not satisfied. BUILDING VALUE THROUGH COMPETITIVE ADVANTAGE CASTLE'S COMPETITIVE ADVANTAGES - - Industry's broadest and deepest selection of grades, conditions, sizes and finishes - - Wide range of value-added processes, many finishing operations unique to Castle - - Geographic coverage provides next-day delivery to over 90% of markets - - Size affords economies of scale, purchasing power, low-cost supplier position - - Technological expertise in designing customized metals solutions - - Alliances provide combined capabilities where appropriate - - "One-stop shopping" for highly engineered metals PAGE 8 On page 9, there are 2 photographs in the upper border of the page. The one on the left is of Edward F. Culliton, Vice President and Chief Financial Officer sitting at a desk writing, and one to the right of that is Richard G. Mork. [PHOTO] Ed Culliton VICE PRESIDENT AND CHIEF FINANCIAL OFFICER [PHOTO] Dick Mork Q. RAPID CHANGES IN TECHNOLOGY SEEM TO BE AFFECTING JUST ABOUT EVERY COMPANY IN EVERY INDUSTRY. HOW BIG A ROLE DOES TECHNOLOGY PLAY IN THE METALS DISTRIBUTION INDUSTRY? A. Mork: In our business, investing in technology takes two forms, the first being the process technology required to offer value-added processing of our customers' products. Increasingly, we've seen a movement toward computer numeric control, ever tighter tolerances -- some to within one-thousandths of an inch -- and greater sophistication in order to build more value into the final product. At Castle, we're investing aggressively in advanced processing capabilities some of which, historically, were never contemplated by the metals service center industry. Similarly, early investments in leading-edge information technology enabled us to pioneer integrated supplier relationships in our industry. Ten years ago, we generated less than 5% of our total business from these relationships, which rely heavily on electronic data interchange. In 1996, they represented approximately 50% of sales. But, with the increasing pace of change, we can never stand still. We are continuously working to expand and improve upon what we call our Total Service Concept. Q. CASTLE WAS VERY ACTIVE IN MAKING ACQUISITIONS IN 1996. CAN YOU TELL US WHAT'S BEHIND YOUR ACQUISITION STRATEGY? A. Simpson: Backed by the strongest balance sheet and operating cash flow in our company history, we acquired two platform businesses that weren't actually on the market, but that offered the best fit -- in terms of their growth potential, value-added service orientation and culture. Both Total Plastics ("TPI"), a Midwest-based industrial plastics distributor, and Cutter Precision Metals, a Pacific Northwest-based aluminum plate distributor and precision processor, were $25 million companies at their date of acquisition. And both are well on the way toward their goal of growing into $100 million regional niche leaders within a five to seven year time frame. I should add that they have been accretive to earnings since day one. We are not turnaround artists. We want to find top-notch companies with strong entrepreneurial management that can execute their vision of growth more rapidly with our financial backing and national reputation. The bottom line of our acquisition strategy is to create value for our customers and, in doing so, to create value for our shareholders. Q. CAN YOU PROVIDE SOME MORE INSIGHT INTO YOUR STRATEGY IN PLASTICS? A. Simpson: TPI enables us to test the concept of transferring our expertise in materials management and logistics into another highly engineered product with a strong value-added component. To give you some background on "why plastics?", this is an industry with an historical growth record in the 7 to 10% per year range. Just as compelling from our perspective, it is an industry that is even more fragmented than metals, and has not yet widely embraced the advanced inventory management techniques and systems that are such an integral part of our business. So, once again, we have identified an attractive opportunity to add value not available elsewhere in the marketplace. BUILDING VALUE THROUGH NEW PLATFORMS RECENT ACQUISITION ACTIVITY - -------------------------------------------------------------------------------- DATE COMPANY SALES* GOAL STRATEGY - -------------------------------------------------------------------------------- 1995 Total Plastics, Inc. $25 MM $100 MM Leveraging logistical skill set - -------------------------------------------------------------------------------- 1996 Pontiac Plastics $10 MM Building our plastics business - -------------------------------------------------------------------------------- 1996 Cutter Precision $25 MM $100 MM Value-added processing - -------------------------------------------------------------------------------- 1996 Kreher Steel $100 MM $300 MM New market channel - -------------------------------------------------------------------------------- *AT DATE OF ACQUISITION PAGE 9 On page 10, in the upper border, is another picture of Michael Simpson. [PHOTO] Mike Simpson - -------------------------------------------------------------------------------- Q. OVER THE PAST THREE YEARS, YOU'VE REDUCED LONG-TERM DEBT BY $20 MILLION. WILL YOUR BALANCE SHEET SUPPORT ADDITIONAL ACQUISITIONS AND/OR MAJOR INVESTMENTS? A. Culliton: The fact that we were able to finish the year with a debt-to- total capital ratio of 26% following the completion of four acquisitions is indicative of the company's solid financial base. Our goal was to improve the efficiency with which we use our assets in our core business rather than a concerted effort to reduce our financial leverage. Actually, we are very comfortable with a debt-to-total capital ratio of 40 to 45%. So, with our ratio well below 30%, we believe we have more than ample resources to fund additional select acquisitions and other investments. Q. SWITCHING GEARS FOR A MOMENT, HOW WOULD YOU EVALUATE YOUR PROGRESS IN YOUR KEY FINANCIAL MEASURES? A. Mork: Since 1992, we've continuously raised the bar on our three key financial measures to levels we would have never dreamed possible. Looking at our 1996 performance, we met the target in our first measure, exceeded the target in our second, but fell short of the target in our third. Let me run through each one briefly. Gross margin, already among our industry's highest, grew almost a full percentage point to 28.4%, reflecting the high value-added orientation of our new platform businesses as well as customer utilization of our ever expanding package of pre-processing services as a way to reduce their total costs. Inventory turn and earn, which is a very critical measurement for us, continued to show dramatic improvement in 1996, reaching an historic high of $1.15 of gross profit for every dollar invested in inventory. Just five years ago, we were earning 65 cents. We set an aggressive 65% target for our ratio of operating expense as a percent of gross profit, and came in a little over 1995's ratio at 72%. While we did achieve solid productivity gains, they weren't enough to completely offset the effects of relatively flat mill pricing in a slightly inflationary environment along with higher levels of transaction activity. But keep in mind that this ratio has improved by 14 percentage points over the last four years -- not a bad performance. Q. NOW THAT YOU'RE TWO MONTHS INTO 1997, WHAT DO YOU SEE AS SOME OF THE KEY OPPORTUNITIES GOING FORWARD? A. Mork: The trend toward outsourcing by OEM's continues to gain momentum and that creates some very exciting opportunities for expanding our market share in 1997. As mentioned earlier, we pioneered the concept of integrated BUILDING VALUE THROUGH INCREASED PRODUCTIVITY [BAR CHART] In the lower third of the page there are 2 bar graphs. The one on the left depicts gross margin improvement in percent over the years 1992 through 1996 and depicts gross margins of 26.0% in 1992; 25.8% in 1993; 27.1% in 1994; 27.6% in 1996; and 27.8% in 1996. [BAR CHART] The bar graph to the right in the lower right hand portion of the page shows inventory turn & earn in dollars for the same 5 year period. It shows that in 1992 it was $.65; in 1993 it was $.74; in 1994 it was $.90; in 1995 it was $.96; and in 1996 it was $1.15. PAGE 10 The top border shows a picture of Edward F. Culliton sitting behind a desk. [PHOTO] Ed Culliton - -------------------------------------------------------------------------------- supply management in our industry, and are currently working with a number of customers to help them take that next step toward a customized and comprehensive service program. We're also excited about the prospects of bringing additional new technologies and value-added processes to our industry. For instance, in response to strong demand for our high value-added bar processing services, we plan to double the size of our operations at H-A Industries. Other innovative new processes which we're very enthusiastic about include the introduction of advanced laser cutting equipment, water-jet and plasma bevel cutting -- all of which will enable us to better serve the needs of our engineered plate customers. It's worth noting that we are the only one in our industry to offer all three of these capabilities. Q. WHAT ARE THE LONG-TERM GROWTH PROSPECTS FOR CASTLE? A. Mork: We believe our growth prospects are excellent -- enough so that we've set long-term average annual growth goals of 7.5 to 10% in revenues and 15 to 20% in earnings. Let me reiterate the three basic facts that underlie our growth prospects. First, we operate in a $600+ billion target market that comprises literally hundreds and hundreds of SIC Codes, and hundreds of thousands of businesses ranging from the top Fortune 500 companies and their mid-sized counterparts, both public and private, all the way to the thousands of job shops which support their efforts. Every day, every single one of these companies consumes metals--historically growing at a rate above GDP. Second, in the last few years, the advanced materials management concepts in which we've developed a competitive advantage have become increasingly invaluable to our target customers as they strive to enhance productivity and quality. And third, as North America's premier distributor of highly engineered metals and value- added services, we are in the best position to meet these needs. Q. ARE THERE ANY OTHER FACTORS UNIQUE TO YOUR SUCCESS? A. Simpson: The values around which we've built our market franchise over the past 100 years will continue to be important to us: our focus on customers; our commitment to be an agent of change; our work environment; our performance standards and our integrity. What we try to do is build value over time--that's not always going to translate into quarter to quarter growth. Instead, by design, we are focused on opportunities that will build lasting value for both our customers and our shareholders. If we keep our focus -- and we intend to do so -- we believe that we can continue to deliver average annual returns to shareholders that consistently exceed the market. That really is our mission -- building long-term value for customers and shareholders. BUILDING VALUE THROUGH TOP-LINE GROWTH On page 11, there are again 2 graphs on the bottom third of the page. [BAR CHART] The bar graph on the lower left hand third of the page shows operating expense as a percentage of gross margin and for the 5 years 1992 through 1996, and it has the following points. For 1992 it is 86%; for 1993 it is 83.4%; for 1994 it is 77%; for 1995 it is 69.5%; and for 1996 it is 72.8%. [PIE CHART] There is a pie chart on the lower left hand third of the page showing where the Company's expected future growth in its core business is to be derived. The Company expects, as shown by the chart, that one-third of its future growth would be derived from the overall increase in metal consumption in North America; an additional one-third of growth would come from the growth of the service center industry market share; and the final one-third growth would come from increases in Castle's market share. PAGE 11 A. M. CASTLE & CO. AND SUBSIDIARIES CONSOLIDATED ELEVEN-YEAR FINANCIAL AND OPERATING SUMMARY
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands). . . . . . . . . . . . . . . . . . . . . . . 331 343 338 SUMMARY OF Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $672.6 $627.8 $536.6 EARNINGS Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 481.4 454.4 391.4 ----------------------------- Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191.2 173.4 145.2 Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . 140.2 121.7 112.1 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 4.5 4.6 ----------------------------- Profit from operations. . . . . . . . . . . . . . . . . . . . . . . . 46.0 47.2 28.5 Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . 2.9 2.9 3.2 ----------------------------- Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 43.1 44.3 25.3 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.0 17.5 9.9 ----------------------------- Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.1 26.8 15.4 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 6.0 3.6 ----------------------------- Reinvested earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 18.1 $ 20.8 $ 11.8 ----------------------------- ----------------------------- - --------------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) . . . . . . . 14,008 13,945 13,850 (NOTE 7) Net income per share. . . . . . . . . . . . . . . . . . . . . . . . . $ 1.86 $ 1.93 $ 1.12 Cash dividends per share. . . . . . . . . . . . . . . . . . . . . . . $ .57 $ .43 $ .26 Book value per share. . . . . . . . . . . . . . . . . . . . . . . . . $ 8.70 $ 7.41 $ 5.94 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80.0 $ 84.4 $ 76.0 POSITION Property, plant and equipment, net. . . . . . . . . . . . . . . . . . $ 62.7 $ 44.5 $ 41.2 AT YEAR-END Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $261.4 $222.5 $213.1 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ -- Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40.9 $ 28.0 $ 38.5 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . $121.9 $103.4 $ 82.2 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9% 4.3% 2.9% RATIOS Asset turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 2.8 2.5 Return on assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0% 12.0% 7.2% Leverage factor . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.7 3.1 Return on opening stockholders' equity. . . . . . . . . . . . . . . . 25.3% 32.6% 22.2% Percent earnings reinvested . . . . . . . . . . . . . . . . . . . . . 69.3% 77.6% 76.6% Percent increase (decrease) in equity . . . . . . . . . . . . . . . . 17.9% 25.8% 18.3% - --------------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment. . . . . . . . . . . . . . $ 22.5 $ 11.8 $ 7.9 Stockholders at year-end. . . . . . . . . . . . . . . . . . . . . . . 1,613 1,618 1,639 Employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . 1,505 1,231 1,185 Per employee data (in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $446.9 $510.0 $452.8 Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . $127.0 $140.8 $122.5 Operating expenses, including depreciation. . . . . . . . . . . . . $ 96.4 $102.5 $ 98.5 Profit from operations. . . . . . . . . . . . . . . . . . . . . . . $ 30.6 $ 38.3 $ 24.0 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands). . . . . . . . . . . . . . . . . . . . . . . 308 249 234 SUMMARY OF Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $474.1 $423.9 $436.4 EARNINGS Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 351.8 313.7 331.1 ----------------------------- Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122.3 110.2 105.3 Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . 102.1 94.9 92.8 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 4.9 5.3 ----------------------------- Profit from operations. . . . . . . . . . . . . . . . . . . . . . . . 15.4 10.4 7.2 Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . 3.8 4.3 6.8 ----------------------------- Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 11.6 6.1 .4 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 2.7 .2 ----------------------------- Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 3.4 .2 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 2.9 3.9 ----------------------------- Reinvested earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.0 $ 0.5 $(3.7) ----------------------------- ----------------------------- - --------------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) . . . . . . . 13,646 13,643 13,643 (NOTE 7) Net income per share. . . . . . . . . . . . . . . . . . . . . . . . . $ .50 $ .25 $ .02 Cash dividends per share. . . . . . . . . . . . . . . . . . . . . . . $ .22 $ .22 $ .29 Book value per share. . . . . . . . . . . . . . . . . . . . . . . . . $ 5.10 $ 4.80 $ 4.74 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 86.1 $ 75.3 $ 79.7 POSITION Property, plant and equipment, net. . . . . . . . . . . . . . . . . . $ 41.0 $ 43.2 $ 47.4 AT YEAR-END Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $204.2 $195.2 $190.4 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ -- $ .2 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58.0 $ 53.0 $ 63.3 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . $ 69.5 $ 65.5 $ 64.7 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5% 0.8% 0.1% RATIOS Asset turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.2 2.3 Return on assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4% 1.7% 0.1% Leverage factor . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 3.0 2.8 Return on opening stockholders' equity. . . . . . . . . . . . . . . . 10.5% 5.2% 0.3% Percent earnings reinvested . . . . . . . . . . . . . . . . . . . . . 58.0% 14.7% -% Percent increase (decrease) in equity . . . . . . . . . . . . . . . . 6.1% 1.2% (5.3%) - --------------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment. . . . . . . . . . . . . . $ 4.6 $ 1.8 $ 3.3 Stockholders at year-end. . . . . . . . . . . . . . . . . . . . . . . 1,625 1,670 1,750 Employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . 1,204 1,196 1,268 Per employee data (in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $393.8 $354.4 $344.2 Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . $101.6 $ 92.1 $ 83.0 Operating expenses, including depreciation. . . . . . . . . . . . . $ 88.8 $ 83.4 $ 77.4 Profit from operations. . . . . . . . . . . . . . . . . . . . . . . $ 12.8 $ 8.7 $ 5.6 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1990 1989 1988 - --------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands). . . . . . . . . . . . . . . . . . . . . . . 248 255 277 SUMMARY OF Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $478.9 $501.1 $499.3 EARNINGS Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 363.6 380.6 375.1 ----------------------------- Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115.3 120.5 124.2 Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . 97.5 96.7 92.6 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 4.4 3.9 ----------------------------- Profit from operations. . . . . . . . . . . . . . . . . . . . . . . . 12.6 19.4 27.7 Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . 6.8 5.1 5.1 ----------------------------- Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 5.8 14.3 22.6 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 5.6 8.9 ----------------------------- Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 8.7 13.7 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9 4.7 3.5 ----------------------------- Reinvested earnings . . . . . . . . . . . . . . . . . . . . . . . . . $(1.8) $ 4.0 $ 10.2 ----------------------------- ----------------------------- - --------------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) . . . . . . . 13,616 13,538 13,481 (NOTE 7) Net income per share. . . . . . . . . . . . . . . . . . . . . . . . . $ .23 $ .64 $ 1.02 Cash dividends per share. . . . . . . . . . . . . . . . . . . . . . . $ .36 $ .34 $ .26 Book value per share. . . . . . . . . . . . . . . . . . . . . . . . . $ 5.02 $ 5.15 $ 4.86 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89.9 $ 75.8 $ 89.0 POSITION Property, plant and equipment, net. . . . . . . . . . . . . . . . . . $ 54.8 $ 45.3 $ 39.4 AT YEAR-END Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $226.6 $202.3 $211.9 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11.9 $ .5 $ -- Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76.7 $ 51.0 $ 61.0 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . $ 68.3 $ 69.7 $ 65.5 - --------------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7% 1.7% 2.7% RATIOS Asset turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.5 2.4 Return on assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4% 4.3% 6.5% Leverage factor . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 3.1 3.8 Return on opening stockholders' equity. . . . . . . . . . . . . . . . 4.5% 13.2% 24.7% Percent earnings reinvested . . . . . . . . . . . . . . . . . . . . . -% 46.3% 74.8% Percent increase (decrease) in equity . . . . . . . . . . . . . . . . (2.0%) 6.4% 18.5% - --------------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment. . . . . . . . . . . . . . $ 13.4 $ 10.4 $ 7.8 Stockholders at year-end. . . . . . . . . . . . . . . . . . . . . . . 1,730 1,747 1,732 Employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . 1,379 1,371 1,373 Per employee data (in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $347.3 $365.5 $363.7 Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83.6 $ 87.9 $ 90.5 Operating expenses, including depreciation. . . . . . . . . . . . . $ 74.5 $ 73.7 $ 70.3 Profit from operations. . . . . . . . . . . . . . . . . . . . . . . $ 9.1 $ 14.2 $ 20.2 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1987 1986 - ---------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands). . . . . . . . . . . . . . . . . . . . . . . 258 231 SUMMARY OF Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $376.1 $322.9 EARNINGS Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 282.1 240.6 -------------------- Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.0 82.3 Operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . 74.9 74.6 Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 3.6 -------------------- Profit from operations. . . . . . . . . . . . . . . . . . . . . . . . 15.4 4.1 Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . 3.3 4.1 -------------------- Income before income taxes. . . . . . . . . . . . . . . . . . . . . . 12.1 0.0 Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 (0.1) -------------------- Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 0.1 Cash dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.0 -------------------- Reinvested earnings . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.6 $ (2.9) -------------------- -------------------- - ---------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) . . . . . . . 13,381 13,325 (NOTE 7) Net income per share. . . . . . . . . . . . . . . . . . . . . . . . . $ .50 $ .01 Cash dividends per share. . . . . . . . . . . . . . . . . . . . . . . $ .22 $ .23 Book value per share. . . . . . . . . . . . . . . . . . . . . . . . . $ 4.14 $ 3.86 - ---------------------------------------------------------------------------------------------------------- FINANCIAL Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47.9 $ 47.5 POSITION Property, plant and equipment, net. . . . . . . . . . . . . . . . . . $ 35.7 $ 38.4 AT YEAR-END Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $158.7 $145.6 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6.0 $ 14.0 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27.8 $ 30.8 Stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . $ 55.3 $ 51.5 - ---------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8% 0.1% RATIOS Asset turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 2.2 Return on assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2% 0.1% Leverage factor . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 2.8 Return on opening stockholders' equity. . . . . . . . . . . . . . . . 12.9% 0.2% Percent earnings reinvested . . . . . . . . . . . . . . . . . . . . . 54.0% -% Percent increase (decrease) in equity . . . . . . . . . . . . . . . . 7.3% (5.0%) - ---------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment. . . . . . . . . . . . . . $ 2.6 $ 6.2 Stockholders at year-end. . . . . . . . . . . . . . . . . . . . . . . 1,750 1,843 Employees at year-end . . . . . . . . . . . . . . . . . . . . . . . . 1,232 1,227 Per employee data (in thousands) Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $305.3 $263.2 Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76.3 $ 67.0 Operating expenses, including depreciation. . . . . . . . . . . . . $ 63.8 $ 63.7 Profit from operations. . . . . . . . . . . . . . . . . . . . . . . $ 12.5 $ 3.3 - 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PAGE 13 A. M. CASTLE & CO. AND SUBSIDIARIES FINANCIAL REVIEW - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This discussion should be read in connection with the information contained in the Consolidated Financial Statements and Notes. OVERVIEW 1996 marked another successful year for A. M. Castle & Co. Sales were the highest in the Company's history, breaking the previous record set in 1995. Earnings also remained strong, finishing as the second highest in Castle's history just behind 1995's record performance. The past year saw Castle aggressively expand its operations, through internal growth and acquisitions, into new markets and complementary lines of business. These new ventures helped achieve record sales levels, and served to offset some of the earnings erosion caused by relatively flat pricing in an inflationary environment in the Company's core business. The current year also showed some slowing in the growth rate of the producer durable goods sector of the economy, as compared to 1995, in which earnings were assisted by rapidly growing demand and a favorable pricing environment at the mill level. Activity levels in 1996 remained strong throughout the year, with the first half outperforming the second half, mainly due to normal seasonal slowdowns that occur during the third quarter summer vacation months and the fourth quarter holiday season. 1996 COMPARED WITH 1995 Net sales for 1996 totaled $672.6 million, an increase of 7.1% over 1995's $627.8 million. Excluding sales generated from our acquisitions, sales declined by 0.4%, with unit volume decreasing by 3.1%. Carbon and stainless steels generated 74% of total sales, with the balance provided by non-ferrous metals. Castle remains committed to its focus on gross margin, a vital component of long-term profitability. In 1996, cost of sales as a percentage of total sales decreased. Gross margin percentage increased to 28.4% compared to 27.6% for 1995. The Company's emphasis on providing value-added services has contributed significantly to the improved margin performance over the past two years. Total gross profit was $191.2 million in 1996, up 10.3% from 1995's level of $173.4 million. Excluding gross margins generated from our acquisitions, gross margin increased slightly by 0.6%. Substantially all inventories are valued using the LIFO (last-in, first-out) method. This method had the effect of decreasing Castle's cost of sales by $8.8 million in 1996, compared with what it would have been on a FIFO basis. Total operating expenses for 1996 were $140.1 million, compared with $121.7 million in the preceding year, a 15.1% increase. Excluding the expenses of our acquired businesses, 1996 operating expenses were up 3.3% as compared to 1995. As a percentage of sales, expenses were 20.8% in 1996 as compared to 19.4% of sales in 1995. Depreciation expense increased by $0.5 million from 1995 primarily due to the additional depreciation expense associated with the acquired companies. Net interest expense declined 2.5% due to lower average borrowings. The Company's income tax rate, at 39.5%, remained unchanged from the previous year. The increased sales revenues, and the effect of the company's operating leverage on incremental sales, helped to offset some of the softness in the economy and provide another strong earnings year for Castle. Continuing focus on gross margins and management of operating expenses also contributed to the strong earnings performance. Earnings for the year totalled $26.1 million, or $1.86 per share, versus $26.8 million, or $1.93, a share in 1995. 1995 COMPARED WITH 1994 In 1995, sales totaled $627.8 million, an increase of 17% over 1994's $536.6 million. Unit volume increased by 1% to 342,700 tons. Carbon and stainless steels generated 77% of total shipments, with the balance provided by non-ferrous metals. Sales growth in dollars outpaced increases in unit volume due to higher prices at the producer level and to improved margins. Average mill prices in 1995 were about 13.8% above 1994 levels. In 1995, material cost as a percentage of total sales decreased. Gross margin percentage rose to 27.6% compared with 27.1% for 1994, primarily due to the higher level of value-added services provided to customers. Gross profit totalled $173.4 million, up 19% from 1994's level of $145.2 million. Strong unit volume increases, higher mill prices, and improved gross margin percentage all contributed to the increase in gross profit. In 1995, LIFO had the effect of increasing Castle's cost of sales by $14.6 million as compared with a $6.1 million increase in 1994. Total operating expenses for 1995 were $121.7 million, compared with $112.1 million in 1994. As a percentage of sales, operating expenses fell to 19.4% as compared to 20.9% in 1994. Depreciation expense decreased slightly while interest expense fell 8% due to lower average borrowings. In 1995, the Company's income tax rate, at 39.5%, increased from the prior year due the full utilization in 1994 of tax loss carryforwards from our Canadian operations. The combination of increased sales revenues and the strong operating leverage created by the Company's focus on gross margins and operating efficiency led to a second consecutive record earnings year in 1995. Earnings for 1995 at $26.8 million, or $1.93 per share, were well over the previous record earnings of $15.4 million, or $1.12 per share, earned in 1994. All per share figures have been adjusted to reflect a five-for-four stock split declared in April 1996. PAGE 14 CAPITAL EXPENDITURES Capital expenditures during 1996 totalled $22.5 million compared with $11.8 million in 1995. Capital expenditures in 1996 included approximately $10.5 million for construction of new facilities in Minneapolis, Minnesota, which opened in mid 1996, and Charlotte, North Carolina, which was put into service in January of 1997. An additional $3.0 million was spent to expand H-A Industries' processing capabilities along with approximately $4.5 million expended for processing and material handling equipment throughout the rest of the Company. The remaining expenditures were aimed at enhancing existing facilities and maintaining property and equipment in good working order. In 1995, approximately $2.9 million was expended for additional production capabilities at H-A Industries, $4.9 million was invested in material handling, sawing, and flame cutting equipment throughout the rest of the Company, and approximately $1.0 million was expended for the purchase of land. The remaining expenditures were aimed at enhancing existing facilities and maintaining property and equipment in good working order. During 1996 and 1995, the Company sold and leased back approximately $2.5 million and $4.1 million of fixed assets respectively, which added to cash flow and reduced long-term borrowing. LIQUIDITY AND CAPITAL RESOURCES Castle continues to make great strides in strengthening its financial position. Strong earnings and cash flows over the past two years have provided funds for capital expansion and acquisitions while long-term borrowings have been maintained at historically low levels. At year end 1996, stockholders' equity had increased 18% over last year to $121.9 million, or $8.70 per share. The previous record earnings achieved in 1995 and 1994 added 49% to stockholders' equity, resulting in a three-year increase in total net worth of 75%. Total borrowings were $43.4 million at year end 1996, as compared to $30.8 million at 1995 year end. Our debt-to-capital ratio was 26% at year end 1996 as compared to 23% at the end of 1995 and 34% at the end of 1994. Accounts receivable rose in 1996 reflecting the increase in sales levels. The number of days sales outstanding at the end of 1996 remained unchanged from 1995. Collections remained strong, exceeding our target levels. Management believes that net receivables at December 31, 1996 are of a very good quality. Inventory levels decreased from 1995 despite the increase in sales. Working capital was $80.0 million at December 31, 1996, compared with $84.4 million at December 31, 1995. Castle had unused committed and uncommitted lines of bank credit of $181.0 million at December 31, 1996, compared with $149.2 million at December 31, 1995. 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. COMMON STOCK INFORMATION Symbol CAS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DIVIDENDS STOCK PRICE RANGE 1996 1995 1996 1995 - -------------------------------------------------------------------------------- First quarter........... $.12 $.096 $20 3/8 $ 25 $ 9 3/4 $11 1/2 Second quarter.......... .15 .096 23 1/2 30 7/8 9 3/4 15 Third quarter........... .15 .12 16 3/4 23 1/4 14 3/8 20 Fourth quarter.......... .15 .12 16 1/8 20 17 5/8 22 5/8 ------------ $.57 $.43 ------------ ------------ - -------------------------------------------------------------------------------- PAGE 15 A. M. CASTLE & CO. AND SUBSIDIARIES SUPPLEMENTAL 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
December 31, - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- (DOLLARS IN MILLIONS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------- Current assets Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.8 $ 0.7 $ 1.0 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . 68.8 63.4 58.9 Inventories, at latest cost. . . . . . . . . . . . . . . . . . . . 152.1 164.1 149.9 --------------------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . 222.7 228.2 209.8 Less--current liabilities. . . . . . . . . . . . . . . . . . . . . (107.4) (104.0) (102.8) --------------------------- Net current assets . . . . . . . . . . . . . . . . . . . . . . . . . 115.3 124.2 107.0 Fixed and other assets, net. . . . . . . . . . . . . . . . . . . . . 97.4 60.7 55.0 --------------------------- Total assets, less current liabilities . . . . . . . . . . . . . 212.7 184.9 162.0 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (40.9) (28.0) (38.5) Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . (11.4) (10.9) (7.8) Postretirement benefit obligations . . . . . . . . . . . . . . . . . (3.2) (2.8) (2.5) Unrecognized inventory gain, net of taxes. . . . . . . . . . . . . . (35.3) (39.8) (31.0) --------------------------- Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $121.9 $103.4 $82.2 --------------------------- --------------------------- - --------------------------------------------------------------------------------------------------------------
PAGE 16 CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $672,617 $627,826 $536,568 Cost of material sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,451 454,428 391,386 -------------------------------------- Gross profit on sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,166 173,398 145,182 -------------------------------------- Expenses Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,144 121,652 112,070 Depreciation (Note 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,008 4,459 4,603 Interest expense, net (Notes 2 and 4). . . . . . . . . . . . . . . . . . . . 2,878 2,953 3,215 -------------------------------------- 148,030 129,064 119,888 -------------------------------------- Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 43,136 44,334 25,294 -------------------------------------- Income taxes (Notes 1 and 3) Federal - currently payable. . . . . . . . . . . . . . . . . . . . . . . . . 12,845 14,114 6,503 - deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 934 (72) 1,474 State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,253 3,466 1,907 -------------------------------------- 17,032 17,508 9,884 -------------------------------------- Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,104 $ 26,826 $ 15,410 -------------------------------------- Net income per share (Notes 1 and 7) . . . . . . . . . . . . . . . . . . . . . $ 1.86 $ 1.93 $ 1.12 -------------------------------------- -------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,998 $61,178 $ 49,409 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,104 26,826 15,410 Cash dividends--$.57 in 1996, $.43 per share in 1995 and $.26 per share in 1994 (Note 7). . . . . . . . . . . . . . . . . . . . . . . (7,978) (6,006) (3,641) -------------------------------------- Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,124 $81,998 $ 61,178 -------------------------------------- -------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. PAGE 17 CONSOLIDATED BALANCE SHEETS
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash (Note 1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,805 $ 667 $ 976 Accounts receivable, less allowances of $700 in 1996 and $600 in 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,791 63,408 58,892 Inventories--principally on last-in, first-out basis (latest cost higher by approximately $58,800 in 1996, $66,300 in 1995 and $51,700 in 1994) (Note 1). . . . . . . . . . . . . . . . . . . . . . . . . 93,315 97,766 98,215 -------------------------------------- Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 163,911 161,841 158,083 -------------------------------------- Prepaid expenses and other assets (Note 1) . . . . . . . . . . . . . . . . . . 34,742 16,245 13,854 -------------------------------------- Property, plant and equipment, at cost (Notes 1 and 5) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,775 4,955 4,062 Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,817 35,485 34,716 Machinery and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . 82,265 64,535 59,497 -------------------------------------- 128,857 104,975 98,275 Less -- accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . 66,140 60,512 57,085 -------------------------------------- 62,717 44,463 41,190 -------------------------------------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $261,370 $222,549 $213,12 -------------------------------------- -------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,860 $ 60,969 $ 61,282 Accrued payroll and employee benefits (Note 6) . . . . . . . . . . . . . . . 10,663 8,681 9,843 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,442 4,095 4,861 Current and deferred income taxes (Notes 1 and 3). . . . . . . . . . . . . . 2,455 958 2,321 Current portion of long-term debt (Note 4) . . . . . . . . . . . . . . . . . 2,482 2,756 3,831 -------------------------------------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 83,902 77,459 82,138 -------------------------------------- Long-term debt, less current portion (Note 4). . . . . . . . . . . . . . . . . 40,934 28,015 38,531 -------------------------------------- Deferred income taxes (Notes 1 and 3). . . . . . . . . . . . . . . . . . . . . 11,427 10,893 7,772 -------------------------------------- Postretirement benefit obligation (Note 6) . . . . . . . . . . . . . . . . . . 3,181 2,819 2,525 -------------------------------------- Stockholders' equity (Notes 1 and 7) Common stock, without par value--authorized 30,000,000 shares; issued and outstanding 14,008,792 in 1996, 13,944,705 in 1995 and 13,849,556 in 1994. . . . . . . . . . . . . . . . . 26,681 25,441 24,114 Earnings reinvested in the business. . . . . . . . . . . . . . . . . . . . . 100,124 81,998 61,178 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 229 244 Treasury stock, at cost (834,439 shares in 1996, 799,268 shares in 1995 and 745,551 shares in 1994) . . . . . . . . . . . . (5,136) (4,305) (3,375) -------------------------------------- Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 121,926 103,363 82,161 -------------------------------------- Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . $261,370 $222,549 $213,127 -------------------------------------- -------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. PAGE 18 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,104 $26,826 $15,410 Adjustments to reconcile net income to net cash provided from operating activities Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,008 4,459 4,603 Gain on sale of facilities/equipment . . . . . . . . . . . . . . . . . . . (112) (90) (106) Increase (decrease) in deferred taxes. . . . . . . . . . . . . . . . . . . 458 3,121 (295) (Increase) in prepaid expenses and other assets. . . . . . . . . . . . . . (3,388) (2,391) (2,766) Vested portion of restricted stock awards. . . . . . . . . . . . . . . . . 198 161 68 Increase in postretirement benefit obligation. . . . . . . . . . . . . . . 362 294 59 -------------------------------------- Cash provided from operating activities before changes in current accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,630 32,380 16,973 -------------------------------------- Increase (decrease) from changes in: Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,619 (4,516) (9,844) Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,835 449 3,357 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,727) (313) 11,300 Accrued payroll and employee benefits. . . . . . . . . . . . . . . . . . . 160 (1,162) 3,861 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 (766) 1,349 Current and deferred income taxes. . . . . . . . . . . . . . . . . . . . . 1,182 (1,363) 1,122 -------------------------------------- Net increase (decrease) from changes in current accounts . . . . . . . . . . . 6,285 (7,671) 11,145 -------------------------------------- Net cash provided from operating activities. . . . . . . . . . . . . . . . . . 34,915 24,709 28,118 -------------------------------------- Cash flows from investing activities Investments and acquisitions (Note 9). . . . . . . . . . . . . . . . . . . . (17,984) -- -- Proceeds from sales of facilities/equipment (Note 5) . . . . . . . . . . . . 2,521 4,140 3,213 Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,544) (11,782) (7,926) -------------------------------------- Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . (38,007) (7,642) (4,713) -------------------------------------- Cash flows from financing activities Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . 23,060 4,685 4,409 Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . (11,091) (16,276) (25,506) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,978) (6,006) (3,641) Net proceeds from issuance of stock. . . . . . . . . . . . . . . . . . . . . 211 236 705 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (15) 76 -------------------------------------- Net cash provided from (used by) financing activities. . . . . . . . . . . . . 4,230 (17,376) (23,957) -------------------------------------- Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . 1,138 (309) (552) Cash--beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 667 976 1,528 -------------------------------------- Cash--end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,805 $ 667 $ 976 -------------------------------------- -------------------------------------- Supplemental disclosures of cash flow information Cash paid during the year for-- Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,997 $ 3,045 $ 3,435 -------------------------------------- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,268 $15,750 $ 9,057 -------------------------------------- -------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. PAGE 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) PRINCIPAL ACCOUNTING POLICIES AND BUSINESS DESCRIPTION NATURE OF OPERATIONS -- The Company is an industrial distributor of specialty metals including carbon, alloy, and stainless steels; nickel alloys; aluminum; titanium; copper and brass; throughout the United States and Canada. The customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized ones in various industries primarily within the producer durable equipment sector. The Company also distributes industrial plastics through its subsidiary Total Plastics, Inc. BASIS OF PRESENTATION -- The financial statements include A. M. Castle & Co. (the Company) and its subsidiaries. All intercompany accounts and transactions have been eliminated. USE OF ESTIMATES -- The financial statements have been prepared in accordance with generally accepted accounting principles which necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. CASH -- For the purposes of these statements, short-term investments which have a maturity of 90 days or less are considered cash equivalents. INVENTORIES -- Substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. The Company values its LIFO increments using the costs of its latest purchases during the years reported. PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are stated at cost and include assets held under capitalized leases. Major renewals and betterments are capitalized, while maintenance and repairs which do not substantially improve or extend the useful lives of the respective assets are expensed currently. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. The Company provides for depreciation of plant and equipment by charging against income amounts sufficient to amortize the cost of properties over their estimated useful lives (buildings--12 to 40 years; machinery and equipment--5 to 20 years). Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Included in depreciation expense is the amortization of assets under capital leases. 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. NET INCOME PER SHARE -- Net income per share has been computed based on weighted average common shares outstanding during the year -- 13,998,783 in 1996, 13,893,798 in 1995 and 13,791,695 in 1994. The number of shares in 1994 and 1995 have been restated to reflect a 25% stock dividend in 1996. 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. The unamortized balance is reflected on the consolidated balance sheet under prepaid expense and other assets. (2) SHORT-TERM DEBT Short-term borrowing activity was as follows (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Maximum borrowed . . . . . . . . . . . . . . . . $5,000 $7,450 $6,975 Average borrowed . . . . . . . . . . . . . . . . 884 1,947 2,638 Average interest rate During the year. . . . . . . . . . . . . . . . . 5.5% 6.1% 4.3% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (3) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's Federal and state deferred tax liabilities and assets as of December 31, 1996, 1995 and 1994 are as follows (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation . . . . . . . . . . . . . . . . . $6,547 $5,666 $5,119 Inventory, net . . . . . . . . . . . . . . . . 2,858 2,799 3,991 Pension. . . . . . . . . . . . . . . . . . . . 5,743 5,030 2,617 Other, net . . . . . . . . . . . . . . . . . . (1,612) (59) (101) --------------------------- Net deferred liabilities . . . . . . . . . . 13,536 13,436 11,626 Deferred tax assets: Postretirement benefits. . . . . . . . . . . . 1,426 1,271 1,155 --------------------------- Net deferred tax liabilities . . . . . . . . $12,110 $12,165 $10,471 --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The components of the provision (benefit) for deferred Federal income tax for the years ended December 31, 1996, 1995 and 1994, are as follows (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Depreciation . . . . . . . . . . . . . . . . . . $537 $415 $(4) Inventory, net . . . . . . . . . . . . . . . . . 125 (1,124) 2,013 Pension. . . . . . . . . . . . . . . . . . . . . 621 963 16 Other, net . . . . . . . . . . . . . . . . . . . (349) (326) (551) --------------------------- $934 $(72) $1,474 --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- A reconciliation between the statutory Federal income tax amount and the effective amounts at which taxes were actually provided is as follows (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Federal income tax at statutory rates. . . . . . $15,098 $15,517 $8,853 State income taxes, net of Federal income tax benefits. . . . . . . . . . . . . . . . . . 2,103 2,248 1,223 Net operating loss carry-forward . . . . . . . . -- (296) (296) Other. . . . . . . . . . . . . . . . . . . . . . (169) 39 104 --------------------------- $17,032 $17,508 $9,884 --------------------------- --------------------------- - -------------------------------------------------------------------------------- (4) LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1996, 1995 and 1994 (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Revolving credit agreement (a) (c) . . . . . . . $ -- $ 7,640 $20,076 6.49% insurance company term loan, due in equal installments from 2004 through 2008. . . . . . . . . . . . . . . 20,000 -- -- 9.3% insurance company term loan, due in equal installments through 2000 . . . . 6,650 8,320 9,990 7.53% insurance company term loan due in equal installments from 1999 through 2005. . . . . . . . . . . . . . . 4,600 4,600 -- Industrial development revenue bonds at variable rates, due in varying amounts through 2010 (b) (c) . . . . . . . . . 11,058 8,700 8,800 11.5% insurance company term loan, due in equal installments through 1995 . . . . -- -- 1,500 Canadian bank term loan at variable rates, final payment in 1996. . . . . . . . . . . . . -- 825 1,158 Other. . . . . . . . . . . . . . . . . . . . . . 1,108 686 838 --------------------------- Total. . . . . . . . . . . . . . . . . . . . . . 43,416 30,771 42,362 Less--current portion. . . . . . . . . . . . . . (2,482) (2,756) (3,831) --------------------------- Total long-term portion. . . . . . . . . . . . . $40,934 $28,015 $38,531 --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The carrying value of long term debt does not differ materially from their estimated fair value as of December 31, 1996. (a) The Company has revolving credit agreements of $80.0 million domestically and $7.7 million with a Canadian bank. The credit facilities are five-year revolvers, extended annually by mutual agreement, and the Canadian facility has a four-year equal amortization term option. 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 .175% 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, 1996, 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): 1998 $2,198 1999 $2,834 2000 $2,778 2001 $1,149 ------ ------ ------ ------ ------ ------ ------ ------ Total net book value of assets collateralized under financing arrangements approximated $2.0 million at December 31, 1996. Net interest expense reported on the accompanying Consolidated Statements of Income was reduced by interest income of $0.3 million in 1996 and $ 0.1 million in 1995 and 1994. (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, 1996, are as follows (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Year ending December 31, - -------------------------------------------------------------------------------- 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,842 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,489 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,007 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,905 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,991 Later years. . . . . . . . . . . . . . . . . . . . . . . . . . 2,770 -------- Total minimum payments required. . . . . . . . . . . . . . . . . $22,004 -------- -------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (d) Rental expense -- Total rental payments charged to expense were $8.9 million in 1996, $7.8 million in 1995 and $7.4 million in 1994. (e) Sale and leaseback of assets -- During 1996, 1995 and 1994 the Company sold and leased back equipment under operating leases with terms ranging from five to eight years. The assets sold at approximately net book value for proceeds of $2,473,000, $4,059,000 and $2,618,000 respectively. The 1996 lease allows for a purchase option at the end of PAGE 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- the lease term of $779,000. The 1995 and 1994 leases allow for a purchase option at the end of the lease term of $1,349,000 for the 1995 leases and $1,101,000 for the 1994 lease. Annual rentals are $336,000 for the 1996 leases, $615,000 for the 1995 leases and $482,000 for the 1994 lease transaction. (6) RETIREMENT, PROFIT-SHARING AND INCENTIVE PLANS Substantially all employees who meet certain requirements of age, length of service and hours worked per year are covered by Company-sponsored retirement plans. These retirement plans are defined benefit, noncontributory plans. Benefits paid to retirees are based upon age at retirement, years of credited service and average earnings. The assets of the Company-sponsored plans are maintained in a single trust account. The majority of the trust assets are invested in common stock mutual funds, insurance contracts, real estate funds and corporate bonds. The Company's funding policy is to satisfy the minimum funding requirements of ERISA. The net pension expense/(credits) in 1996, 1995 and 1994 were composed of the following (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Normal service cost. . . . . . . . . . . . . . . $1,798 $1,302 $1,318 Interest cost on projected benefit obligation. . 4,261 3,929 3,612 Actual return on plan assets . . . . . . . . . . (7,373) (10,314) (820) Net amortization and deferral. . . . . . . . . . 1,572 4,866 (4,145) --------------------------- Net pension expense (credit) . . . . . . . . . . $ 258 $ (217) $ (35) --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The status of the plans at December 31, 1996, 1995 and 1994, was as follows: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Actuarial present value of vested benefit obligation. . . . . . . . . . . $44,011 $45,519 $36,617 Plus--Nonvested benefit obligation . . . . . . 2,670 3,180 2,945 --------------------------- Vested and nonvested accumulated benefit obligation . . . . . . . . . . . . . . . . . 46,681 48,699 39,562 Plus--Projected salary increases benefit obligation . . . . . . . . . . . . . . . . . 9,894 9,407 4,816 --------------------------- Projected benefit obligation . . . . . . . . . 56,575 58,106 44,378 Plan assets at fair market value . . . . . . . . 65,511 57,222 46,508 --------------------------- Plan assets in excess of (less than) projected benefit obligation . . . . . . . . . 8,936 (884) 2,130 Items not yet recognized in earnings Unrecognized net transitional assets . . . . . -- (976) (1,952) Unrecognized net loss. . . . . . . . . . . . . 4,477 10,649 4,791 Unrecognized prior-service cost. . . . . . . . 942 1,148 1,353 --------------------------- Pension prepaid recognized on the consolidated balance sheets at December 31. . . . . . . . . $14,355 $ 9,937 $ 6,322 --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate. . . . . . . . . . . . . . . . . . 8.00% 7.25% 8.75% 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Profit sharing and 401-K . . . . . . . . . . . . $2,469 $2,258 $2,224 -------------------------- -------------------------- Management incentive . . . . . . . . . . . . . . $2,664 $2,966 $2,678 -------------------------- -------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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. Net postretirement benefit cost for 1996, 1995 and 1994 includes the following components (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost . . . . . . . . . . . . . . . . . . $214 $154 $128 Interest cost on accumulated postretirement benefit obligation . . . . . . . . . . . . . . 311 313 238 Amortization of unrecognized prior service cost . . . . . . . . . . . . . . . . . 22 (26) 17 Amortization of unrecognized net (gain) or loss. . . . . . . . . . . . . . . . . . . . 25 49 (25) --------------------------- Net periodic postretirement benefit cost . . . . $572 $490 $358 --------------------------- --------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PAGE 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following is a reconciliation between the plan's funded status and the accrued postretirement benefit obligation as reflected on the balance sheet as of December 31, 1996, 1995 and 1994 (in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees . . . . . . . . . . . . . . . . . . . $1,528 $2,003 $1,354 Fully eligible active plan participants. . . . 133 147 149 Other active plan participants . . . . . . . . 2,825 3,088 1,524 -------------------------- 4,486 5,238 3,027 Unrecognized prior service cost. . . . . . . . (459) (480) 238 Unrecognized net loss. . . . . . . . . . . . . (431) (1,523) (324) -------------------------- Accrued postretirement benefit obligation. . . $3,596 $3,235 $2,941 -------------------------- -------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Future benefit costs were estimated assuming medical costs would increase at a 11.75% annual rate for the current year, with annual increases decreasing by 0.5% per year for two years, and 1% per year thereafter until an ultimate trend rate of 5 3/4% is reached. A 1% increase in the health care cost trend rate assumptions would have increased the accumulated postretirement benefit obligation at December 31, 1996 by $343,000 with no significant effect on the 1996 postretirement benefit expense. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.00% in 1996, 7.25% in 1995 and 8.75% in 1994. (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 1996, 1995 and 1994 were as follows (dollars in thousands): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stock Treasury Stock - -------------------------------------------------------------------------------- Shares Issued Amount Shares Amount - -------------------------------------------------------------------------------- December 31, 1993. . . . . . . . . 14,264,618 $21,938 617,775 $1,972 Stock options exercised. . . . . 316,202 2,108 127,930 1,404 Other. . . . . . . . . . . . . . 14,287 68 (154) (1) ---------------------------------------- December 31, 1994. . . . . . . . . 14,595,107 24,114 745,551 3,375 Stock options exercised. . . . . 132,055 1,166 53,691 930 Other. . . . . . . . . . . . . . 16,810 161 25 -- ---------------------------------------- December 31, 1995. . . . . . . . . 14,743,972 25,441 799,267 4,305 Stock options exercised. . . . . 90,944 1,064 35,141 831 Other. . . . . . . . . . . . . . 8,225 176 (59) -- ---------------------------------------- December 31, 1996. . . . . . . . . 14,843,141 $26,681 834,349 $5,136 ---------------------------------------- ---------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 1996, 1995 and 1994 is as follows: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------- Compensation expense . . . . . . . . . . . . . . $330,000 $275,000 $117,000 ---------------------------- ---------------------------- Shares awarded . . . . . . . . . . . . . . . . . 8,945 16,810 14,823 ---------------------------- ---------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Option Wtd. Avg. Shares Exercise Price Range - -------------------------------------------------------------------------------- December 31, 1993. . . . . . . . . 413,063 $ 6.64 $6.27 - 7.07 Granted. . . . . . . . . . . . . 210,938 12.07 12.07 Exercised. . . . . . . . . . . . (316,203) 6.67 6.27 - 7.07 ----------------------------------------- December 31, 1994. . . . . . . . . 307,798 10.33 6.27 - 12.07 Granted. . . . . . . . . . . . . 8,000 12.10 12.10 Forfeitures. . . . . . . . . . . (2,625) 7.07 7.07 Exercised. . . . . . . . . . . . (132,055) 8.83 6.27 - 12.07 ----------------------------------------- December 31, 1995. . . . . . . . . 181,118 11.53 6.27 - 12.07 Granted. . . . . . . . . . . . . 184,255 18.95 18.75 - 23.38 Exercised. . . . . . . . . . . . (90,944) 11.70 6.27 - 12.07 ----------------------------------------- December 31, 1996. . . . . . . . . 274,429 $16.44 $6.27 - 23.38 ----------------------------------------- ----------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As of December 31, 1996, 90,174 of the 274,429 options outstanding, were currently exercisable and had a weighted average contractual life of 2.4 years with a weighted average exercise price of $11.32. The remaining 184,255 shares were not exercisable and had a weighted average contractual life of 4.5 years, with a weighted average exercise price of $18.95. The weighted average fair value of the current year's option grant is estimated to be $5.32 per share. The fair value has been estimated on the day of the grant using the Black Scholes option pricing model with the following assumptions, risk free interest rate of 6.3%, expected dividend yield of 3.0%, option life of 5 years, and expected volatility of 30 percent. PAGE 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 1996 net income would have been reduced by approximately $490,000 or $.03 per share. The effect on 1995 net income was immaterial. (8) CONTINGENT LIABILITIES At December 31, 1996 total exposure under guarantees issued for banking facilities of unconsolidated affiliates was $21 million. The Company was contingently liable as endorser on discounted trade acceptances aggregating $5.3 million at December 31, 1996. Also, the Company has $1.4 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 1996 the Company purchased four distribution businesses and through its joint venture, Depot Metals L.L.C., acquired a one-third interest in another metals distributor. The aggregate cash consideration paid was $17,984,000 including certain transaction costs. The acquisitions have been accounted for as purchases and are included in the financial statements from the date of acquisition. 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 financial statements 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 1996 and 1995 are as follows (dollars in thousands, except per share data--Note 7): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------------------- 1996 QUARTERS NET SALES. . . . . . . . . . . . $175,047 $174,797 $162,322 $160,451 GROSS PROFIT . . . . . . . . . . 49,005 49,322 45,490 47,349 NET INCOME . . . . . . . . . . . 7,622 7,025 5,258 6,199 NET INCOME PER SHARE. . . . . . . . . . . $.54 $.50 $.38 $ .44 1995 quarters Net sales. . . . . . . . . . . . $169,056 $163,080 $149,023 $146,667 Gross profit . . . . . . . . . . 47,299 44,784 40,726 40,589 Net income . . . . . . . . . . . 8,246 6,839 5,393 6,348 Net income per share . . . . . . $.59 $.50 $.38 $.46 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1996, 1995 and 1994, 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, 1996, 1995 and 1994, 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 3, 1997 PAGE 24 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 and Chief Executive Officer Falcon Building Products, Inc. a diversified manufacturer of building products 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 WILLIAM J. MCDERMOTT Retired President Simpson Estates, Inc. a private management firm RICHARD G. MORK President and Chief Executive Officer JOHN PUTH Principle J.W. Puth Associates a consulting firm MICHAEL SIMPSON Chairman of the Board RICHARD A. VIRZI Retired President and Chief Executive Officer A. M. Castle & Co. OFFICERS MICHAEL SIMPSON Chairman of the Board RICHARD G. MORK President and Chief Executive Officer EDWARD F. CULLITON Vice President and Chief Financial Officer SVEN G. ERICSSON Vice President- International M. Bruce herron Vice President- Western Region STEPHEN V. HOOKS Vice President- Midwest Region FRITZ OPPENLANDER Vice President- Operations RICHARD G. PHIFER Vice President- Eastern Region ALAN D. RANEY Vice President- Advanced Materials Group ROBERT A. ROSENOW Vice President- Plate & Carbon Products Group GISE VAN BAREN Vice President- Alloy Products Group 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 THOMAS GARRETT Vice President STEVEN E. HULBERT Vice President CUTTER PRECISION METALS, INC. KIRKLAN VOLL 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 meetings which are held on the fourth Thursday of January, April, July and October. ANNUAL MEETING The Annual Meeting of the Company's shareholders will be held at our corporate headquarters on Thursday, April 24, 1997 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. EX-27 3 EXHIBIT 27
5 1,000 YEAR DEC-31-1997 JAN-01-1996 DEC-31-1996 1,770 35 69,471 (680) 93,315 163,911 128,857 (66,140) 261,370 83,902 40,934 0 0 26,681 95,245 261,370 672,617 672,617 (481,451) (144,684) 0 (468) (2,878) 43,136 (17,032) 26,104 0 0 0 26,104 1.86 1.86
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