-----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, JbKG9ZEUaYA2mb+r+NyoQk7kAQEGp6Qc2xv28ZxCoOP93Z6WqSnDSsxhrp+5nvnY kugG1n09plnD4sSakH2UuA== 0000950124-98-001674.txt : 19980330 0000950124-98-001674.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950124-98-001674 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: AMEX SROS: CSX 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: SEC FILE NUMBER: 001-05415 FILM NUMBER: 98576780 BUSINESS ADDRESS: STREET 1: 3400 N WOLF RD CITY: FRANKLIN PARK STATE: IL ZIP: 60131 BUSINESS PHONE: 7084557111 MAIL ADDRESS: STREET 1: 3400 N WOLF RD CITY: FRANKLIN PARK STATE: IL ZIP: 60131 10-K405 1 FORM 10-K DATED DECEMBER 31, 1997 1 Page 1 of 16 Pages ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1997 Commission File Number: 1-5415 ------------------ ------ A. M. CASTLE & CO. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 36-0879160 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3400 North Wolf Road, Franklin Park, Illinois 60131 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 455-7111 --------------------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - --------------------------- ------------------------------------ Common Stock - no par value American and Chicago Stock Exchanges Securities registered pursuant to Section 12(g) of the Act: None --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X . --- The approximate aggregate market value of the registrant's common stock held by non-affiliates of the registrant on March 2, 1998 was $338,789,160. ------------ The number of shares outstanding of the registrant's common stock on March 2, 1998 was 14,043,074 shares. ---------- DOCUMENTS INCORPORATED BY REFERENCE Documents Incorporated by Reference Applicable Part of Form 10-K - ------------------------------------- ---------------------------- Annual Report to Stockholders for the Parts I, II and IV year ended December 31, 1997 Proxy Statement dated March 9, 1998 Part III furnished to Stockholders in connection with registrant's Annual Meeting of Stockholders ================================================================================ 2 PAGE 2 OF 16 PART I Item 1. Business. A. M. Castle & Co. is one of North America's largest, independent metals service center companies. The registrant (Company) provides a complete range of inventories as well as preprocessing services to a wide variety of customers. In the last three years, sales mix in the Company's core business was approximately as follows:
1997 1996 1995 ---- ---- ---- Carbon and Stainless 73% 74% 77% Non-Ferrous Metals 27% 26% 23% ---- ---- ---- 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. 3 PAGE 3 OF 16 In Canada, the Company serves a wide range of businesses similar to the market profile in the United States. These markets are serviced by the Company's Canadian subsidiary A. M. Castle & Co. (Canada) Inc. In Mexico, the Company operates through a joint venture, Castle de Mexico, S.A. de C.V., and targets a wide range of businesses within the producer durable goods sector. Markets in western Europe, South America and the Pacific Rim are serviced through the Company's International Sales Department located in the Franklin Park facility, and starting in late 1996, the Company's new United Kingdom based subsidiary, A. M. Castle & Co. Limited, a U.K. Corporation. The Company's Hy-Alloy Steels Co. division, located in Bedford Park, Illinois, a Chicago suburb, is a distributor of alloy bars stocked as rounds, squares, hexes, and flats; and of alloy tubing. In 1993 a value-added bar processing center, H-A Industries, was added. From this facility, the Company operates a heat treat line producing quench and tempered alloy bar product, an annealing line, and a bar turning and straightening line producing cold finished bars. The Company also operates two businesses acquired in 1996 whose activities complement the Company's distribution and value added focus. Total Plastics, Inc., acquired in January 1996, is a Midwest based distributor serving a wide variety of users of industrial plastics. Cutter Precision Metals, Inc., acquired in April 1996, is a Pacific Northwest based metals distributor which has added highly specialized sawing and grinding capabilities to the Company's range of processing services. In June of 1997 the Company acquired Keystone Tube Inc., a Midwest based specialty distributor of tubular products and a leading processor of high-value added mechanical tube and chrome plated bar serving the fluid power industry. The acquisition expands an existing product line and broadens the Company's core specialty metals business. The Company also holds a one-third joint venture interest in Kreher Steel Co., a Midwest based distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, SBQ and stainless bars. In general, the Company purchases metals from many producers. In the case of nickel alloys, it is single sourced. Satisfactory alternative sources, however, are available for all metals that the Company buys and its business would not be materially adversely affected by the loss of any one supplier. Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities. The Company's ability to provide quick delivery, frequently overnight, of a wide variety of metal products allows customers to reduce inventory investment because they do not need to order the large quantities required by producing mills. The major portion of 1997 net sales were from materials owned by the Company. The materials required to fill the balance of such sales were obtained from other sources, such as direct mill shipments to customers or purchases from other metals distributors. Sales are primarily through the Company's own sales organization and are made to many thousands of customers in a wide variety of industries. No single customer is significant to the Company's sales volume. Deliveries are made principally by leased trucks. Common carrier delivery is used in areas not serviced directly by the Company's fleet. The Company encounters strong competition both from other independent metals distributors and from large distribution organizations, some of which have substantially greater resources. 4 PAGE 4 OF 16 The Company has approximately 1,850 full-time employees in its operations throughout the United States, Canada and the United Kingdom. Approximately 300 of these are represented by collective bargaining units, principally the United Steelworkers of America. Item 2. Properties. The Company's principal executive offices are at its Franklin Park plant near Chicago, Illinois. All properties and equipment are well maintained and in good operating condition and sufficient for the current level of activities. Metals distribution centers and sales offices are maintained at each of the following locations, all of which are owned in fee, except as indicated: 5 PAGE 5 OF 16
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 Milwaukee area - Wauwatosa, Wisconsin 98,000 (1) Minneapolis, Minnesota 60,000 Philadelphia, Pennsylvania 71,600 Salt Lake City, Utah 45,400 (1) Stockton, California 60,000 (1) Wichita, Kansas 26,500 (1) Worcester, Massachusetts 60,000 --------- Total Castle Metals 2,167,900 Hy-Alloy Steels Co. - -------------------- Chicago area - Bedford Park, Illinois 103,700 --------- H-A Industries - -------------------- Hammond, Indiana 250,000 (1) --------- A. M. Castle & Co. (Canada) Inc. - --------------------------------- Edmonton, Alberta 36,600 (1) Montreal, Quebec 25,600 (1) Toronto area - Mississauga, Ontario 57,100 (1) Etobicoke, Ontario 8,000 (1) Winnipeg, Manitoba 28,900 (1) --------- 156,200 Cutter Precision Metals, Inc. - ------------------------------- Kent, Washington 24,000 (1) Santa Clara, California 20,000 (1) --------- 44,000 Castle Metals U.K. Ltd. - ------------------------ Manchester, U.K. 12,000 (1) --------- Keystone Tube, Inc. - --------------------- La Porte, Indiana 90,000 Riverdale, Illinois 115,000 (1) Titusville, Pennsylvania 92,000 --------- 297,000
6 PAGE 6 of 16
Approximate Floor Area in Locations Square Feet - -------------- --------------- Total Plastics, Inc. - ----------------------- Detroit, Michigan 32,000 (1) Elk Grove Village, Illinois 15,000 (1) Fort Wayne, Indiana 15,000 (1) Grand Rapids, Michigan 22,000 (1) Indianapolis, Indiana 20,000 (1) Kalamazoo, Michigan 50,000 (1) ---------- 154,000 GRAND TOTAL 3,184,800 ========== Sales Offices (Leased) - ------------------------- Buffalo, New York Detroit, Michigan Pittsburgh, Pennsylvania Phoenix, Arizona San Diego, California Tulsa, Oklahoma
(1) Leased: See Note 5 in the 1997 Annual Report to Stockholders, incorporated herein by this specific reference, for information regarding lease agreements. 7 PAGE 7 OF 16 Item 3. Legal Proceedings. There are no material legal proceedings other than the ordinary routine litigation incidental to the business of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. 8 PAGE 8 OF 16 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Item 6. Selected Financial Data. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required to be filed in Part II (Items 5, 6, and 7) in Form 10-K has been included in the 1997 Annual Report to Stockholders, as required by the Securities and Exchange Commission, and is included elsewhere in the filing. Accordingly, the following items required under Items 5, 6, and 7 are incorporated herein by this specific reference to the 1997 Annual Report to Stockholders: "Common Stock Information", page 15, "Eleven-Year Financial and Operating Summary", pages 12 and 13, and "Financial Review", pages 14 and 15. Item 8. Financial Statements and Supplementary Data. See Part IV, Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Item 9. Disagreements on Accounting and Financial Disclosure. None. 9 PAGE 9 OF 16 PART III Item 10. Directors and Executive Officers of the Registrant.
Executive Officers of The Registrant ------------------------------------ Name and Title Age Business Experience - -------------- --- ------------------- Michael Simpson 59 Mr. Simpson began his employment with the Chairman of the Board registrant in 1968. In 1974 Mr. Simpson was elected President of Hy-Alloy Steels Co. Mr. Simpson was elected Vice President - Midwest Region in 1977. In 1979 Mr. Simpson was elected Chairman of the Board. Richard G. Mork 62 Mr. Mork began his employment with the registrant in 1957. President and Chief In 1977 Mr. Mork was elected to the position of Vice President Executive Officer - Eastern Region and in 1988 to the position of Senior Vice President and Chief Operating Officer. In 1990 Mr. Mork was made President and Chief Executive Officer. Edward F. Culliton 56 Mr. Culliton began his employment with the registrant in 1965. Vice President and Mr. Culliton was elected Corporate Secretary in 1972 and Chief Financial Officer Treasurer in 1975. In 1977 he was elected Vice President of Finance. He is the Chief Financial Officer. Sven G. Ericsson 49 Mr. Ericsson began his employment with the registrant in Vice President - 1989. Mr. Ericsson was elected to the position of Vice International President - Eastern Region in 1989, Vice President - Plate and Carbon Products Group in 1992, and Vice President - International in 1995. M. Bruce Herron 52 Mr. Herron began his employment with the registrant in 1970. Vice President - Mr. Herron was elected to the position of Vice President - Western Region Western Region in 1989. Stephen V. Hooks 46 Mr. Hooks began his employment with the registrant in 1972. Vice President - Mr. Hooks was elected to the position of Vice President - Midwest Region Midwest Region in 1993. Fritz Oppenlander 45 Mr. Oppenlander began his employment with the registrant in Vice President - 1996 and was elected Vice President - Operations in 1996. Operations Alan D. Raney 46 Mr. Raney began his employment with the registrant in 1986. Vice President - Mr. Raney was elected Vice President - Midwest Region Advanced Materials during 1989, and Vice President - Advanced Materials Group Group in 1990. Robert A. Rosenow 44 Mr. Rosenow began his employment with the registrant in Vice President - 1977. In 1995, Mr. Rosenow was elected Vice President - Plate Plate and Carbon and Carbon Products Group. Group Gise Van Baren 66 Mr. Van Baren began his employment with the registrant's Vice President - Alloy Hy-Alloy Steels Co. (acquired in 1973) in 1954. He Products Group and became Vice President of Hy-Alloy in 1976 and President in President - Hy-Alloy Steels 1979. He was elected Vice President - Alloy Products Division Group in 1991.
10 PAGE 10 OF 16
Name and Title Age Business Experience - -------------- --- ------------------- Craig R. Wilson 46 Mr. Wilson began his employment with the registrant in Vice President - 1979. He was elected to the position of Vice President - Eastern Region Eastern Region in 1997. Paul J. Winsauer 46 Mr. Winsauer began his employment with the registrant in Vice President - 1981. In 1996, Mr. Winsauer was elected to the position of Human Resources Vice President - Human Resources. James A. Podojil 55 Mr. Podojil began his employment with the registrant in Chief Accounting Officer 1968. In 1977 he was elected to the position of Controller and Treasurer/Controller and in 1985 was elected to the additional post of Treasurer. Jerry M. Aufox 55 Mr. Aufox began his employment with the registrant in 1977. Secretary and Corporate In 1985 he was elected to the position of Secretary and Counsel Corporate Counsel. He is responsible for all legal affairs of the registrant.
11 PAGE 11 OF 16 All additional information required to be filed in Part III, Item 10, Form 10-K, has been included in the Definitive Proxy Statement dated March 9, 1998 filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled "Information Concerning Nominees for Directors" and is hereby incorporated by this specific reference. Item 11. Executive Compensation. All information required to be filed in Part III, Item 11, Form 10-K, has been included in the Definitive Proxy Statement dated March 9, 1998, filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled "Management Remuneration" and is hereby incorporated by this specific reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required to be filed in Part I, Item 4, Form 10-K, has been included in the Definitive Proxy Statement dated March 9, 1998, filed with the Securities and Exchange Commission pursuant to Regulation 14A, entitled "Information Concerning Nominees for Directors" and "Stock Ownership of Certain Beneficial Owners and Management" is hereby incorporated by this specific reference. Other than the information provided above, Part III has been omitted pursuant to General Instruction G for Form 10-K and Rule 12b-23 since the Company will file a Definitive Proxy Statement not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A, which involves the election of Directors. Item 13. Certain Relationships and Related Transactions. None. 12 PAGE 12 OF 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Financial statements (incorporated by reference to the 1997 Annual Report to Stockholders) and exhibits are set forth in the accompanying index to Financial Statements and Schedules. No reports on Form 8-K were filed in the fourth quarter of 1997. 13 PAGE 13 OF 16 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 1997 Annual Report to Stockholders of A. M. Castle & Co., included herein - Consolidated Statements of Income - For the years ended December 31, 1997, 1996, and 1995...................................................................................................... Page 17 Consolidated Statements of Reinvested Earnings - For the years ended December 31, 1997, 1996, and 1995.......................................................................................... Page 17 Consolidated Balance Sheets - December 31, 1997, 1996, and 1995............................................... Page 18 Consolidated Statements of Cash Flows - For the years ended December 31, 1997, 1996, and 1995...................................................................................................... Page 19 Notes to Consolidated Financial Statements................................................................ Pages 20-24 Report of Independent Public Accountants..................................................................... Page 24 Exhibits: 20 - Report furnished to security holders .................................................................. Exhibit A 3 - Articles of Incorporation and amendments .............................................................. Exhibit B 3 - By laws of the Company ................................................................................ Exhibit C 10 - Long term incentive compensation plan ................................................................. Exhibit D 10 - 1990 restricted stock and stock option plan ........................................................... Exhibit E 10 - Description of management incentive plan .............................................................. Exhibit F 10 - 1996 restricted stock and stock option plan ........................................................... Exhibit G
Except for Exhibits C, F and G, exhibits listed above are incorporated by reference in accordance with Rule 12b-32 (17 CFR 240.12b-32) as the material has been previously filed as part of registrants form 10-K filing for the fiscal year ended December 31, 1996. All schedules and exhibits, other than those listed above are omitted as the information is not required or is furnished elsewhere in the financial statements or the notes thereto. 14 PAGE 14 OF 16 SUPPLEMENTAL REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To A. M. Castle & Co.: We have audited in accordance with generally accepted auditing standards, the financial statements included in the A. M. Castle & Co. 1997 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 2, 1998. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois, February 2, 1998 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FORM S-8 As independent public accountants, we hereby consent to the incorporation by reference of the following into the Company's previously filed S-8 Registration Statements Numbers 33-30545 and 33-37818: 1. Our supplemental report dated February 2, 1998 included in this Annual Report on Form 10-K for the year ended December 31, 1997; and 2. Our report dated February 2, 1998 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1997. Arthur Andersen LLP Chicago, Illinois March 15, 1998 15 PAGE 15 OF 16 SCHEDULE II A. M. CASTLE & CO. ACCOUNTS RECEIVABLE - ALLOWANCE FOR DOUBTFUL ACCOUNTS VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 ----------------------------------------------------- (Dollars in thousands)
1997 1996 1995 ----- ----- ----- Balance, beginning of year $680 $600 $600 Add - Provision charged to income 281 245 530 - Recoveries 238 223 86 - From acquisitions 53 80 -- Less - Uncollectible accounts charged against allowance (632) (468) (616) ----- ----- ----- Balance, end of year $620 $680 $600 ===== ===== =====
16 PAGE 16 OF 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. A. M. Castle & Co. - ------------------- (Registrant) By: /s/ James A. Podojil ----------------------------- James A. Podojil, Treasurer and Controller (Mr. Podojil is the Chief Accounting Officer and has been authorized to sign on behalf of the registrant.) Date: March 2, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Michael Simpson /s/ William K. Hall - ---------------------------- ------------------------------- Michael Simpson, William K. Hall, Director Chairman of the Board Chairman, Audit Committee March 2, 1998 March 2, 1998 /s/ Richard G. Mork /s/ John P. Keller - ---------------------------- ------------------------------- Richard G. Mork, President - John P. Keller, Director Chief Executive Officer, and Director March 2, 1998 March 2, 1998 /s/ Edward F. Culliton /s/ John W. McCarter, Jr. - ---------------------------- ------------------------------- Edward F. Culliton, Vice President - John W. McCarter, Jr., Director Chief Financial Officer, and Director March 2, 1998 March 2, 1998 /s/ Richard A. Virzi ------------------------------- Richard A. Virzi, Director March 2, 1998 EX-13 2 ANNUAL REPORT 1 1997 ANNUAL REPORT [A.M. Castle Logo] THE CASTLE DIFFERENCE 2 CORPORATE PROFILE Founded in 1890, A. M. Castle & Co. provides highly engineered materials and value-added processing services to a wide range of industrial companies within the $600 billion producer durable equipment sector of the economy. Our customer base includes many Fortune 500 companies as well as thousands of medium and smaller-sized ones spread across the entire spectrum of metals-using industries. Within our core specialty metals business, we are recognized as North America's largest industrial distributor of carbon, alloy and stainless steels; nickel alloys; aluminum; titanium; copper and brass; as well as the industry pioneer and premier provider of materials management programs that are designed to reduce our customers' total costs. Through our subsidiary, Total Plastics, Inc., we also distribute a broad range of value-added industrial plastics. Together, Castle and its affiliated companies operate 47 locations throughout North America. Our common stock is traded on the American and Chicago Stock Exchanges under the ticker symbol CAS. OUR CORPORATE GOALS - - Market Leadership in all Core Products - - Supplier of Choice to Our Customers - - World Class Quality Process - - Consistently Competitive Returns on Capital - - Superior Long-Term Total Returns to Shareholders THE CASTLE DIFFERENCE reflects the many strengths we have built over the past several decades. We have achieved industry leadership in the distribution of highly engineered materials by developing a world-class base of both customers and suppliers. In a market that is moving toward increasingly demanding performance and service features, we believe we offer the most advanced processing technologies in our industry. We're also the industry leader in integrated supply chain management, a strategic asset in winning and keeping customers. But with all these advantages, the fundamental reason for The Castle Difference is our people. Their enthusiasm and dedication gives us great confidence in the outlook for our company as we move toward the next century. TABLE OF CONTENTS Financial Highlights 1 Letter to Shareholders 2 Investment Report 5 The Castle Difference 6 Eleven-Year Financial & Operating Statements 12 Financial Review 14 Consolidated Statements and Notes 17 Management and Shareholder Information--Inside Back Cover
3 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. THE YEAR IN BRIEF
(dollars and shares in thousands except per share amounts) - ------------------------------------------------------------------------------------------------- % 1997 1996 Change - ------------------------------------------------------------------------------------------------- OPERATING RESULTS Net sales $754,865 $672,617 12% Gross profit on sales 214,579 191,166 12% Income before taxes 39,531 43,136 (8%) Net income 23,845 26,104 (9%) PER SHARE OF COMMON STOCK Net income (basic) 1.70 1.86 (9%) Dividends .66 .57 16% Stockholders' equity 9.74 8.70 12% BALANCE SHEET Total assets 366,375 261,370 40% Total debt 93,423 43,416 115% Total equity 136,709 121,926 12% Working capital 119,770 80,009 50% Cash flow* 30,051 31,112 (3%) Average shares outstanding 14,026 13,999 -- SELECTED RATIOS Return on sales 3.2% 3.9% (18%) Return on assets 6.5% 10.0% (35%) Return on opening equity 19.6% 25.3% (22%) Current ratio 2.0 2.0 -- Debt-to-capital ratio 40.6% 26.3% 54% - ---------------------------------------------------------------------------------------------
* Net income plus depreciation [ GRAPH ] NET SALES ($ Millions) 1993 1994 1995 1996 1997 - --------------------------------- 474 537 628 673 755 NET INCOME ($ Millions) 1993 1994 1995 1996 1997 - --------------------------------- 6.9 15.4 26.8 26.1 23.8 NET WORTH ($ Millions) 1993 1994 1995 1996 1997 - --------------------------------- 70 82 103 122 137 - ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 1 4 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. TO OUR SHAREHOLDERS, CUSTOMERS AND EMPLOYEES: The bold statement on this year's front cover represents more than a decade's work to create The Castle Difference -- the most innovative and highest value-added materials management capability in our industry. More than anything else, this expertise differentiates our company from other leading metals distributors and processors. Today, we are leveraging this capability into new distribution channels and market niches. As we move toward the millennium and beyond, we are uniquely positioned as a full-service, multi-channel materials management company -- capable of growing average annual earnings at double-digit rates while maintaining consistently high returns on our shareholders' capital. We believe that we have developed the most compelling strategic and financial model for growth in our industry. This model, the values that drive it, and the opportunities upon which it is based, are the focus of our 1997 Annual Report. 1997 FINANCIAL RESULTS Fueled by strong contributions from the acquisitions made over the past two years, our revenues rose 12% to a record $754.9 million. Our gross profit also hit a record level, up 12% to $214.6 million. This achievement is especially notable in a relatively flat mill pricing environment because it confirms the high value that our customers place on the processing and logistical services that are an integral part of the highly engineered products we provide to them. Earnings of $23.8 million, or $1.70 per share, represented a decline of 9% from 1996, which was the second strongest year on record. Earnings were reduced by the higher level of transactional activity that occurs during periods of relatively stable demand and pricing, and by underlying inflation in our operating expenses which was not fully offset by productivity improvements. Additionally, earnings were affected by the integration of our recent acquisitions as well as by activities associated with the startup of an unprecedented level of investment in processing technologies. Putting all of this in perspective, during a year in which we made aggressive moves to support future growth, we were still able to achieve a 20% return on our shareholders' capital -- again the highest in our industry. With our strong free cash flow, we were able to return more than $9.2 million to shareholders in dividends. This represents a 13% annual increase in our quarterly dividend, contributing to a 53% increase in cash dividends over the last three years. At 1997 year end, the dividend yield on our stock stood at just under 3%, also the highest in our industry. OUR GROWTH MODEL. The Castle growth model is simple, but, we believe, unique in the metals distribution business. It begins with a large and growing market - -- the $600 billion North American producer durable equipment sector. Comprised of literally thousands of industries, we serve a highly diverse customer base of which no one sector represents more than 6% of total sales, and, no one customer, more than 2%. Within this market, we dominate the product, industry and geographic segments in which we choose to participate. We hold the #1 position in core products which account for 55% of sales, and the #2 or #3 position in products which generate an additional 25% of total volume. In turn, this product mix is supported by a wide range of leading-edge processing technologies and logistical services -- many of them unique to Castle, all of them designed to enhance our customers' productivity and quality. One of the cornerstones of the Castle growth model is our Total Service Concept -- a comprehensive materials management system designed to dramatically reduce our customers' total cost. Pioneered by Castle over a decade ago, TSC still represents the leading edge in integrated supplier relationships in the metals distribution industry. Further strengthening our dominance in highly engineered metals is a more recently implemented strategy aimed at expanding into multiple distribution channels within the $6 billion specialty metals market. During the past few years, we have added six new platform companies to the Castle family -- each of them capable of 20% annual revenue growth; each of them run by entrepreneurial and incentivized management teams; and each of them profitable. Admittedly, none of these strategic elements, on their own, are unique. Leading-edge companies across a wide array of industrial and service businesses successfully employ these same concepts. What makes our model distinctive within our industry is what we - ------------------------------------------------------------------------------- 2 1997 ANNUAL REPORT 5 - -------------------------------------------------------------------------------- A.M. CASTLE & CO. refer to as The Castle Difference...a materials management capability which we believe to be unparalleled in the metals distribution business, and which enables us to set the industry standards for customer satisfaction, product quality and operational efficiency. THE VALUES. While consistent growth and superior returns are the output of this model, the energy behind it is our culture. Our culture is driven by two fundamental principles: first, to conduct our business in accordance with the highest standards of integrity so we may win the respect and confidence of our shareholders, customers, suppliers and the public; and second, to function as an agent of change by anticipating market developments and moving quickly to seize emerging opportunities. As described in detail later in this Report, our agility...our eagerness...to provide innovative solutions for customers far in advance of the rest of the industry are the defining qualities of our 108-year long cultural evolution. How do we support and reinforce this behavior? While many companies are currently revising their executive incentive plans to encourage a focus on shareholder returns, Castle has long had a compensation plan in effect aligning pay with total returns to investors. Our specific shareholder value objective is to produce three-year average total returns which exceed the benchmark S&P 500 index by 5.5% per year. This may sound like an ambitious goal for a company which competes in a cyclical industry. But in most three-year periods over the last several decades, we have exceeded the S&P 500 index as well as all other major market indices. And while we cannot make forecasts or promises, we believe our opportunities to maintain these superior returns have never been greater. Underlying our shareholder value objective are aggressive annual profit goals. Our minimum expectation is that we earn a 15% return on opening equity, while a 25% return on investment is considered the benchmark of excellent performance. Virtually all of our employees participate in compensation plans linked to our return on investment standards. To further align our employees' and shareholders' interests, in 1996, we began making all contributions to our profit sharing plan in the form of Castle stock. We have found that this system provides a powerful incentive to build shareholder value as an integrated team. THE GROWTH OPPORTUNITIES. We know that, to continue delivering superior returns to our shareholders, we must produce sustained revenue and earnings growth. Several basic facts tell us that our opportunities for continued growth are vast. First, every day, every end user within the $600 billion North American producer durable equipment market consumes metals. Second, their move toward sophisticated materials management concepts in which we've developed a competitive advantage continues to gain momentum as they strive to enhance productivity and quality. And finally, as the industry leader, we are in the best position to meet these needs. [ PHOTO OF RICHARD G. MORK & MICHAEL SIMPSON ] - ------------------------------------------------------------------------------ 1997 ANNUAL REPORT 3 6 - -------------------------------------------------------------------------------- A.M. CASTLE & CO. The most exciting program we have to capitalize on this growth opportunity is our multi-channel strategy to penetrate specialty metals niches in which we currently do not have a significant share. We are working toward deploying cost-effective service capabilities to reach every end user within the producer durable equipment sector -- from the major original equipment manufacturers and their mid- and smaller-sized counterparts, to the contract manufacturers and job shops that support them. As an example, for those companies requiring just-in-time bulk delivery of alloy and stainless bars, our joint venture with Kreher Steel now gives these customers a cost-effective solution at very high service levels. And at the other end of the spectrum, we have developed several innovative approaches to process smaller orders cost-effectively, regardless of the size of the end user from which they originate. In giving you this snapshot of some of the new growth initiatives in front of us, we do not for a moment minimize the outstanding opportunities that exist within our traditional core specialty metals business. These include a long list of innovative processing technologies designed to build more value into our customers' final products; advances in our market segmentation strategy in order to reach all categories of customers in the most desirable manner; and our continuous improvement process aimed at raising customer service levels as well as our own productivity. Furthermore, we are now taking our Total Service Concept to an entirely new dimension by leveraging it across multiple channels within the Castle family of companies. OUTLOOK FOR 1998 AND BEYOND. So as we look ahead, we are excited by the wide range of growth opportunities in front of us. First and foremost, we have chosen a target market that continues to exhibit healthy and stable demand as well as outstanding geographic, industry and product diversification. Two major economic developments in 1997 underscored the value of our long-term market diversification strategy. In the fall, our focus on the producer durable equipment sector shielded us from a temporary slowdown in the automotive industry which affected many of our major competitors. Similarly, since less than 5% of the highly engineered metals which we deliver to our North American customers ultimately is destined for southeast Asian markets, we expect the current situation there to have a negligible impact on our performance. With our rapid expansion, we have evolved the capabilities of A. M. Castle & Co. into a full-service, multi-channel materials management company with three-quarters of a billion dollars in 1997 revenues. More than ever, it will be incumbent upon us to consistently improve our service levels, to grow our market leadership and to increase our productivity at a rate at least equal to or greater than the long-term inflationary trend. We believe that our continuous improvement process will serve us well in meeting these ongoing challenges. In closing, we want to thank our 1,877 colleagues, a talented group of men and women with a true commitment to creating value, each in his or her own specific area of responsibility. We also are grateful to our customers and suppliers. Finally, we especially want to thank our shareholders. We assure you that being the custodians of your investment in our Company is a responsibility we take most seriously, and we appreciate your continued support. [Signature] [Signature] Michael Simpson Richard G. Mork Chairman of the Board President and Chief Executive Officer February 17, 1998 - --------------------------------------------------------------------------- 4 1997 ANNUAL REPORT 7 INVESTMENT REPORT Castle has a history of strong performance. Over the last few decades, our average annual total return to shareholders has consistently outpaced the Standard & Poor's 500 Index and the Lipper Growth & Income Index. Our goal is to improve on that performance in the future. TOTAL RETURN ON AN INVESTMENT IN CASTLE: In 1997, a $1,000 investment produced a total return of 19% compared with 33% for the S&P 500 Index and an inflation rate of 3.0%. Over the 15-year period ended December 31, 1997, Castle generated a 20% compound annual rate of return versus an 18% return for the S&P 500 and an annual inflation rate of 4%. CASTLE'S DIVIDEND RECORD: We continue to reward our shareholders with an attractive dividend yield. This dividend emphasis offers investors three important advantages: relatively steady income, reduced volatility, and enhanced total return through the reinvesting and compounding of dividends. Since 1994, we've raised our cash dividend four times, increasing its value by 150 percent. At the end of 1997, our dividend yield was the highest of any publicly traded metals distribution company and well above that of the S&P 500 Index. As illustrated, during the 15-year period ended December 31, 1997, Castle's dividends rose at a compound annual rate of 20% versus an 18% rate for the S&P 500 Index. COMPOUND TOTAL RETURNS
1 Year 3 Year 5 Year 10 Year 15 Year Castle 18.7% 29.4% 32.3% 21.4% 19.9% S&P 500 33.2% 31.2% 20.2% 18.0% 17.5% Lipper Growth & Income 27.0% 26.2% 18.1% 16.0% 15.6%
TOTAL RETURN ON AN INVESTMENT IN CASTLE [ GRAPH ]
1983 1984 1985 1986 1987 1988 1989 ----------------------------------------------------------------------- Castle's 1,535 1,565.7 2,112.1 1,719.3 2,180.0 3,520.8 3,591.2 S&P 1,226 1,303.2 1,717.7 2,038.9 2,146.9 2,508.3 3,296.9 Inflation 1,038 1,082.6 1,120.5 1,141.8 1,192.1 1,244.5 1,304.2
1990 1991 1992 1993 1994 1995 1996 1997 ------------------------------------------------------------------------------------ Castle's 3,206.8 3,345.6 3,743.7 5,682.9 7,019.5 14,501.7 12,774.5 15,168.5 S&P 3,194.7 4,169.0 4,490.1 4,939.1 5,003.3 6,884.5 8,467.9 11,279.3 Inflation 1,282.8 1,426.7 1,469.5 1,512.1 1,552.9 1,593.3 1,641.1 1,690.4
CASTLE'S DIVIDEND RECORD [ GRAPH ]
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 -------------------------------------------------------------------------------------------------------------------- Castle's 100 132.9 182.9 199.8 199.5 224.3 301.1 318.1 252.8 187.4 187.4 230.9 378.4 500.3 579 33 S&P 100 105.91 110.97 116.48 123.63 137.13 154.85 170.04 171.31 174.26 176.79 185.65 194.09 209.70 218.00
- ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 5 8 THE CASTLE DIFFERENCE . . . DECADES IN THE MAKING SALES GROWTH ($ Millions) [ GRAPH ]
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 1997 --------------------------------------------------------------------------------- Sales 1 1 2 3 4 6 19 20 100 290 480 755
Eight years ago, the inside cover of our Centennial Book contained this pledge: "We, the employees of A. M. Castle & Co., wish to thank those who have gone before us for their efforts in building our great Company, and we pledge our commitment to them, to our customers and to future employees that we will uphold the integrity, dedication, perseverance and quality of the past 100 years as we go forward into Castle's 2nd Century of Excellence." In many ways, our company represents a trust between past, present and future generations. All of us at Castle today share a strong sense of respect and admiration toward those whose accomplishments brought us to where we are. We also share a strong sense of commitment and obligation toward those who will follow us. In this section, we provide further perspective on the historical events and strategies behind The Castle Difference. We also provide some insight into the exciting future which lies ahead of us. - ------------------------------------------------------------------------------- 6 1997 ANNUAL REPORT 9 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. THE 1970s: RADICAL CHANGE FOR CASTLE AND ITS CUSTOMER BASE Ironically, the foundation for The Castle Difference was set during one of the most difficult decades in our long history ... the 1970s. Like most major distributors, Castle struggled with the effects of steep inflation, growing competition from imports, and the prohibitive cost of stocking a broad product line. However, there were some bright spots during this period. We expanded our stainless steel, carbon alloy and nickel alloy lines because of the favorable margins associated with these products. And we also moved into several new markets, including Tulsa and Wichita. A major milestone occurred in 1973 with the acquisition of Hy-Alloy Steels Co., an Illinois-based distributor of carbon alloys across a broad range of sophisticated manufacturing applications. For Castle, the purchase made perfect sense: Hy-Alloy generated $5 million in revenues and $230,000 in earnings. But beyond its financial contribution, Hy-Alloy paved the way toward a re-examination of our market strategies. Increasingly, we realized that, if we stayed on our traditional course as a general-line metals distributor, we would always be subject to the wide swings in pricing and demand that characterized the commodity markets in which we participated. And in turn, we would also have to accept the accompanying swings in earnings and returns to shareholders that this volatility created. Determined to break this cycle, we called a critical meeting in 1977 to evaluate the future direction of our company. Two key decisions were reached at this major turning point in our history: first, that our strategy predicated on the slogan "Everything in Steel" was no longer right for Castle; and second, that radical change in our product mix and market approach was required. The success of two earlier acquisitions helped expedite our decision process. Purchased in the mid-60s, Pacific Metals, a West Coast-based distributor of nickel and aerospace grades of stainless and aluminum, had achieved significant growth with less volatility in pricing and demand than we experienced with our commodity metals. And Hy-Alloy, which also focused on highly engineered materials, was rapidly evolving into a dominant factor in the alloy bar markets. So we saw a model for the future in which we could diversify into highly engineered products with applications across the entire North American producer durable equipment sector, and, in turn, mitigate the cyclicality inherent in the commodity metals markets. As the 70s came to a close, both Castle and its customer base were on the verge of significant, structural change. While we initiated a multi-year transformation from a general line to a specialty metals distributor, our customers were entering the first phase of a continuous effort to restructure and improve their operating productivity. Consequently, our plan to move beyond the primary drivers of price and availability traditionally associated with the distribution function was completely aligned with our customers' needs. And the foundation for The Castle Difference was well in place by the end of this decade. 1973 - ------------------------------------------------------------------------- Castle acquires Hy-Alloy Steel Co., an Illinois-based distributor of high value-added carbon alloys. 1974 - --------------------------------------------------------------------------- [LOGO] A new logo for Castle Metals is created with the twin towers symbolizing the company's dual objectives of building value for customers and shareholders. Castle announces its first stock split in a move to enhance the marketability of its common stock. 1977 - ------------------------------------------------------------------------------ Management sets a new course for Castle, which will gradually transform the Company from a general line to a specialty metals distributor. - ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 7 10 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. THE 1980s: THE SHIFT TO SPECIALTY METALS AND EVOLUTION OF TSC During the 1980s, virtually every U.S. company was forced to take a hard look at what their core competencies were, and, perhaps more importantly from our perspective, what they were not. Many manufacturing companies came to the conclusion that such non-core functions as just-in-time inventory management and specialized processing could be more efficiently outsourced to a distributor with proven expertise in these areas. And furthermore, if the technology and systems support were available as well, these distributors could become "evergreen partners" in their businesses. Correctly anticipating this trend, we took a number of innovative and early steps to position our offering beyond just the immediate availability of metals to a total materials management solution for our customers. We began to invest aggressively in computerized systems to better align our inventories with customers' needs. And we began to build more value into our metals with processing services which would enhance the quality of our customers' final products. By the mid-80s, our Total Service Concept emerged as an outgrowth of the drive to provide the highest level of value-added service in our industry. Building on our early investments in systems, state-of-the-art facilities and an expanded array of high value-added processing capabilities, we developed a unique technology-driven sales approach ("TSC") that focused on all the areas where we can help our customers reduce their total cost. Our longer-term investors have witnessed the rapid growth in our TSC business from less than 5% of sales to approximately 50% of our core business volume today. This is the equivalent of a 30% compound annual growth rate. But back in the 80s, the most exciting aspect of TSC was that it gave us a unique platform to quantifiably demonstrate how The Castle Difference could dramatically improve our customers' operating efficiency. Acquisitions also continued to play a role in our growth during the 80s. We acquired Massachusetts-based George F. Blake, Inc., which gave us an entree into the concentration of high-tech industries across New England. And we accelerated our expansion in the Carolinas, another geographic market with a large component of sophisticated manufacturing applications, through the purchase of two distributors in North Carolina. Yet, we still faced significant challenges in the late 80s as our customer base went through a final phase of restructuring before emerging as low-cost competitors in the global marketplace. Recognizing that their drive for productivity would only intensify in the 90s, we aggressively initiated measures to make major improvements in our own service levels and expense ratios. Called Project 90, we completed several multi-year breakthrough projects including the redeployment of inventory and processing equipment throughout our coast-to-coast network of service centers, and the realignment of our sales and marketing organization. So as the 80s came to a close, with our TSC concept adding a new dimension to our identity as a leading distributor of highly engineered metals and value-added services, we were well positioned to enter the next decade. 1982 - ------------------------------------------------------------------------------ Castle initiates a formal quality process centered around the concepts of zero-defects and continuous improvement. 1983 - ------------------------------------------------------------------------------- The acquisition trail continues with the purchase of Massachusetts-based George F. Blake, Inc. 1984 - ------------------------------------------------------------------------------- Castle introduces its proprietary Total Service Concept, setting a new standard for the metals distribution industry in providing customers with comprehensive service solutions. 1985 - ------------------------------------------------------------------------------- Castle acquires two North Carolina-based distributors, Alloy Steel and Cavexsa. - ------------------------------------------------------------------------------- 8 1997 ANNUAL REPORT 11 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. THE 1990s: EXPANDING OUR PROCESSING CAPABILITIES For our customers, the 90s marked the start of an extended resurgence in which U.S. manufacturers not only recaptured their global competitive advantage, but actually took the lead in what has become the longest economic expansion on record. As their recovery gained momentum, our long-term strategy to target the North American producer durable equipment sector worked exactly as intended. With no one customer representing more than 2% of our total business, we were gradually able to moderate much of the cyclicality in our earnings which plagued us in the 70s and 80s. The 90s also marked another major turning point for Castle. The disciplined and patient efforts, year in and year out during the 70s and 80s, in building dominant franchises in our highly engineered metals and in strengthening the basics of the business began paying off handsomely. Never one to stand still, we initiated several exciting new ventures to bring even greater value to our customers. Prior to the passage of NAFTA, we moved into Canada with the 1990 purchase of Norton Steel Co., Ltd. This acquisition became the foundation for our Canadian subsidiary, which today has locations in Edmonton, Montreal, Toronto and Winnipeg. [ H-A LOGO ] In 1993, we launched H-A INDUSTRIES, a 125,000 square foot value-added bar processing center in Hammond, Indiana. The roll-out of H-A Industries represents Castle ingenuity and drive at its best -- in creating custom-engineered solutions unique to the industry. It began with a quench and temper heat treat line, engineered to our exact specifications, so that it would satisfy existing customers' requirements for high value-added products with shorter lead times and superior quality. This was quickly followed by the addition of unique annealing capabilities, and the introduction of bar turning and straightening to HAI's service offering. In 1997, we expanded this plant to 250,000 square feet, allowing us to double our heat treating capacity and to triple our bar turning output. Today, H-A Industries generates an outstanding revenue stream with superior margins. Yet, it represents just one aspect of our integrated processing strategy. We continue to reinforce The Castle Difference by investing aggressively in other "backward integration" opportunities which were previously available only at the producer level, as well as highly sophisticated "forward integration" opportunities such as precision sawing and double disk grinding. We completed a massive three-year expansion of our North American plate processing capabilities, boosting our capacity by 40% nationwide. And we significantly expanded our bar processing capabilities with sawing systems and centerless grinding operations. In 1997, we introduced laser, water-jet and plasma bevel cutting equipment, making Castle the only metals distributor with all three of these advanced capabilities. In the future, you will see more of these types of processes, which are essential in creating a Difference that is so distinctly recognizable that it becomes an integral part of the Castle brand name. In addition to expanding our traditional core business, recent acquisitions and joint ventures have opened the door to new market niches and distribution channels. Much attention has been paid in the media to the new "super-acquirers", who accumulate small independent, local or regional participants within a fragmented industry into a huge 1990 - ---------------------------------------------------------------------------- Castle moves into Canada with the acquisition of Norton Steel Co., Ltd., our Canadian subsidiary. 1992 - ----------------------------------------------------------------------------- Castle becomes the first major U.S. metals service chain to obtain ISO 9002 certification, the internationally recognized quality standard for competing globally. 1993 - ------------------------------------------------------------------------------ [logo] H-A Industries is established. Its unique CNC quench and temper heat treat line begins producing alloy bars for distribution throughout North America. 1994 - ------------------------------------------------------------------------------- With the help of an outstanding joint venture partner, Castle establishes a foothold in Monterrey, Mexico. - ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 9 12 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. THE 1990s: DEVELOPING NEW DISTRIBUTION CHANNELS umbrella company. Like other consolidating industries, the metals distribution industry has felt the imprint of the "super-acquirers". While we do not dispute the merits of their consolidation strategy, our own approach is quite different. In fact, none of the nine companies which we acquired in the past several years were even for sale. We sought them out after we had first identified the niches which we wanted to penetrate, and because we believed they were ideally positioned to help us rapidly expand our core business. Another major point of differentiation is the strict investment criteria which all of our acquisition candidates must meet. Applying the same tough standards to these companies as we do to our core business, they must have the potential to achieve a #1 or #2 market position in their respective niches. They must also possess processing technologies and/or highly engineered products that can be leveraged across our entire distribution network. In terms of financial targets, they must be capable of meeting aggressive double-digit annual revenue growth targets, and they must be profit contributors from Day One. And finally, acquisition candidates must be led by an entrepreneurial management team that shares our vision and values. So clearly, we believe that each of the companies acquired in the past several years has the potential to contribute the kind of growth and market presence which we achieved with Hy-Alloy Steels and Pacific Metals, the catalysts for our transformation into a specialty metals distributor. Now, let's take a closer look at the specific strategies behind each of the platform businesses we've created. [ TPI LOGO ] Acquired in January 1996, TOTAL PLASTICS, INC. ("TPI") marked our first step in this new direction as well as a unique opportunity to transfer our distribution expertise into another highly engineered material. An industrial plastics distributor with $25 million in annual revenues, TPI's high value-added market approach affords strikingly similar strategic versus operating synergies. With the subsequent acquisitions of PONTIAC PLASTICS and ASN PLASTICS, we have created an excellent platform for building TPI into one of the Midwest's largest distributors and fabricators of industrial plastics. Through our joint venture with KREHER STEEL CO., we gained instant entree to a major market channel that we hadn't previously served. Kreher, a Chicago-based distributor of alloy, SBQ and stainless bars with $110 million in 1996 sales, focuses on several of Castle's core products. But while our marketing strategy emphasizes high value-added services, Kreher approaches the market with a "full-bundle" orientation geared toward customers whose primary need is reliable, immediate deliveries of larger quantities of material. Together, we have created a major force in the distribution of specialty bars to the North American OEM market. [ CUTTER LOGO ] Following rapidly on the heels of our joint venture agreement with Kreher, we acquired CUTTER PRECISION METALS, a $25 million a year distributor with operations in Kent, Washington and Santa Clara, California. The advantages of this new platform business are three-fold. First, we expanded our presence in the northwest region of the U.S. Second, we added another precision processing capability not available elsewhere in our business. And longer-term, we gain the opportunity to bring Cutter's unique expertise to a wide range of high-end, technology-driven industries across North America. As previously stated, we are committed to supporting our customers' globalization of their production processes where and when 1995 - ---------------------------------------------------------------------------- [logo] Castle acquires Kalamazoo, Michigan-based Total Plastics, Inc., a plastics distributor with a strong value-added focus. 1996 - ----------------------------------------------------------------------------- Total Plastics, Inc. expands with the purchase of Pontiac Plastics & Supply Co., a distributor and fabricator serving the Detroit market. 1996 - ----------------------------------------------------------------------------- Castle enters a joint venture with Kreher Steel Co., a Chicago-based bulk distributor of alloy, SBQ and stainless bars. 1996 - ------------------------------------------------------------------------------ [logo] Castle acquires Cutter Precision Metals, a Northwest-based high value-added specialty metals distributor and precision processor. - ------------------------------------------------------------------------------ 10 1997 ANNUAL REPORT 13 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. BEYOND THE 1990s: GROWING THE CASTLE DIFFERENCE we can add value to their efforts. This commitment took us into Mexico in 1994, when we established CASTLE DE MEXICO through a joint venture agreement. And in 1997, we established a base in Europe with the acquisition of HIGH PERFORMANCE ALLOYS, LTD., a privately owned distributor headquartered in Manchester, England. [LOGO] After years of searching for the best entree to the broad fluid power market, we believe the acquisition of KEYSTONE TUBE and the subsequent acquisition of KEYSTONE HONING may, together, prove to be the most significant development of 1997. With annual revenues of $55 million, Keystone is a leading distributor and processor of tubular products and chrome plated bar. Going forward, the combination of Keystone and Castle creates an opportunity to penetrate and, longer-term, even dominate the fluid power industry in a way that neither company could achieve on its own. Today, the name A. M. Castle & Co. reflects an identity that goes well beyond that of the original Castle Metals. In the space of three momentous years, we have created a family of companies, the sum of which are worth far more collectively than as stand-alone businesses. Heading toward the millennium, The Castle Difference will become even more pronounced as we continue to innovate and anticipate the needs of our customers. Castle has two great advantages as it leads the way into the future. The first is our current positioning, which is the end-result of the many large and small steps taken over the past three decades. We have built our company into North America's largest industrial distributor of highly engineered metals and value-added services. As you've seen in this historical perspective, our customer base has changed right along with us. Their requirements for just-in-time inventory, EDI linkages, advanced processing technologies and total customer solutions have caused the evolution of the metals distribution business to advance at an unprecedented pace. But there is no let-up in their drive for continued productivity improvement. In fact, we are already gearing up to meet customers' requirements for further advances in working capital management, integrated supplier communications, reduced cycle times and increasingly demanding performance and service features. As an industry leader, we believe these trends will fuel even greater recognition of The Castle Difference. Looking ahead, our commitment to continuous process improvement will also be increasingly critical. The quick fixes were made years ago. The improvements we're making now are designed to raise our performance, particularly in customer satisfaction, process excellence, quality and cost efficiency. To accelerate this process, we're working to move decision making as close to the customer as possible. The benefits have already started, but will be seen increasingly this year and in the years that follow. Not headline-making news perhaps, but ultimately very rewarding. The changes we're making now aren't a dramatic departure from where we've been going all along. They're aimed at making us the best industrial distributor of highly engineered metals as defined by our customers, our employees, and you, our shareholders. They're a natural by-product of the direction Castle has been heading in for years. The other great advantage we have as we move towards the 21st century is the Castle team of employees. Committed to doing their consistently best work, we'll be prepared not just to compete in the years ahead but to grow and prosper as never before. 1996 - ------------------------------------------------------------------------------- Castle acquires High Performance Alloys, Ltd., a distributor of high value-added specialty metals to European-based chemical, petrochemical, nuclear power generation and aerospace manufacturers. 1997 - ------------------------------------------------------------------------------- Total Plastics, Inc., acquires Indiana-based ASN Plastics, bringing its network to six service locations. 1997 - ------------------------------------------------------------------------------ [logo] Castle acquires Keystone Tube, a specialty distributor and processor of tubular products and chrome plated bar. 1997 - ------------------------------------------------------------------------------ The acquisition of Keystone Honing Corp, a value-added processor of mechanical tubes and chrome plated bars, expands the range of tubular processing services to include trepanning, boring and gun drilling. - ------------------------------------------------------------------------------ 1997 ANNUAL REPORT 11 14 - ----------------------------------------------------------------------------- A. M. CASTLE & CO. CONSOLIDATED ELEVEN-YEAR FINANCIAL AND OPERATING SUMMARY
- ----------------------------------------------------------------------------------------------------------------- (Dollars in millions, except employee and per share data-Note 7) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands) 378 331 343 SUMMARY OF Net sales $754.9 $672.6 $627.8 EARNINGS Cost of sales 540.3 481.4 454.4 ----------------------- Gross profit 214.6 191.2 173.4 Operating expenses 164.7 140.2 121.7 Depreciation 6.2 5.0 4.5 ---------------------- Profit from operations 43.7 46.0 47.2 Interest expense, net 4.2 2.9 2.9 ---------------------- Income before income taxes 39.5 43.1 44.3 Income taxes 15.7 17.0 17.5 ---------------------- Net income 23.8 26.1 26.8 Cash dividends 9.2 8.0 6.0 ---------------------- Reinvested earnings $ 14.6 $ 18.1 $ 20.8 ====================== - ----------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) 14,041 14,008 13,945 (NOTE 7) Net income per share basic $ 1.70 $ 1.86 $ 1.93 Net income per share diluted $ 1.69 $ 1.86 $ 1.93 Cash dividends per share $ .66 $ .57 $ .43 Book value per share $ 9.74 $ 8.70 $ 7.41 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital $119.8 $ 80.0 $ 84.4 POSITION Property, plant and equipment, net $ 77.4 $ 62.7 $ 44.5 AT YEAR-END Total assets $366.4 $261.4 $222.5 Short-term debt $ -- $ -- $ -- Long-term debt $ 90.7 $ 40.9 $ 28.0 Stockholders' equity $136.7 $121.9 $103.4 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales 3.2% 3.9% 4.3% RATIOS Asset turnover 2.1 2.6 2.8 Return on assets 6.5% 10.0% 12.0% Leverage factor 3.0 2.5 2.7 Return on opening stockholders' equity 19.6% 25.3% 32.6% Percent earnings reinvested 61.3% 69.3% 77.6% Percent increase (decrease) in equity 12.1% 17.9% 25.8% - ----------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment $ 16.2 $ 22.5 $ 11.8 Stockholders at year-end 1,699 1,613 1,618 Employees at year-end 1,877 1,505 1,231 Per employee data (in thousands) Net sales $402.2 $446.9 $510.0 Gross profit $114.3 $127.0 $140.8 Operating expenses, including depreciation $ 91.0 $ 96.4 $102.5 Profit from operations $ 23.3 $ 30.6 $ 38.3 - -----------------------------------------------------------------------------------------------------------------
This schedule is prepared reflecting accounting changes as required or allowed to more fairly present the results of operations over the eleven-year period. Statements for years preceding these changes have not been revised to reflect their retroactive application of these changes. Refer to prior year annual reports for specific accounting changes. - ------------------------------------------------------------------------------ 12 1997 ANNUAL REPORT 15 - ------------------------------------------------------------------------------ A. M. CASTLE & CO.
------------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 1989 1988 1987 ------------------------------------------------------------------------------------------ 338 308 249 234 248 255 277 258 $536.6 $474.1 $423.9 $436.4 $478.9 $501.1 $499.3 $376.1 391.4 351.8 313.7 331.1 363.6 380.6 375.1 282.1 ------- ------- -------- -------- -------- -------- -------- -------- 145.2 122.3 110.2 105.3 115.3 120.5 124.2 94.0 112.1 102.1 94.9 92.8 97.5 96.7 92.6 74.9 4.6 4.8 4.9 5.3 5.2 4.4 3.9 3.7 ------- ------- -------- -------- -------- -------- -------- -------- 28.5 15.4 10.4 7.2 12.6 19.4 27.7 15.4 3.2 3.8 4.3 6.8 6.8 5.1 5.1 3.3 ------- ------- -------- -------- -------- -------- -------- -------- 25.3 11.6 6.1 .4 5.8 14.3 22.6 12.1 9.9 4.7 2.7 .2 2.7 5.6 8.9 5.5 ------- ------- -------- -------- -------- -------- -------- -------- 15.4 6.9 3.4 .2 3.1 8.7 13.7 6.6 3.6 2.9 2.9 3.9 4.9 4.7 3.5 3.0 ------- ------- -------- -------- -------- -------- -------- -------- $ 11.8 $ 4.0 $ 0.5 $(3.7) $(1.8) $ 4.0 $ 10.2 $ 3.6 ======= ======= ======== ======== ======== ======== ======== ======== ------------------------------------------------------------------------------------------ 13,850 13,646 13,643 13,643 13,616 13,538 13,481 13,381 $ 1.12 $ .50 $ .25 $ .02 $ .23 $ .64 $ 1.02 $ .50 $ 1.11 $ .50 $ .25 $ .02 $ .23 $ .64 $ 1.01 $ .49 $ .26 $ .22 $ .22 $ .29 $ .36 $ .34 $ .26 $ .22 $ 5.94 $ 5.10 $ 4.80 $ 4.74 $ 5.02 $ 5.15 $ 4.86 $ 4.14 ------------------------------------------------------------------------------------------ $ 76.0 $ 86.1 $ 75.3 $ 79.7 $ 89.9 $ 75.8 $ 89.0 $ 47.9 $ 41.2 $ 41.0 $ 43.2 $ 47.4 $ 54.8 $ 45.3 $ 39.4 $ 35.7 $213.1 $204.2 $195.2 $190.4 $226.6 $202.3 $211.9 $158.7 $ -- $ -- $ -- $ 0.2 $ 11.9 $ 0.5 $ -- $ 6.0 $ 38.5 $ 58.0 $ 53.0 $ 63.3 $ 76.7 $ 51.0 $ 61.0 $ 27.8 $ 82.2 $ 69.5 $ 65.5 $ 64.7 $ 68.3 $ 69.7 $ 65.5 $ 55.3 ------------------------------------------------------------------------------------------ 2.9% 1.5% 0.8% 0.1% 0.7% 1.7% 2.7% 1.8% 2.5 2.3 2.2 2.3 2.1 2.5 2.4 2.3 7.2% 3.4% 1.7% 0.1% 1.4% 4.3% 6.5% 4.2% 3.1 3.1 3.0 2.8 3.3 3.1 3.8 3.1 22.2% 10.5% 5.2% 0.3% 4.5% 13.2% 24.7% 12.9% 76.6% 58.0% 14.7% -% -% 46.3% 74.8% 54.0% 18.3% 6.1% 1.2% (5.3%) (2.0%) 6.4% 18.5% 7.3% ------------------------------------------------------------------------------------------ $ 7.9 $ 4.6 $ 1.8 $ 3.3 $ 13.4 $ 10.4 $ 7.8 $ 2.6 1,639 1,625 1,670 1,750 1,730 1,747 1,732 1,750 1,185 1,204 1,196 1,268 1,379 1,371 1,373 1,232 $452.8 $393.8 $354.4 $344.2 $347.3 $365.5 $363.7 $305.3 $122.5 $101.6 $ 92.1 $ 83.0 $ 83.6 $ 87.9 $ 90.5 $ 76.3 $ 98.5 $ 88.8 $ 83.4 $ 77.4 $ 74.5 $ 73.7 $ 70.3 $ 63.8 $ 24.0 $ 12.8 $ 8.7 $ 5.6 $ 9.1 $ 14.2 $ 20.2 $ 12.5 ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ 1997 ANNUAL REPORT 13 16 - ------------------------------------------------------------------------------ A. M. CASTLE & CO. FINANCIAL REVIEW This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes. OVERVIEW 1997 marked another year of significant growth for A. M. Castle & Co. The Company's primary market -- the North American producer durable equipment market -- continued to grow at historically healthy and stable rates. While final figures are not yet available, the latest Commerce Department data estimates 12% annual growth for this sector versus 4% growth for the economy as a whole. Activity levels at Castle remained strong throughout the year. In fact, the months of November and December, which normally reflect a seasonal holiday slowdown, showed surprising strength, providing a good finish to the year. Sales were again the highest in Company history, breaking the previous record set last year. Earnings also remained strong, down slightly from the record-setting years in 1996 and 1995. The past year also marked a period of aggressive expansion through internal growth and acquisitions into new markets and complementary lines of business. As in the prior year, the new ventures contributed to record sales levels and helped offset some of the earnings erosion caused by flat pricing and inflationary pressures occurring in the Company's core business environment. 1997 COMPARED WITH 1996 Net sales for 1997 totaled $754.9 million, an increase of 12.2% over 1996's $672.6 million. Excluding sales generated from our 1996 and 1997 acquisitions, sales in our core business increased by 5.0%. Carbon and stainless steels generated 73% of total sales, with the balance provided by non-ferrous metals. Castle continued to concentrate on gross margin improvement as a component of long term profitability. In 1997, gross margin percentage remained very strong at 28.4%, the same percentage achieved in 1996. The Company's value-added service strategy continues to yield a positive effect on overall gross margins. Total gross profit was $214.6 million in 1997, up 12.2% from 1996's level of $191.2 million. Excluding gross margins generated from our 1996 and 1997 acquisitions, total gross margin increased by 4.2%. Substantially all inventories are valued using the LIFO method (last-in, first-out) method. This method had the effect of decreasing Castle's cost of sales by $1.1 million in 1997, compared with what it would have been on a FIFO basis. Total operating expenses for 1997 were $164.7 million, compared with $140.1 million last year, a 17.6% increase. Excluding the expenses of our acquired businesses, 1997 operating expenses were up 9.8% as compared to 1996. As a percentage of sales, consolidated operating expenses were 21.8% in 1997 as compared to 20.8% of sales in 1996. Depreciation expense increased by $1.2 million from 1996 primarily due to the depreciation expense associated with the acquired companies. Net interest expense increased by $1.3 million due to higher average borrowings in support of the Company's recent acquisitions. The Company's effective income tax rate at 39.7% was relatively unchanged from the previous year. Increased sales and earnings contributions from recently acquired businesses helped offset some of the earnings erosion experienced due to inflationary pressures in a relatively flat pricing environment. Earnings for the year totaled $23.8 million as compared to $26.1 million in 1996. Basic earnings per share were $1.70 for the year as compared to $1.86 per share last year. 1996 COMPARED WITH 1995 Net sales for 1996 totaled $672.6 million, an increase of 7.1% over 1995's $627.8 million. Excluding sales generated from our acquisitions, sales declined by 0.4%, with unit volume decreasing by 3.1%. Carbon and stainless steels generated 74% of total sales, with the balance provided by non-ferrous metals. In 1996, cost of sales as a percentage of total sales decreased. Gross margin percentage increased to 28.4% compared to 27.6% for 1995. The Company's emphasis on providing value-added services contributed to the improved margin performance over the previous year. Total gross profit was $191.2 million in 1996, up 10.3% from 1995's level of $173.4 million. Excluding gross margins generated from our acquisitions, gross margin increased slightly by 0.6%. In 1996, LIFO had the effect of decreasing Castle's cost of sales by $8.8 million as compared with a $14.6 million increase in cost of sales due to LIFO in 1995. Total operating expenses for 1996 were $140.1 million, compared with $121.7 million in the preceding year, a 15.1% increase. Excluding the expenses of our acquired businesses, 1996 operating expenses were up by 3.3% as compared to 1995. As a percentage of sales, expenses were 20.8% in 1996 as compared to 19.4% of sales in 1995. Depreciation expense increased by $0.5 million from 1995 primarily due to the additional depreciation expense associated with the acquired companies. Net interest expense declined 2.5% due to lower average borrowings. The Company's effective income tax rate at 39.5% remained - ----------------------------------------------------------------------------- 14 1997 ANNUAL REPORT 17 - ----------------------------------------------------------------------------- A.M. CASTLE & CO. FINANCIAL REVIEW unchanged from the previous year. The increased revenues and the effect of the Company's operating leverage on incremental sales helped to offset some of the softness in the economy and provide a strong earnings year for Castle. Continuing focus on gross margins and operating expenses also contributed to the strong earnings performance. Earnings for the year totaled $26.1 million, or $1.86 per share, versus $26.8 million or $1.93, a share in 1995. CAPITAL EXPENDITURES Capital expenditures during 1997 totaled $16.2 million as compared with the $22.5 million expended in 1996. Capital expenditures in 1997 included approximately $4.1 million for additional processing equipment at H-A Industries along with $8.3 million expended for processing and material handling equipment throughout the rest of the Company. The remaining expenditures were aimed at enhancing existing facilities and maintaining property and equipment in good working order. In 1996, capital expenditures included approximately $10.5 million for construction of new facilities in Minneapolis, Minnesota, which opened in mid 1996, and Charlotte, North Carolina, which opened in January of 1997. An additional $3.0 million was spent to expand H-A Industries' processing capabilities along with an additional $4.5 million expended for processing and material handling equipment throughout the company. The balance of 1996 expenditures were aimed at enhancing existing facilities and maintaining property and equipment in good working order. During 1997 and 1996, the Company sold and leased back approximately $2.4 million and $2.5 million of fixed assets, respectively, which added to cash flow and reduced long-term borrowing. LIQUIDITY AND CAPITAL RESOURCES Castle places a great emphasis on maintaining a strong balance sheet and financial position. Continued earnings strength and cash flow over the past three years have provided funds for capital expansion and acquisitions, while long-term borrowings and debt ratios have been maintained at, or below, the Company's target range. At year end 1997, stockholders' equity had increased 12.1% over the prior year to $136.7 million, or $9.74 per share. The previous strong earnings achieved in 1996 and 1995 added 47% to stockholders' equity, resulting in a three-year increase in total net worth of 66%. Total borrowings were $93.4 million at year end 1997 as compared to $43.4 million at 1996 year end. Our debt-to-capital ratio was 40.6% at year end 1997 as compared to 26.3% at the end of 1996 and 22.9% at the end of 1995. Accounts receivable rose in 1997 reflecting the increase in sales levels. The number of days outstanding at the end of 1997 was slightly decreased from 1996. Collections remain strong and in line with target levels. Management believes that the net accounts receivable at December 31, 1997 are of a very good quality. Inventory levels increased $58.7 million from 1996. Of that amount, $20.8 million can be attributed to our acquisitions; $7.2 million was the result of discontinuing a consignment program; and $29.8 million was due to increases designed to support certain market initiatives and the higher level of business activity. Working capital was $119.8 million at December 31, 1997, compared with $80.0 million at December 31, 1996. Castle had unused committed and uncommitted lines of bank credit of $109.5 million at December 31, 1997, compared with $181.0 million at December 31, 1996. Management believes that funds generated from operations, existing lines of credit and additional borrowing capacity should provide adequate funding for current and anticipated business operations. YEAR 2000 The Company is currently modifying its computer systems in order to properly process transactions in the year 2000. Expenditures for these modifications are being expensed as incurred. The Company expects to have substantially all necessary modifications completed by late 1998 with no significant impact on the Company's ongoing results of operations. COMMON STOCK INFORMATION Symbol CAS
- ----------------------------------------------------------------------------------------- Dividends Stock Price Range 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------ First quarter $.15 $.12 17 1/4 20 7/8 20 3/8 25 Second quarter .17 .15 16 3/4 23 5/8 23 1/2 30 7/8 Third quarter .17 .15 21 3/4 26 1/2 16 3/4 23 1/4 Fourth quarter .17 .15 22 1/2 26 1/2 16 1/8 20 ----------- $.66 $.57 ===========
- ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 15 18 - -------------------------------------------------------------------------------- A. M. CASTLE & CO. SUPPLEMENTARY SCHEDULES The Company's LIFO inventory system charges cost of material sold at the inventory costs of its most recent purchases. The LIFO method matches current revenues with current costs of inventory. This method more fairly presents results of operations, whether in periods of inflation or deflation. The Supplementary Statements of Consolidated Financial Position are presented for analytical and comparative purposes. They are intended to display the Company's financial position as if the Company were on a FIFO-based inventory system rather than the LIFO-based inventory system the Company actually uses. The statements reflect taxes on the unrecognized inventory gain at statutory Federal rates and the Company's historical average state tax rates and give no effect to any supplemental expenses. Supplementary Statements Of Consolidated Financial Position
December 31, ================================================================================================ (Dollars in millions) 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Current assets Cash ......................................................... $ 2.8 $ 1.8 $ 0.7 Accounts receivable, net...................................... 88.5 68.8 63.4 Inventories, at latest cost .................................. 209.1 152.1 164.1 ------------------------------- Total current assets ........................................ 300.4 222.7 228.2 Less--current liabilities .................................... (146.4) (107.4) (104.0) ------------------------------- Net current assets ........................................... 154.0 115.3 124.2 Fixed and other assets, net ................................... 123.1 97.4 60.7 ------------------------------- Total assets, less current liabilities....................... 277.1 212.7 184.9 Long-term debt ................................................ (90.7) (40.9) (28.0) Deferred income taxes ......................................... (12.5) (11.4) (10.9) Other liabilities ............................................. (2.9) (3.2) (2.8) Unrecognized inventory gain, net of taxes ..................... (34.3) (35.3) (39.8) ------------------------------- Stockholders' equity .......................................... $136.7 $121.9 $103.4 =============================== - ------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- 16 1997 ANNUAL REPORT 19 - -------------------------------------------------------------------------------- A. M. CASTLE & CO. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ========================================================================================= (Dollars in thousands, except per share data) 1997 1996 1995 - ----------------------------------------------------------------------------------------- Net sales ............................................. $754,865 $672,617 $627,826 Cost of material sold.................................. 540,286 481,451 454,428 ------------------------------- Gross profit on sales................................. 214,579 191,166 173,398 ------------------------------- Expenses Operating expenses.................................... 164,659 140,144 121,652 Depreciation (Note 1)................................. 6,206 5,008 4,459 Interest expense, net (Notes 2 and 4) ................ 4,183 2,878 2,953 ------------------------------- 175,048 148,030 129,064 ------------------------------- Income before income taxes............................. 39,531 43,136 44,334 ------------------------------- Income taxes (Notes 1 and 3) Federal-currently payable............................. 10,152 12,845 14,114 -deferred ..................................... 2,469 934 (72) State................................................. 3,065 3,253 3,466 ------------------------------- 15,686 17,032 17,508 ------------------------------- Net income............................................. $ 23,845 $ 26,104 $ 26,826 =============================== Basic income per share (Notes 1 and 7)................. $ 1.70 $ 1.86 $ 1.93 =============================== Diluted income per share (Notes 1 and 7)............... $ 1.69 $ 1.86 $ 1.93 =============================== - --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
Years Ended December 31, ====================================================================================== (Dollars in thousands, except per share data) 1997 1996 1995 - -------------------------------------------------------------------------------------- Balance at beginning of year............................. $100,124 $ 81,998 $ 61,178 Net income .............................................. 23,845 26,104 26,826 Cash dividends--$.66 in 1997, $.57 per share in 1996 and $.43 per share in 1995 (Note 7)......................... (9,260) (7,978) (6,006) ---------------------------- Balance at end of year................................... $114,709 $100,124 $ 81,998 ============================ - --------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. - -------------------------------------------------------------------------------- 1997 ANNUAL REPORT 17 20 - -------------------------------------------------------------------------------- A. M. CASTLE & CO. CONSOLIDATED BALANCE SHEETS
Years Ended December 31, ============================================================================================================================== (Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ ASSETS Current assets Cash (Note 1) ................................................................................. $ 2,775 $ 1,805 $ 667 Accounts receivable, less allowances of $600 in 1997, $700 in 1996, and $600 in 1995 ............................................................................. 88,478 68,791 63,408 Inventories--principally on last-in, first-out basis (latest cost higher by approximately $57,100 in 1997, $58,800 in 1996, and $66,300 in 1995) (Note 1)................................................................... 152,028 93,315 97,766 ---------------------------- Total current assets.......................................................................... 243,281 163,911 161,841 ---------------------------- Prepaid expenses and other assets (Note 1)...................................................... 45,684 34,742 16,245 ---------------------------- Property, plant and equipment, at cost (Notes 1 and 5) Land .......................................................................................... 5,915 5,775 4,955 Buildings...................................................................................... 48,366 40,817 35,485 Machinery and equipment........................................................................ 99,359 82,265 64,535 ---------------------------- 153,640 128,857 104,975 Less--accumulated depreciation ................................................................. 76,230 66,140 60,512 ---------------------------- 77,410 62,717 44,463 ---------------------------- Total assets.................................................................................... $366,375 $261,370 $222,549 ============================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable .............................................................................. $ 98,813 $ 63,860 $ 60,969 Accrued payroll and employee benefits (Note 6)................................................. 12,554 10,663 8,681 Accrued liabilities ........................................................................... 5,522 4,442 4,095 Current and deferred income taxes (Notes 1 and 3).............................................. 3,934 2,455 958 Current portion of long-term debt (Note 4) .................................................... 2,688 2,482 2,756 ---------------------------- Total current liabilities..................................................................... 123,511 83,902 77,459 ---------------------------- Long-term debt, less current portion (Note 4) .................................................. 90,735 40,934 28,015 ---------------------------- Deferred income taxes (Notes 1 and 3)........................................................... 12,543 11,427 10,893 ---------------------------- Other liabilities (Notes 1 and 6)............................................................... 2,877 3,181 2,819 ---------------------------- Stockholders' equity (Notes 1 and 7) Common stock, without par value--authorized 30,000,000 shares; issued and outstanding 14,040,924 in 1997, 14,008,792 in 1996 and 13,944,705 in 1995............................................................................. 27,293 26,681 25,441 Earnings reinvested in the business............................................................ 114,709 100,124 81,998 Other ......................................................................................... 85 257 229 Treasury stock, at cost (845,019 shares in 1997, 834,439 shares in 1996 and 799,268 shares in 1995).................................................................... (5,378) (5,136) (4,305) ---------------------------- Total stockholders' equity ................................................................... 136,709 121,926 103,363 ---------------------------- Total liabilities and stockholders' equity ..................................................... $366,375 $261,370 $222,549 ============================
- -------------------------------------------------------------------------------- The accompanying notes to consolidated financial statements are an integral part of these statements. - -------------------------------------------------------------------------------- 18 1997 ANNUAL REPORT 21 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, =============================================================================== (Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Cash flows from operating activities Net income...................................... $ 23,845 $ 26,104 $ 26,826 Adjustments to reconcile net income to net cash provided from operating activities Depreciation.................................... 6,206 5,008 4,459 (Gain) loss on sale of facilities/equipment..... 22 (112) (90) Increase in deferred taxes...................... 670 458 3,121 (Increase) in prepaid expenses and other assets. (63) (3,388) (2,391) Vested portion of restricted stock awards....... 207 198 161 Increase (decrease) in other liabilities........ (1,187) 362 294 ---------------------------- Cash provided from operating activities before changes in current accounts..................... 29,700 28,630 32,380 ---------------------------- Increase (decrease) from changes in: Accounts receivable........................... (12,590) 2,619 (4,516) Inventories................................... (43,507) 10,835 449 Accounts payable.............................. 28,787 (8,727) (313) Accrued payroll and employee benefits......... 1,300 160 (1,162) Accrued liabilities........................... 188 216 (766) Current and deferred income taxes............. 1,287 1,182 (1,363) ---------------------------- Net increase (decrease) from changes in current accounts............................. (24,535) 6,285 (7,671) ---------------------------- Net cash provided from operating activities....... 5,165 34,915 24,709 ---------------------------- Cash flows from investing activities Investments and acquisitions (Note 9)........... (29,265) (17,984) -- Proceeds from sales of facilities/equipment (Note 5)................. 2,470 2,521 4,140 ---------------------------- Capital expenditures............................ (16,182) (22,544) (11,782) ---------------------------- Net cash used by investing activities............. (42,977) (38,007) (7,642) ---------------------------- Cash flows from financing activities Proceeds from issuance of long-term debt........ 50,838 23,060 4,685 Repayments of long-term debt.................... (2,787) (11,091) (16,276) Dividends paid.................................. (9,260) (7,978) (6,006) Net proceeds from issuance of stock............. 161 211 236 Other........................................... (170) 28 (15) ---------------------------- Net cash provided from (used by) financing activities............................ 38,782 4,230 (17,376) ---------------------------- Net increase (decrease) in cash................... 970 1,138 (309) Cash--beginning of year........................... 1,805 667 976 ---------------------------- Cash--end of year................................. $ 2,775 $ 1,805 $ 667 ============================ Supplemental disclosures of cash flow information Cash paid during the year for-- Interest...................................... $ 4,209 $ 2,997 $ 3,045 ---------------------------- Income taxes.................................. $ 13,729 $ 15,268 $ 15,750 ---------------------------- - --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. - -------------------------------------------------------------------------------- 1997 ANNUAL REPORT 19 22 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) PRINCIPAL ACCOUNTING POLICIES AND BUSINESS DESCRIPTION Nature of operations -- The Company is an industrial distributor of specialty metals including carbon, alloy, and stainless steels; nickel alloys; aluminum; titanium; copper and brass; throughout the United States and Canada. The customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized ones in various industries primarily within the producer durable equipment sector. The Company also distributes industrial plastics through its subsidiary Total Plastics, Inc. Basis of presentation -- The financial statements include A. M. Castle & Co. (the Company) and its subsidiaries. All intercompany accounts and transactions have been eliminated. Use of estimates -- The financial statements have been prepared in accordance with generally accepted accounting principles which necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. Cash -- For the purposes of these statements, short-term investments which have a maturity of 90 days or less are considered cash equivalents. Inventories -- Substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. The Company values its LIFO increments using the costs of its latest purchases during the years reported. Property, plant and equipment -- Property, plant and equipment are stated at cost and include assets held under capitalized leases. Major renewals and betterments are capitalized, while maintenance and repairs which do not substantially improve or extend the useful lives of the respective assets are expensed currently. When properties are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. The Company provides for depreciation of plant and equipment by charging against income amounts sufficient to amortize the cost of properties over their estimated useful lives (buildings--12 to 40 years; machinery and equipment--5 to 20 years). Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Included in depreciation expense is the amortization of assets under capital leases. Other liabilities -- Includes postretirement benefit obligations along with the minority interest in consolidated subsidiaries. Income taxes -- Income tax provisions are based on income reported for financial statement purposes. Retirement plan costs -- The Company accrues and funds its retirement plans based on amounts, as determined by an independent actuary, necessary to maintain the plans on an actuarially sound basis. The Company also provides certain health care and life insurance benefits for retired employees. The cost of these benefits are recognized in the financial statements during the employee's active working career. Earnings per share -- In accordance with SFAS No. 128 "Earnings per Share" below is a reconciliation of the basic and diluted earnings per share calculations for the three year reporting period. (dollars and shares in thousands)
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Net income........................................ $23,845 $26,104 $26,826 Weighted average common shares outstanding........ 14,026 14,000 13,894 Dilutive effect of outstanding employee and directors' common stock options............. 49 68 33 ---------------------------- Diluted common shares outstanding................. 14,075 14,068 13,927 Basic earnings per share.......................... $ 1.70 $ 1.86 $ 1.93 ============================ Diluted earnings per share........................ $ 1.69 $ 1.86 $ 1.93 ============================ Outstanding employee and directors' common stock options having no dilutive effect......... 8 8 0 ============================ - -------------------------------------------------------------------------------
Goodwill -- Cost in excess of net assets of acquired companies is amortized on a straight-line basis over a 40 year period. As required, the Company continually evaluates whether later events or circumstances warrant a revision in the remaining useful life and recoverability of the unamortized balance. (2) SHORT-TERM DEBT Short-term borrowing activity was as follows (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Maximum borrowed.................................. $ 8,500 $ 5,000 $ 7,450 Average borrowed.................................. 1,003 884 1,947 Average interest rate During the year................................. 5.8% 5.5% 6.1% - -------------------------------------------------------------------------------
(3) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's Federal and state deferred tax liabilities and assets as of December 31, 1997, 1996 and 1995 are as follows (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation.................................... $ 7,688 $ 6,547 $ 5,666 Inventory, net.................................. 4,912 2,858 2,799 Pension......................................... 5,608 5,743 5,030 Other, net...................................... (1,173) (1,612) (59) ---------------------------- Net deferred liabilities...................... 17,035 13,536 13,436 Deferred tax assets: Postretirement benefits......................... 937 1,426 1,271 ---------------------------- Net deferred tax liabilities.................. $ 16,098 $ 12,110 $ 12,165 ============================ - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 20 1997 ANNUAL REPORT 23 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the provision (benefit) for deferred Federal income tax for the years ended December 31, 1997, 1996 and 1995, are as follows (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Depreciation...................................... $ 257 $ 537 $ 415 Inventory, net.................................... 1,753 125 (1,124) Pension/Postretirement benefits................... 428 621 963 Other, net........................................ 31 (349) (326) ---------------------------- $ 2,469 $ 934 $ (72) ============================ - -------------------------------------------------------------------------------
A reconciliation between the statutory Federal income tax amount and the effective amounts at which taxes were actually provided is as follows (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Federal income tax at statutory rates............. $ 13,836 $ 15,098 $ 15,517 State income taxes, net of Federal income tax benefits............................. 1,864 2,103 2,248 Net operating loss carry-forward.................. -- -- (296) Other............................................. (14) (169) 39 ---------------------------- $ 15,686 $ 17,032 $ 17,508 ============================ - -------------------------------------------------------------------------------
(4) LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1997, 1996 and 1995 (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Revolving credit agreement (a) (c)................ $ 25,838 $ -- $ 7,640 6.49% insurance company term loan, due in equal installments from 2004 through 2008............. 20,000 20,000 -- 9.3% insurance company term loan, due in equal installments through 2000....................... 4,980 6,650 8,320 7.53% insurance company term loan due in equal installments from 1999 through 2005............. 4,600 4,600 4,600 Industrial development revenue bonds at variable rates, due in varying amounts through 2010 (b) (c).................................... 10,791 11,058 8,700 7.54% insurance company loan due in equal installments from 2005 through 2009............. 25,000 -- -- Other............................................. 2,214 1,108 1,511 ---------------------------- Total............................................. 93,423 43,416 30,771 Less -- current portion........................... (2,688) (2,482) (2,756) ---------------------------- Total long-term portion........................... $ 90,735 $ 40,934 $ 28,015 ============================ - -------------------------------------------------------------------------------
The carrying value of long term debt does not differ materially from their estimated fair value as of December 31, 1997. (a) The Company has revolving credit agreements of $70.0 million domestically and $7.4 million with a Canadian bank. The credit facilities are five-year revolvers, extended annually by mutual agreement. Under these credit arrangements all borrowings are considered to be long-term debt for balance sheet presentation purposes. Interest rate options on the domestic facility are based on Eurodollar Interbank Rates, Reference Rates or competitive Bid Rates from five participating banks. A commitment fee of .2% of the unused portion of the commitment is required on the domestic facility. (b) The industrial revenue bonds are based on a variable rate demand bond structure and are backed by a letter of credit. (c) The most restrictive provisions of the loan agreements require the Company to maintain minimum funded debt to total capitalization ratios. At December 31, 1997, the Company was in compliance with all restrictive covenants. (d) Aggregate annual principal payments required on the noncurrent portion of long-term debt (including obligations under capital leases) are due as follows (in thousands): 1999 $2,834 2000 $2,778 2001 $1,149 2002 $1,046 ====== ====== ====== ====== Total net book value of assets collateralized under financing arrangements approximated $1.9 million at December 31, 1997. Net interest expense reported on the accompanying Consolidated Statements of Income was reduced by interest income of $0.2 million in 1997, $0.3 million in 1996 and $ 0.1 million in 1995. (5) LEASE AGREEMENTS (a) Description of leasing arrangements--The Company has capital and operating leases covering certain warehouse facilities, equipment, automobiles and trucks, with lapse of time as the basis for all rental payments plus a mileage factor included in the truck rentals. (b) Capital leases--Obligations under capitalization of leases are not significant. (c) Operating leases--Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997, are as follows (in thousands):
=============================================================================== Year ending December 31, - ------------------------------------------------------------------------------- 1998............................................................... $ 6,161 1999............................................................... 4,808 2000............................................................... 3,329 2001............................................................... 2,526 2002............................................................... 1,545 Later years........................................................ 9,768 ------- Total minimum payments required....................................... $28,137 ======= - -------------------------------------------------------------------------------
(d) Rental expense--Total rental payments charged to expense were $9.5 million in 1997, $8.9 million in 1996 and $7.8 million in 1995. (e) Sale and leaseback of assets--During 1997, 1996 and 1995 the Company sold and leased back equipment under operating leases with terms ranging from five to eight years. The assets sold at approximately net book value for proceeds of $2,421,000, $2,473,000 and $4,059,000 respectively. The 1997 lease allows for a purchase option at the end of the lease term of $738,000. The 1996 and 1995 leases allow for a purchase option at the end of the lease term of $779,000 and $1,349,000 respectively. Annual rentals are $326,000 for the 1997 lease, $336,000 for the 1996 lease, and $615,000 for the 1995 leases. - ------------------------------------------------------------------------------- 1997 ANNUAL REPORT 21 24 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) RETIREMENT, PROFIT-SHARING AND INCENTIVE PLANS Substantially all employees who meet certain requirements of age, length of service and hours worked per year are covered by Company-sponsored retirement plans. These retirement plans are defined benefit, noncontributory plans. Benefits paid to retirees are based upon age at retirement, years of credited service and average earnings. The assets of the Company-sponsored plans are maintained in a single trust account. The majority of the trust assets are invested in common stock mutual funds, insurance contracts, real estate funds and corporate bonds. The Company's funding policy is to satisfy the minimum funding requirements of ERISA. The net pension expense/(credits) in 1997, 1996 and 1995 were composed of the following (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Normal service cost............................... $ 1,475 $ 1,798 $ 1,302 Interest cost on projected benefit obligation..... 4,327 4,261 3,929 Actual return on plan assets...................... (14,399) (7,373) (10,314) Net amortization and deferral..................... 8,607 1,572 4,866 ---------------------------- Net pension expense (credit)...................... $ 10 $ 258 $ (217) ============================ - -------------------------------------------------------------------------------
The status of the plans at December 31, 1997, 1996 and 1995, was as follows:
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Actuarial present value of vested benefit obligation.............................. $50,877 $44,011 $45,519 Plus--Nonvested benefit obligation.............. 2,057 2,670 3,180 ---------------------------- Vested and nonvested accumulated benefit obligation............................ 52,934 46,681 48,699 Plus--Projected salary increases benefit obligation............................ 11,035 9,894 9,407 ---------------------------- Projected benefit obligation.................... 63,969 56,575 58,106 Plan assets at fair market value................. 77,957 65,511 57,222 ---------------------------- Plan assets in excess of (less than) projected benefit obligation.............................. 13,988 8,936 (884) Items not yet recognized in earnings Unrecognized net transitional assets............ -- -- (976) Unrecognized net loss........................... 488 4,477 10,649 Unrecognized prior-service cost................. (118) 942 1,148 ---------------------------- Pension prepaid recognized on the consolidated balance sheets at December 31................... $14,358 $14,355 $ 9,937 ============================ - -------------------------------------------------------------------------------
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:
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Discount rate..................................... 7.25% 8.00% 7.25% Projected annual salary increases................. 4.75 4.75 4.75 Expected long-term rate of return on plan assets.. 9.50 9.50 9.50 - -------------------------------------------------------------------------------
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):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Profit sharing and 401-K.......................... $2,304 $2,469 $2,258 ============================ Management incentive.............................. $2,670 $2,664 $2,966 ============================ - -------------------------------------------------------------------------------
The Company also provides declining value life insurance to its retirees and a maximum of three years of medical coverage to qualified individuals who retire between the ages of 62 and 65. The Company does not fund these plans. During 1997, the Company elected to terminate the plan providing medical coverage to non-union employees who retire between the ages of 62 and 65 after March 31, 1998. The Company recognized a pre-tax gain of $1,449,000 as a result of this curtailment in coverage. Net postretirement benefit cost for 1997, 1996 and 1995 includes the following components (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost...................................... $169 $214 $154 Interest cost on accumulated postretirement benefit obligation............................... 283 311 313 Amortization of unrecognized prior service cost... 21 22 (26) Amortization of unrecognized net (gain) or loss... (3) 25 49 ---------------------------- Net periodic postretirement benefit cost.......... $470 $572 $490 ============================ - -------------------------------------------------------------------------------
The following is a reconciliation between the plan's funded status and the accrued postretirement benefit obligation as reflected on the balance sheet as of December 31, 1997, 1996 and 1995 (in thousands):
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees........................................ $1,382 $1,528 $2,003 Fully eligible active plan participants......... 189 133 147 Other active plan participants.................. 1,179 2,825 3,088 ---------------------------- 2,750 4,486 5,238 Unrecognized prior service cost................. (437) (459) (480) Unrecognized net (gain) or loss................. 81 (431) (1,523) ---------------------------- Accrued postretirement benefit obligation....... $2,394 $3,596 $3,235 ============================ - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 22 1997 ANNUAL REPORT 25 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future benefit costs were estimated assuming medical costs would increase at a 11.25% annual rate for the current year, with annual increases decreasing by 0.5% per year for one year, and 1% per year thereafter until an ultimate trend rate of 5.75% is reached. A 1% increase in the health care cost trend rate assumptions would have increased the accumulated postretirement benefit obligation at December 31, 1997 by $170,000 -with no significant effect on the 1997 postretirement benefit expense. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% in 1997, 8.00% in 1996 and 7.25% in 1995. (7) COMMON STOCK On April 23, 1996, the Company declared a 25% stock dividend which was accounted for as a 5-for-4 stock split and had no effect on common stock or reinvested earnings. All per share amounts presented reflect the effect of the 25% stock dividend on a retroactive basis. Changes in the common and treasury stock accounts during 1997, 1996 and 1995 were as follows (dollars in thousands):
=============================================================================== Common Stock Treasury Stock - ------------------------------------------------------------------------------- Shares Issued Amount Shares Amount - ------------------------------------------------------------------------------- December 31, 1994................... 14,595,107 $24,114 745,551 $3,375 Stock options exercised........... 132,055 1,166 53,691 930 Other............................. 16,810 161 25 -- ------------------------------------------ December 31, 1995................... 14,743,972 $25,441 799,267 $4,305 Stock options exercised........... 90,944 1,064 35,141 831 Other............................. 8,225 176 (59) -- ------------------------------------------ December 31, 1996................... 14,843,141 $26,681 834,349 $5,136 Stock options exercised........... 31,732 405 10,639 242 Other............................. 11,070 207 31 -- ------------------------------------------ DECEMBER 31, 1997................... 14,885,943 $27,293 845,019 $5,378 ========================================== - -------------------------------------------------------------------------------
The Company has long-term stock incentive and stock option plans for the benefit of officers, directors, and key management employees. The plans and related activity are summarized below. The 1989 Long-Term Incentive Plan authorized up to 421,875 shares of common stock for use under the plan. Compensation expense is recognized ratably over the vesting period as determined by the plan. Activity under the plan for 1997, 1996 and 1995 is as follows:
=============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Compensation expense.............................. $362,000 $330,000 $275,000 ============================ Shares awarded.................................... 11,070 8,945 16,810 ============================ - -------------------------------------------------------------------------------
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, 1994 307,798 10.33 6.27 - 12.07 Granted 8,000 12.10 12.10 Forfeitures (2,625) 7.07 7.07 Exercised (132,055) 8.83 6.27 - 12.07 ---------------------------------------- December 31, 1995 181,118 11.53 6.27 - 12.07 Granted 184,255 18.95 18.75 - 23.38 Exercised (90,944) 11.70 6.27 - 12.07 ---------------------------------------- December 31, 1996 274,429 16.44 6.27 - 23.38 Granted 111,400 21.88 21.88 Forfeitures (23,625) 15.79 6.27 - 21.88 Exercised (37,520) 13.95 6.60 - 18.75 ---------------------------------------- DECEMBER 31, 1997 324,684 18.64 6.60 - 21.88 ======================================== - -------------------------------------------------------------------------------
As of December 31, 1997, 220,384 of the 324,684 options outstanding, were currently exercisable and had a weighted average contractual life of 3.01 years with a weighted average exercise price of $17.11. The remaining 104,300 shares were not exercisable and had a weighted average contractual life of 4.5 years, with a weighted average exercise price of $21.88. The weighted average fair value of the current year's option grant is estimated to be $5.76 per share. The fair value has been estimated on the day of the grant using the Black Scholes option pricing model with the following assumptions, risk free interest rate of 5.5%, expected dividend yield of 3.0%, option life of 5 years, and expected volatility of 30 percent. The Company has chosen to account for the stock option plans in accordance with APB Opinion No. 25 under which no compensation expense has been recognized. Had compensation cost for these plans been determined under SFAS No. 123, the Company's 1997 net income would have been reduced by approximately $811,000 or $0.06 per share, and 1996 net income would have been reduced by approximately $490,000 or $0.03 per share. The effect on 1995 income was immaterial. (8) CONTINGENT LIABILITIES At December 31, 1997 total exposure under guarantees issued for banking facilities of unconsolidated affiliates was $15.5 million. The Company was contingently liable as endorser on discounted trade acceptances aggregating $6.5 million at December 31, 1997. Also, the Company has $1.6 million of irrevocable letters of credit outstanding to comply with the insurance reserve requirements of its workers' compensation insurance carrier. - -------------------------------------------------------------------------------- 1997 ANNUAL REPORT 23 26 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company is the defendant in several lawsuits arising out of the conduct of its business. These lawsuits are incidental and occur in the normal course of the Company's business affairs. It is the opinion of counsel that no significant uninsured liability will result from the outcome of the litigation, and thus there is no material financial exposure to the Company. (9) ACQUISITIONS During 1997 the Company purchased four distribution businesses. The aggregate cash consideration paid was $29,265,000 including certain transaction costs. The acquisitions have been accounted for as purchases and are included in the financial statements from the date of acquisition. Pro-forma results are not presented as the amounts do not significantly differ from historical results. (10) SELECTED QUARTERLY DATA (UNAUDITED) The unaudited quarterly results of operations for 1997 and 1996 are as follows (dollars in thousands, except per share data--Note 7):
=============================================================================== First Second Third Fourth Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------- 1997 QUARTERS NET SALES............................ $177,326 $187,981 $192,735 $196,823 GROSS PROFIT......................... 50,931 53,445 54,836 55,367 NET INCOME........................... 6,182 6,136 5,734 5,793 NET INCOME PER SHARE BASIC........... $ .44 $ .44 $ .41 $ .41 NET INCOME PER SHARE DILUTED............................ $ .44 $ .44 $ .41 $ .41 1996 quarters Net sales............................ $175,047 $174,797 $162,322 $160,451 Gross profit......................... 49,005 49,322 45,490 47,349 Net income........................... 7,622 7,025 5,258 6,199 Net income per share basic........... $ .54 $ .50 $ .38 $ .44 Net income per share diluted......... $ .54 $ .50 $ .37 $ .44 - -------------------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of A.M. Castle & Co.: We have audited the accompanying consolidated balance sheets of A.M. Castle & Co. (a Delaware corporation) and Subsidiaries as of December 31, 1997, 1996 and 1995, and the related consolidated statements of income, reinvested earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A.M. Castle & Co. and Subsidiaries as of December 31, 1997, 1996 and 1995, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 2, 1998. - -------------------------------------------------------------------------------- 24 1997 ANNUAL REPORT 27 - ------------------------------------------------------------------------------- A. M. CASTLE & CO. DIRECTORS DANIEL T. CARROLL Chairman The Carroll Group a management consulting firm EDWARD F. CULLITON Vice President and Chief Financial Officer WILLIAM K. HALL Chairman & Chief Executive Officer Falcon Building Products, Inc. a diversified manufacturing company ROBERT S. HAMADA Dean Graduate School of Business University of Chicago PATRICK J. HERBERT, III President Simpson Estates, Inc. a private management firm JOHN P. KELLER President Keller Group an industrial manufacturing & coal mining company JOHN W. MCARTER, JR. President The Field Museum a natural history museum RICHARD G. MORK President and Chief Executive Officer JOHN PUTH Principle J.W. Puth Associates a consulting firm MICHAEL SIMPSON Chairman of the Board RICHARD A. VIRZI Retired President and Chief Executive Officer A. M. Castle & Co. OFFICERS MICHAEL SIMPSON Chairman of the Board RICHARD G. MORK President and Chief Executive Officer EDWARD F. CULLITON Vice President and Chief Financial Officer SVEN G. ERICSSON Vice President- International M. BRUCE HERRON Vice President- Western Region STEPHEN V. HOOKS Vice President- Midwest Region FRITZ OPPENLANDER Vice President- Operations ALAN D. RANEY Vice President- Advanced Materials Group ROBERT A. ROSENOW Vice President- Plate & Carbon Products Group GISE VAN BAREN Vice President- Alloy Products Group CRAIG R. WILSON Vice President- Eastern Region PAUL J. WINSAUER Vice President- Human Resources JAMES A. PODOJIL Treasurer-Controller JERRY M. AUFOX Secretary- Legal Counsel HY-ALLOY STEELS CO. GISE VAN BAREN President and General Manager TOTAL PLASTICS, INC. JOHN A. KOZACKI President CUTTER PRECISION METALS KIRKLAN VOLL President KEYSTONE TUBE COMPANY MARC BIOLCHIN President GENERAL OFFICES 3400 North Wolf Road Franklin Park, IL 60131 847/455-7111 GENERAL COUNSEL Mayer, Brown & Platt TRANSFER AGENT & REGISTRAR American Stock Transfer and Trust Company COMMON STOCK TRADED American Stock Exchange Chicago Stock Exchange INDEPENDENT AUDITORS Arthur Andersen LLP DIVIDEND REINVESTMENT PLAN All registered holders of A. M. Castle & Co. common stock are eligible to participate in a convenient and economical Dividend Reinvestment Plan. Participants may also make voluntary cash payments. The company pays all commissions and fees associated with stock purchased under the Plan. If you own Castle common stock in "street name" (no certificates), please contact your brokerage firm for further information. DIVIDEND PAYMENT DATES Dividends are paid approximately four weeks following the regular Board meeting which are held on the fourth Thursday of January, April, July and October. ANNUAL MEETING The Annual Meeting of the Company's shareholders will be held at our corporate headquarters on Thursday, April 23, 1998 at 10 a.m. Our corporate headquarters address is 3400 North Wolf Road, Franklin Park, Illinois 60131. FORM 10-K A. M. Castle & Co. will be pleased to make its annual report on Form 10-K, filed with the Securities and Exchange Commission, available at no cost to interested stockholders on written request to the corporate secretary. 28 A. M. CASTLE & CO. Castle Metals Locations Atlanta, Buffalo, Charlotte, Chicago, Cincinnati, Cleveland, Dallas, Detroit, Houston, Kansas City, Los Angeles, Milwaukee, Minneapolis, Philadelphia, Phoenix, Pittsburgh, Portland, Salt Lake City, San Diego, Stockton, Tulsa, Wichita, Worcester Divisions Cutter Precision Metals - Minneapolis, Santa Clara, Seattle Hy-Alloy Steels Co. - Chicago H-A Industries - Hammond Subsidiaries A. M. Castle & Co. (Canada), Inc. - Edmonton, Montreal, Toronto, Winnipeg Total Plastics, Inc. - Chicago, Detroit, Fort Wayne, Grand Rapids, Indianapolis, Kalamazoo A. M. Castle & Co. Limited - Blackburn, Great Britain Keystone Tube Company - LaPorte, Riverdale, Titusville Joint Ventures Castle de Mexico, S.A. de C.V. - Monterrey Kreher Steel Company, L.L.C. - Chicago, Dallas, Detroit, Houston A. M. Castle & Co. 3400 North Wolf Road Franklin Park, IL 60131 EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 0 2,727 0 48 0 89,098 0 (620) 0 152,028 0 243,281 0 153,640 0 (76,230) 0 366,375 0 123,511 0 90,735 0 0 0 0 0 27,293 0 109,416 0 366,375 196,823 754,865 196,823 754,865 (141,456) (540,286) (44,061) (170,293) 0 0 (418) (572) (1,483) (4,183) 9,405 39,531 (3,612) (15,686) 5,793 23,845 0 0 0 0 0 0 5,793 23,845 0.41 1.70 0.41 1.69
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