-----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, OFuk/ufTYaNi8zzZ331JMrpiahanTU7H4hu+way0qVBJ7389psvdqnUJv02El4sq z9TkI/LABQb36DmMwk1dtw== 0001047469-99-009665.txt : 19990316 0001047469-99-009665.hdr.sgml : 19990316 ACCESSION NUMBER: 0001047469-99-009665 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990315 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: 99564815 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 10-K405 Page 1 of 16 Pages SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended DECEMBER 31, 1998 Commission File Number: 1-5415 ------------------ ------ A. M. CASTLE & CO. ------------------ (Exact name of registrant as specified in its charter) Delaware 36-0879160 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3400 North Wolf Road, Franklin Park, Illinois 60131 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (847) 455-7111 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------- Common Stock--no par value American and Chicago Stock Exchanges Securities registered pursuant to Section 12(g)of the Act: NONE ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K X . --- The approximate aggregate market value of the registrant's common stock held by non-affiliates of the registrant on March 1, 1999 was $191,342,510. ------------ The number of shares outstanding of the registrant's common stock on March 1, 1999 was 14,043,487 shares. ---------- DOCUMENTS INCORPORATED BY REFERENCE DOCUMENTS INCORPORATED BY REFERENCE APPLICABLE PART OF FORM 10-K Annual Report to Stockholders for the Parts I, II and IV year ended December 31, 1998 Proxy Statement dated March 8, 1999 Part III furnished to Stockholders in connection with registrant's Annual Meeting of Stockholders PAGE 2 OF 16 PART I Item 1. Business. A. M. Castle & Co. is one of North America's largest, independent metals service center companies. The registrant (Company) provides a complete range of inventories as well as preprocessing services to a wide variety of customers. The Company has reviewed the business activities of its divisions and subsidiaries in accordance with the requirements of SFAS No. 131. The Company has concluded that its business activities fall into one identifiable core business segment as approximately 95% of all revenues are derived from the distribution of its specialty metals products. These products are purchased, warehoused, processed and sold using essentially the same systems, facilities, sales-force and distribution network. In the last three years, sales mix in the Company's core business was approximately as follows:
1998 1997 1996 ---- ---- ---- Carbon and Stainless 75% 73% 74% Non-Ferrous Metals 25% 27% 26% --- --- --- 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, Laser Burning, Water-Jet Cutting, Stress Relieving and Annealing Furnaces, Surface Grinding Equipment, Edge Conditioning Equipment, Sheet Shears and Coil Processing Equipment. The Company also does specialized fabrications for customers through pre-qualified subcontractors. Emphasis on the more highly engineered grades and alloys of metals, supported by strong service commitments, has earned the Company a leadership role in filling the needs of users of those metals. The Company has its main office, and largest distribution center, in Franklin Park, Illinois. This center serves metropolitan Chicago and, approximately, a nine state area. In addition, there are distribution centers in various other cities (see Item 2). The Chicago, Los Angeles and Cleveland distribution centers together account for approximately one-half of all sales. In the United States, the Company serves the wide range of industrial companies within the $700 billion producer durable equipment sector of the economy. The customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized ones spread across the entire spectrum of metals using industries. The Company's customer base is well diversified with no single industry accounting for more than 6% of the Company's total business and, no one customer, more than 2%. The Company's coast-to-coast network of metals service centers provides next day delivery to over 90% of the markets it serves, and two day delivery to virtually all of the rest. Listed below are the operating subsidiaries and divisions included in the Company's core business segment, along with a brief summary of their business activities. PAGE 3 OF 16 In Canada, the Company serves a wide range of businesses similar to the market profile in the United States. These markets are serviced by the Company's Canadian subsidiary A. M. Castle & Co. (Canada) Inc. In Mexico, the Company operates through a joint venture, Castle de Mexico, S.A. de C.V., and targets a wide range of businesses within the producer durable goods sector. Markets in western Europe, South America and the Pacific Rim are serviced through the Company's International Sales Department located in the Franklin Park facility, and starting in late 1996, the Company's United Kingdom based subsidiary, A. M. Castle & Co. Limited, a U.K. Corporation. The Company's Hy-Alloy Steels Co. division, located in Bedford Park, Illinois, a Chicago suburb, is a distributor of alloy bars stocked as rounds, squares, hexes, and flats; and of alloy tubing. In 1993 a value-added bar processing center, H-A Industries, was added. From this facility, the Company operates a heat treat line producing quench and tempered alloy bar product, an annealing line, and a bar turning and straightening line producing cold finished bars. Beginning in 1996, Castle acquired several businesses whose activities complement the Company's distribution and value-added focus. Total Plastics, Inc. acquired in 1996 is a Midwest based distributor serving a wide variety of users of industrial plastics. Cutter Precision Metals, Inc., acquired in 1996, and merged into the Company in 1997 served to increase the Company's presence in the Pacific Northwest and added highly specialized sawing and grinding capabilities to the Company's range of processing services. In 1997 the company added Keystone Tube Company, a Midwest based specialty distributor of tubular products and a leading processor of high value-added mechanical tube and chrome plated bar serving the fluid power industry. The acquisition expanded an existing product line and served to broaden Castle's core specialty metals business. Oliver Steel Plate Company, acquired in 1998, is an Ohio based distributor and processor of heavy steel plate. This acquisition adds to Castle's plate processing capacity in the East and strengthens the Company's position in this target product. The Company holds a one-third joint venture interest in Kreher Steel Co., a Midwest distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, SBQ and stainless bars. In 1998, Castle also purchased a 50% joint venture interest in Energy Alloys LLC, a Houston based metals distributor. In general, the Company purchases metals from many producers. Satisfactory alternative sources are available for all metals that the Company buys and its business would not be materially adversely affected by the loss of any one supplier. Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities. The Company's ability to provide quick delivery, frequently overnight, of a wide variety of metal products allows customers to reduce inventory investment because they do not need to order the large quantities required by producing mills. The major portion of 1998 net sales were from materials owned by the Company. The materials required to fill the balance of such sales were obtained from other sources, such as direct mill shipments to customers or purchases from other metals distributors. Sales are primarily through the Company's own sales organization and are made to many thousands of customers in a wide variety of industries. No single customer is significant to the Company's sales volume. Deliveries are made principally by leased trucks. Common carrier delivery is used in areas not serviced directly by the Company's fleet. The Company encounters strong competition both from other independent metals distributors and from large distribution organizations, some of which have substantially greater resources. PAGE 4 OF 16 The Company has approximately 1,900 full-time employees in its operations throughout the United States, Canada and the United Kingdom. Approximately 300 of these are represented by collective bargaining units, principally the United Steelworkers of America. Item 2. Properties. The Company's principal executive offices are at its Franklin Park plant near Chicago, Illinois. All properties and equipment are well maintained and in good operating condition and sufficient for the current level of activities. Metals distribution centers and sales offices are maintained at each of the following locations, all of which are owned in fee, except as indicated: PAGE 5 OF 16
Approximate Floor Area in Locations Square Feet --------- ------------- CASTLE METALS Atlanta, Georgia .......................... 35,100 (1) Charlotte, North Carolina ................. 116,500 Chicago area - Franklin Park, Illinois ................. 522,600 Cincinnati, Ohio .......................... 9,300 (1) Cleveland area - Bedford Heights, Ohio ................... 374,400 Dallas, Texas ............................. 78,000 Fairfield, Ohio ........................... 108,000 (1) Houston, Texas ............................ 109,100 Kansas City, Missouri ..................... 170,000 Kent, Washington .......................... 24,000 (1) Los Angeles area - Paramount, California ................... 264,900 Milwaukee area - Wauwatosa, Wisconsin .................... 98,000 (1) Minneapolis, Minnesota .................... 60,000 Philadelphia, Pennsylvania ................ 71,600 Portland, Oregon .......................... 17,600 (1) Salt Lake City, Utah ...................... 45,400 (1) Santa Clara, California ................... 36,000 (1) Stockton, California ...................... 60,000 (1) Wichita, Kansas ........................... 22,500 (1) Worcester, Massachusetts .................. 56,000 --------- Total Castle Metals ................ 2,279,000 HY-ALLOY STEELS CO Chicago area-- Bedford Park, Illinois .................. 103,700 --------- H-A INDUSTRIES Hammond, Indiana .......................... 243,000 (1) --------- A. M. CASTLE & CO. (CANADA) INC Edmonton, Alberta ......................... 38,300 (1) Montreal, Quebec .......................... 26,100 (1) Toronto area-- Mississauga, Ontario .................... 60,000 (1) Etobicoke, Ontario ...................... 17,000 (1) Winnipeg, Manitoba ........................ 50,000 --------- 191,400 CASTLE METALS U.K. LTD Blackburn, U.K ............................ 43,000 (1) Christchurch, U.K ......................... 12,000 (1) --------- 55,000 KEYSTONE TUBE, INC La Porte, Indiana ......................... 90,000 Riverdale, Illinois ....................... 115,000 (1) Titusville, Pennsylvania .................. 92,000 --------- 297,000
PAGE 6 of 16
Approximate Floor Area in Locations Square Feet --------- ------------- TOTAL PLASTICS, INC Baltimore, Maryland ...................... 24,000 (1) Detroit, Michigan ........................ 31,000 (1) Elk Grove Village, Illinois .............. 14,400 (1) Fort Wayne, Indiana ...................... 9,600 (1) Grand Rapids, Michigan ................... 42,500 Harrisburg, Pennsylvania ................. 24,000 (1) Indianapolis, Indiana .................... 27,500 (1) Kalamazoo, Michigan ...................... 53,500 (1) South Bend, Indiana ...................... 7,500 (1) --------- 234,000 OLIVER STEEL PLATE COMPANY Twinsburg, Ohio .......................... 120,000 (1) GRAND TOTAL ......................... 3,523,100 --------- --------- SALES OFFICES (LEASED) Buffalo, New York Detroit, Michigan Pittsburgh, Pennsylvania Phoenix, Arizona San Diego, California Tulsa, Oklahoma
(1) Leased: See Note 5 in the 1998 Annual Report to Stockholders, incorporated herein by this specific reference, for information regarding lease agreements. PAGE 7 OF 16 Item 3. Legal Proceedings. There are no material legal proceedings other than the ordinary routine litigation incidental to the business of the Company. Item 4. Submission of Matters to a Vote of Security Holders. None. PAGE 8 OF 16 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. Item 6. Selected Financial Data. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required to be filed in Part II (Items 5, 6, and 7) in Form 10-K has been included in the 1998 Annual Report to Stockholders, as required by the Securities and Exchange Commission, and is included elsewhere in the filing. Accordingly, the following items required under Items 5, 6, and 7 are incorporated herein by this specific reference to the 1998 Annual Report to Stockholders: "Common Stock Information", page 15, "Eleven-Year Financial and Operating Summary", pages 12 and 13, and "Financial Review", pages 14 and 15. Item 8. Financial Statements and Supplementary Data. See Part IV, Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Item 9. Disagreements on Accounting and Financial Disclosure. None. PAGE 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 60 Mr. Simpson began his employment with the registrant in Chairman of the Board 1968. In 1974 Mr. Simpson was elected President of Hy-Alloy Steels Co. Mr. Simpson was elected Vice President--Midwest Region in 1977. In 1979 Mr. Simpson was elected Chairman of the Board Richard G. Mork 63 Mr. Mork began his employment with the registrant in 1957. President and Chief In 1977 Mr. Mork was elected to the position of Vice President-- Executive Officer Eastern Region and in 1988 to the position of Senior Vice President and Chief Operating Officer. In 1990 Mr. Mork was made President and Chief Executive Officer Alan D. Raney 47 Mr. Raney began his employment with the registrant in 1986. Vice President-- Mr. Raney was elected Vice President--Midwest Region Executive Vice President and during 1989, Vice President--Advanced Materials Group Chief Operating Officer in 1990, and Executive Vice President and Chief Operating Officer in 1998 Edward F. Culliton 57 Mr. Culliton began his employment with the registrant in 1965. Vice President and Mr. Culliton was elected Corporate Secretary in 1972 and Chief Financial Officer Treasurer in 1975. In 1977 he was elected Vice President of Finance. He is the Chief Financial Officer Marc Biolchin 44 Mr. Biolchin began his employment with the registrant's Vice President-- Keystone Tube Company (acquired in 1997) in 1977. Tubular Group Sven G. Ericsson 50 Mr. Ericsson began his employment with the registrant in Vice President-- 1989. Mr. Ericsson was elected to the position of Vice Business Development President--Eastern Region in 1989, Vice President--Plate and Carbon Products Group in 1992, Vice President-- International in 1995, and Vice President--Business Development in 1998. M. Bruce Herron 53 Mr. Herron began his employment with the registrant in 1970. Vice President-- Mr. Herron was elected to the position of Vice President-- Sales Western Region in 1989, and Vice President--Sales in 1998. Stephen V. Hooks 47 Mr. Hooks began his employment with the registrant in 1972. Vice President-- Mr. Hooks was elected to the position of Vice President-- Merchandising Midwest Region in 1993, and Vice President--Merchandising in 1998 Tim N. Lafontaine 45 Mr. Lafontaine began his employment with the registrant Vice President-- in 1975, and was elected Vice President--Alloy Group in 1998. Alloy Group John R. Nordin 42 Mr. Nordin began his employment with the registrant in 1998. Vice President-- He was elected Vice President--Chief Information Officer Chief Information Officer in 1998.
PAGE 10 OF 16
NAME AND TITLE AGE BUSINESS EXPERIENCE - -------------- --- ------------------- Fritz Oppenlander 46 Mr. Oppenlander began his employment with the registrant in Vice President-- 1996 and was elected Vice President--Operations in 1996. Operations Robert A. Rosenow 45 Mr. Rosenow began his employment with the registrant in Vice President-- 1977. In 1995, Mr. Rosenow was elected Vice President--Carbon Group Carbon Group. Carbon Group Gise Van Baren 67 Mr. Van Baren began his employment with the registrant's Vice President Hy-Alloy Steels Co. (acquired in 1973) in 1954. He and President-- Hy-Alloy became Vice President of Hy-Alloy in 1976 and President in Steels Division 1979. He was elected Vice President--Alloy Products Group in 1991. Craig R. Wilson 47 Mr. Wilson began his employment with the registrant in Vice President-- 1979. He was elected to the position of Vice President-- Business Process Eastern Region in 1997, and Vice President--Business Improvement and Quality Improvement and Quality in 1998. Paul J. Winsauer 47 Mr. Winsauer began his employment with the registrant in Vice President-- 1981. In 1996, Mr. Winsauer was elected to the position of Human Resources Vice President--Human Resources. James A. Podojil 56 Mr. Podojil began his employment with the registrant in Chief Accounting Officer 1968. In 1977 he was elected to the position of Controller and Treasurer/Controller and in 1985 was elected to the additional post of Treasurer. Jerry M. Aufox 56 Mr. Aufox began his employment with the registrant in 1977. Secretary and Corporate In 1985 he was elected to the position of Secretary and Counsel Corporate Counsel. He is responsible for all legal affairs of the registrant.
PAGE 11 OF 16 All additional information required to be filed in Part III, Item 10, Form 10-K, has been included in the Definitive Proxy Statement dated March 8, 1999 filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled "Information Concerning Nominees for Directors" and is hereby incorporated by this specific reference. Item 11. Executive Compensation. All information required to be filed in Part III, Item 11, Form 10-K, has been included in the Definitive Proxy Statement dated March 8, 1999, filed with the Securities and Exchange Commission, pursuant to Regulation 14A entitled "Management Remuneration" and is hereby incorporated by this specific reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required to be filed in Part I, Item 4, Form 10-K, has been included in the Definitive Proxy Statement dated March 8, 1999, filed with the Securities and Exchange Commission pursuant to Regulation 14A, entitled "Information Concerning Nominees for Directors" and "Stock Ownership of Certain Beneficial Owners and Management" is hereby incorporated by this specific reference. Other than the information provided above, Part III has been omitted pursuant to General Instruction G for Form 10-K and Rule 12b-23 since the Company will file a Definitive Proxy Statement not later than 120 days after the end of the fiscal year covered by this Form 10-K pursuant to Regulation 14A, which involves the election of Directors. Item 13. Certain Relationships and Related Transactions. None. PAGE 12 OF 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Financial statements (incorporated by reference to the 1998 Annual Report to Stockholders) and exhibits are set forth in the accompanying index to Financial Statements and Schedules. No reports on Form 8-K were filed in the fourth quarter of 1998. PAGE 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 1998 Annual Report to Stockholders of A. M. Castle & Co., included herein-- Consolidated Statements of Income--For the years ended December 31, 1998, 1997, and 1996..................................................................................................... Page 17 Consolidated Statements of Reinvested Earnings--For the years ended December 31, 1998, 1997, and 1996......................................................................................... Page 17 Consolidated Balance Sheets--December 31, 1998, 1997, and 1996............................................... Page 18 Consolidated Statements of Cash Flows--For the years ended December 31, 1998, 1997, and 1996......................................................................................... Page 19 Notes to Consolidated Financial Statements................................................................... Pages 20-24 Report of Independent Public Accountants..................................................................... Page 24
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, 1997. All schedules and exhibits, other than those listed above are omitted as the information is not required or is furnished elsewhere in the financial statements or the notes thereto. PAGE 14 OF 16 SUPPLEMENTAL REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To A. M. Castle & Co.: We have audited in accordance with generally accepted auditing standards, the financial statements included in the A. M. Castle & Co. 1998 Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 2, 1999. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Chicago, Illinois, February 2, 1999 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FORM S-8 --------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of the following into the Company's previously filed S-8 Registration Statements Numbers 33-30545 and 33-37818: 1. Our supplemental report dated February 2, 1999 included in this Annual Report on Form 10-K for the year ended December 31, 1998; and 2. Our report dated February 2, 1999 incorporated by reference in this Annual Report on Form 10-K for the year ended December 31, 1998. Arthur Andersen LLP Chicago, Illinois March 15, 1999 PAGE 15 OF 16 SCHEDULE II A. M. CASTLE & CO. ACCOUNTS RECEIVABLE--ALLOWANCE FOR DOUBTFUL ACCOUNTS VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (Dollars in thousands) 1998 1997 1996 ---- ---- ---- Balance, beginning of year $ 620 $ 680 $ 600 Add -- Provision charged to income 418 281 245 -- Recoveries 186 238 223 -- From acquisitions -- 53 80 Less -- Uncollectible accounts charged against allowance (586) (632) (468) ----- ----- ----- Balance, end of year $ 638 $ 620 $ 680 ----- ----- ----- ----- ----- -----
PAGE 16 OF 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. A. M. CASTLE & CO. - ------------------ (Registrant) By: /S/ JAMES A. PODOJIL --------------------- James A. Podojil, Treasurer and Controller (Mr. Podojil is the Chief Accounting Officer and has been authorized to sign on behalf of the registrant.) Date: MARCH 1, 1999 ---------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /S/ MICHAEL SIMPSON /S/ WILLIAM K. HALL - ------------------------------------- ----------------------------------- Michael Simpson, William K. Hall, Director Chairman of the Board Chairman, Audit Committee March 1, 1999 March 1, 1999 /S/ RICHARD G. MORK /S/ JOHN P. KELLER - ------------------------------------- ----------------------------------- Richard G. Mork, President-- John P. Keller, Director Chief Executive Officer, and Director March 1, 1999 March 1, 1999 /S/ EDWARD F. CULLITON /S/ JOHN W. MCCARTER, JR - ------------------------------------- ----------------------------------- Edward F. Culliton, Vice President-- John W. McCarter, Jr., Director Chief Financial Officer, and Director March 1, 1999 March 1, 1999 /S/ JOHN MCCARTNEY ----------------------------------- John McCartney, Director March 1, 1999 EX-13 2 EX-13 CORPORATE PROFILE: Founded in 1890, A.M. Castle & Co. provides highly engineered materials and value added services to a wide range of industrial companies within the nearly $700 billion producer durable equipment sector of the economy. Our customer base includes many Fortune 500 companies as well as thousands of medium and smaller-sized ones spread across the entire spectrum of metals using industries. Within our core specialty metals business, we are recognized as North America's largest industrial distributor of carbon; alloy and stainless steels; nickel alloys; aluminum; titanium; copper and brass; as well as the industry pioneer and premier provider of materials management programs that are designed to reduce our customers' total costs. Through our subsidiary, Total Plastics, Inc, we also distribute a broad range of value added industrial plastics. Together, Castle and its affiliated companies operate over 50 locations throughout North America. Our common stock is traded on the American and Chicago Stock Exchanges under the ficker symbol CAS. Our Corporate Goals Market Leadership in all Core Products Supplier of Choice to Our Customers World Class Quality Process Consistently Competitive Returns on Capital Superior Long-Term Total Returns to Shareholders Table of Contents Financial Highlights Letter to Shareholders Our Commitment to Our Customers Eleven-Year Financial & Operating Statements Financial Review Consolidated Statements and Notes Management and Shareholder Information....Inside Back Cover The Supplier of Choice This year's annual report begins and ends with our focus on North America's industrial equipment makers -- the most innovative and productive manufacturing base in the world. On the pages that follow, we'll explain how we add value to these great companies' products and processes with solutions that deliver the highest quality at the lowest total unit cost. That is how we've become our customers' supplier of choice for highly engineered metals and services. THE YEAR IN BRIEF
[PHOTO] (DOLLARS AND SHARES IN THOUSANDS EXCEPT PER SHARE AMOUNTS) % 1998 1997 CHANGE - ---------------------------------------------------------------------------------- OPERATING RESULTS Net sales $792,846 $754,865 5% Gross profit on sales 233,762 214,579 9% Operating profit 48,653 50,295 (3%) Income before taxes 30,729 39,531 (22%) Net income 18,522 23,845 (22%) - ---------------------------------------------------------------------------------- PER SHARE OF COMMON STOCK Net income (basic) 1.32 1.70 (22%) Dividends .755 .66 14% Stockholders' equity 10.25 9.74 5% - ---------------------------------------------------------------------------------- BALANCE SHEET Total assets 459,963 366,375 26% Total debt 176,078 93,423 88% Total equity 144,012 136,709 5% Working capital 181,213 119,770 51% Cash flow* 27,008 30,426 (11%) Average shares outstanding 14,043 14,026 -- - ---------------------------------------------------------------------------------- SELECTED RATIOS Return on sales 2.3% 3.2% (28%) Return on assets 4.0% 6.5% (38%) Return on opening equity 13.5% 19.6% (31%) Current ratio 2.5 2.0 25% Debt-to-capital ratio 55.0% 40.6% 35% - ---------------------------------------------------------------------------------- *NET INCOME PLUS DEPRECIATION AND AMORTIZATION
NET SALES NET INCOME OPERATING PFT NET WORTH ------------- -------------- ----------------- ------------- ($ IN MILLIONS) ($ IN MILLIONS) ($ IN MILLIONS) ($ IN MILLIONS) 1994 537 15 33 82 1995 628 27 52 103 1996 673 26 51 122 1997 755 24 50 137 1998 793 19 49 144
A. M. CASTLE & CO. 1998 Annual Report PAGE 1 TO OUR SHAREHOLDERS: - ------------------------------------------------------------------------------- "CASTLE CONTINUES TO BE NORTH AMERICA'S SUPPLIER OF CHOICE FOR HIGHLY ENGINEERED METALS AND [PHOTO] SERVICES. IN 1998, WE INCREASED MARKET SHARE DESPITE A GLOBAL SLOWDOWN IN MANY OF OUR CUSTOMERS' END-USE MARKETS, THEREBY REINFORCING OUR STRATEGY TO BE THE MARKET LEADER IN OUR CORE PRODUCTS. WITH OUR MAJOR INVESTMENTS IN PROCESSING TECHNOLOGIES AND NEW GROWTH PLATFORMS SUBSTANTIALLY IN PLACE, WE ARE WELL POSITIONED TO INCREASE SHAREHOLDER VALUE AS THE CURRENT CYCLE MOVES INTO POSITIVE TERRITORY." Mike Simpson, STANDING Dick Mork, SEATED THE YEAR IN PERSPECTIVE. Even with the strongest and most competitive line-up of products and services in our company's history, 1998 proved to be a challenging year. Market conditions for highly engineered metals weakened during the second half as our customers, North America's durable equipment makers, became increasingly cautious with their purchases. This environment continued into the fall reflecting the difficulties in Asia and its effect on some of our customers' key markets. So, for much of 1998, we found ourselves in a transitional period that we have seen before, characterized by excess inventory in the overall market and unsustainably low pricing that, in turn, puts considerable short-term pressure on our earnings. Our market diversification strategy goes a long way toward mitigating the impact of the business cycle on our performance and use of capital. Our long-term financial goals are: to achieve a 15% return on opening equity at the bottom of the cycle, and a 21% or better return at the top. In 1998, our most difficult year since the early 1990s, our return came in at 13.5%, a little more than a percentage point off our target. So while we can't eliminate the business cycle, we are confident in our ability to not only work through it, but to deliver a reasonably good return during its low points. Along with industry analysts, we are cautiously optimistic that 1999 will see a correction in the current imbalance between supply and demand, together with a move towards a more stable balance between domestic and import sources. This could provide substantial upside leverage should those imbalances correct rapidly. In the meantime, we continue to strategically invest in what we believe will be one of the world's most compelling markets in the 21st Century: our customer base, the nearly $700 billion North American producer durable equipment sector. PAGE 2 - ------------------------------------------------------------------------------- [Photo] 1998 RESULTS. Net sales rose 5% to a record $793 million, reflecting contributions from two acquisitions completed during the past two years. Gross margin increased 9% to a record $234 million, reflecting the higher value-added contribution from our recent acquisitions and investments in leading-edge processing technologies. This gain, achieved within a highly competitive industry environment, reflects the premium that our customers place on our leading-edge capabilities and business solutions orientation. Operating earnings fell 3% to $48.7 million with several factors related to global uncertainty obscuring much of the impact of our revenue-enhancing actions as well as the operating efficiencies which we achieved in 1998. These factors included increased transaction-activity as our customers ordered in smaller quantities with more frequent deliveries and inflation in operating expenses of about 3% in the face of lower mill pricing. Operating earnings were also affected by increased expenses related to the start-up of new processing equipment and the integration of recent acquisitions. These latter expenses are now largely behind us. Net income decreased by 22% to $18.5 million, or $1.32 per diluted share, reflecting higher interest, depreciation and amortization expenses associated with the unprecedented level of investment during the 1995 through 1998 period. Looking ahead, we expect capital expenditures will moderate, resulting in stronger cash flow performance as our markets move off the low point of this cycle. We believe that the investments and infrastructure we have put into place will enable us to grow to $1.5 billion in revenues within the next five years. Reflecting our long-standing growth and income orientation, we returned $10.6 million in dividends to shareholders in 1998. Following a 15% dividend increase in April, our fifth increase in the last five years, "CAS" generated a 5% dividend yield, not only the highest in our peer group, but in the top tier of all publicly held companies. Despite an increase in our investors' annual income, Castle's total return to shareholders for the year was down 32%, slightly better than the industry average. As a group, the metals distribution-and-processing stocks declined 34 percent. INVESTING IN THE FUTURE. Our success in managing through past business cycles gives us a valuable longer-term perspective of the current operating environment. In the early 1980s, while many were writing off the U.S. industrial sector, we took a very different view, investing in a widespread restructuring of our product mix and service capabilities. We emerged a much more competitive and focused company and our customers were the beneficiaries. In the 1990-1991 period, when American manufacturers went through a second wave of restructuring, we again seized the opportunity to invest in new services, new geographic markets and the realignment of our sales and marketing organization. The result was revenue growth of 44% and a nearly seven-times earnings increase in the four years following this downturn. Today, our attention remains focused just as it did during the last two cycles on building shareholder value. The past four years have marked an unprecedented period of investment aimed at extending our expertise and leadership in the industrial distribution of highly engineered metals and value-added services. These investments fall into three major categories: leading-edge processing capabilities that enhance the performance and cost characteristics of our customers' production processes; acquisitions and joint ventures that provide entree into new market niches and channels; and business process improvement initiatives, designed to advance the efficiency of every process that touches our customers toward near-perfect quality. While diverse, these investments share the same strategic intent to provide customers with innovative business solutions that deliver the highest quality AND lowest total cost of production. PROCESSING CAPABILITIES. Since 1993, we've invested more than $48 million in leading-edge processing capabilities which provide our customers with a more comprehensive and cost-efficient way of solving their metallurgical requirements. In 1998, key among these were: the ramping up of several new lines at H-A Industries that doubled this facility's capacity; the recently completed replacement of Keystone Services' chrome plated bar line that quadruples its A. M. CASTLE & CO. 1998 Annual Report PAGE 3 - ------------------------------------------------------------------------------- capacity; and a company-wide expansion of plate processing capacity. All of these projects are in place and ready to operate at optimum production levels as we enter 1999. ACQUISITIONS AND JOINT VENTURES. Another important growth engine is acquisitions and joint ventures. In the last three years, we've completed four platform acquisitions and established four joint ventures, all of which were accretive to earnings and capable of growing at double-digit rates. In 1998, we acquired Oliver Steel, which further extends our lead in the quality plate category; and Aerospace Alloys, which builds on the base that we've established in Europe to support our customers who require local on-site production support. We also entered a joint venture with Energy Alloys, which takes us into the tubular business for the oil field industry, another highly specialized market niche. BUSINESS PROCESS IMPROVEMENT. While growth is an important part of our business model, there are a number of other initiatives underway which further reinforce our confidence about our future earnings potential. During this year, we continued a comprehensive productivity improvement program designed to achieve $4-$6 million in annual cost savings in three major areas: transportation; warehouse management; and administrative overhead. Considerable progress was made in each of these initiatives. First, by the end of 1998, approximately 75% of the targeted savings associated with the rationalization of our transportation supply base have been realized. Second, our new automated warehouse management system, piloted in our flagship Franklin Park facility, is now beginning to realize our expectations for improvements in service, quality and productivity. Finally, our administrative initiatives, which were aimed at achieving $1.5 million in annual cost savings, have been substantially completed. Going forward, our intention is to build on what we've learned to achieve even more significant gains in the future. STRENGTHENING OUR SENIOR MANAGEMENT TEAM. Along with investing in the future, we have significantly enhanced our senior management team. These changes reflect the fact that our industry has become much more challenging and that Castle is a much larger, more complex and dynamic organization than it was just a few years ago. To support our ambitious growth goals, we've promoted Alan Raney to the newly created position of Chief Operating Officer. Alan will be directly responsible for our core Castle Metals business, enabling us to focus on the longer-term strategic issues involved with leveraging our recently acquired growth platforms. Several other new corporate positions have been created to support our drive for the future. Effective January 1st, Bruce Herron has assumed the position of Vice President--Sales; Steve Hooks has been named Vice President--Merchandising; Fritz Oppenlander, Vice President--Operations; and Craig Wilson, whose responsibilities as Vice President of Quality and Business Process Improvement have been significantly expanded. We're excited about these changes as they recognize the depth and quality of our Castle team and its ability to take on new challenges and opportunities. OUTLOOK FOR 1999. We share the view of economists and industry experts who believe that market imbalances will correct far more rapidly than they did in the past. Based on their projections, we are looking for an inventory correction within a six-to-nine month time frame as excess supply currently in the pipeline works its way through the marketplace. Once this correction gets underway, supply and demand will become more balanced, thereby creating modestly more favorable pricing at the mill level. As these industry factors come into play, the leverage which we've created in our business model during the last several years will be highly apparent. Our focus on the North American producer durable equipment market continues to be the foundation of our strategy. Just like during the slowdowns in the early 1980s and again in the early 1990s, there are rumblings about the long-term 'health' of this sector. The truth is that, even today with all the global uncertainty, capital spending on producer durable equipment as a whole rose an estimated 9.5% in 1998. Remember, the long-term impact of increased competition drives producers to invest in tools and equipment that will make their businesses more efficient. Since our customers are the ones who make those tools and equipment, this suggests more, rather than less, capital investment over PAGE 4 - ------------------------------------------------------------------------------- [PHOTO] time. So while there may be discretionary cutbacks in the short-term, the long-term trend is that the more competitive the market, the more compelling the need to make those investments that will strengthen a company's market position. For Castle, there are significant opportunities for growth and improved profitability ahead. After spending the last four years in an acquiring-and-assimilating mode, we are now moving into a new phase where we will focus on achieving the maximum leverage from these investments. Similarly, we expect to reap the benefits of several new processing capabilities that were either not in place or operating at less than full capacity in 1998. At Keystone Services, for example, we were literally "off-line" for more than half of the year while we replaced existing equipment with a state-of-the-art chrome plating line that quadruples our capacity. In 1999, all of our new equipment will be running at optimal levels, another factor that points to improved profitability. Our business process improvement program is a cornerstone of our long-term strategy to build shareholder value. While we made significant progress in 1998, these improvements mark a good beginning rather than an ending point. Our initiatives in this key area include: cycle time reduction; first pass yield; and the elimination of non-productive operating activities. As we reported last year, the "easy fixes" were made several years ago. However, it will be incumbent upon us to identify new opportunities that will enable us, at a minimum, to offset the annual inflation in operating expenses. We also expect to be strong cash flow generators in 1999. First, with our growth platforms now substantially in place, our capital requirements will decline from $30 million in 1998 to between $10-$15 million in 1999. Second, in this phase of the business cycle, we will be liquidating the build-up of inventories that occurs in a downturn because we are in the business of shouldering our customers' inventory risk. Based on our expectations for positive cash flow, we have targeted a reduction in our debt-to-total capital ratio from the present level of 55% to our target rate of 45% by the end of the year. As we assess our prospects, one of our most compelling strengths is our ability to think and act "outside of the box" for our customers. More than any other single factor, this is what has made us the first choice for highly engineered metals and services in North America, and this is what will keep us there in the future. On the following pages, you'll see images from an award-winning ad campaign that we introduced in 1998, as well as a few of the many industrial applications for our products and services. The message of this campaign is that Castle is in the business of solving customer problems, of seeing specific situations and going beyond traditional methods to create a total value package of products, services and expertise. It also helps create a line of sight between our customers and employees that strengthens our relationship with them. Throughout Castle, we are committed to the success of the 35,000 companies in the North American durable equipment sector who are our customers, and we appreciate their loyalty. Similarly, we take great pride in the exceptional commitment of our employees. We believe that we are better positioned than at any point in our history to increase shareholder value over the long term. /s/ Richard G. Mork /s/ Michael Simpson ----------------------- --------------------- Richard G. Mork Michael Simpson President and Chairman of the Board Chief Executive Officer February 15, 1999 A. M. CASTLE & CO. 1998 Annual Report PAGE 5 PEOPLE ARE THE KEY [Photo] [Photo] MOST PEOPLE SEE A MACHINE THAT CUTS PLATE. TODD SCHILL SEES A MACHINE THAT CUTS COSTS. PAGE 6 WHAT WE DO... [PHOTO] To industrial America, the Castle name is widely recognized for its leadership in innovation, quality, and customer care. We continue to hold the position as North America's leading metals supplier of carbon, alloy and stainless steels: nickel alloys; aluminum; titanium; copper and brass. Yet to the outside world, the products that we distribute and the services we provide aren't very well known. Look inside any of our CUSTOMERS' products and you'll get a strong sense of our significance. Take jet aircraft for example. "We" are the titanium in the nose, the alloy bar in the landing gear, and the aluminum in the frame. We're also in such diverse components as the engines and propulsion systems, and even the instrumentation. Given the critical nature of these aircraft features, the selection of a metals supplier takes on great significance. It's our unique package of product innovation, quality, and customer care developed over many years that makes Castle more often than not the supplier of choice for highly engineered metals. And our reach extends to virtually ALL of the high-profile industries in the North American durable equipment market. Clearly, OUR PRODUCTS DON'T HAVE TO BE VISIBLE TO BE VALUABLE. In fact, we're glad to take a back seat to many of our higher profile customers. But understanding who our customers are and anticipating their needs has long been a cornerstone of our strategy and culture. And it has largely been the reason for our dominant market share in most of our product categories. We hold the number one position in core products that generate over half of our total sales. We are number two or three in an additional thirty percent. Where we're number three, we're working hard to move up to number two. Where we're second, we want to be first. And where we're first, we're working just as hard to extend our lead. How did we get there? It sounds simple, but the key has been anticipating the kinds of products and services manufacturers want. Back in the early 80s, we began to build a market franchise around highly engineered metals in which we could create an unbeatable combination of inventory, services and metallurgical expertise. By the mid-80s, we moved into customer solutions, pioneering our industry's first comprehensive materials management program. Because we started early and made significant investments, we've developed what we believe to be the best industrial distribution network in our industry. And we continue to leverage that network into complementary products and services as we expand and strengthen our customer offerings. Today, we're serving customers across an ever-increasing array of applications and market channels. Going forward, we will stay on the "leading-edge" in developing unique and proprietary products and processing technology to deliver the highest level of value to our customers. Whatever the need, whether it is a major world class manufacturer or an independent job shop, we're determined to structure the right solution for every customer that consumes highly engineered metals. WHO OUR CUSTOMERS ARE... It's frequently the first question asked when we meet with current and prospective shareholders. We've long believed that market diversification greatly mitigates our company's sensitivity to both overall and industry-specific cyclicality. Rather than be dependent on one or two major industries, we have proactively built and maintained a diversified portfolio of customers within North America's durable equipment sector. As a whole, the companies that comprise this sector generate nearly $700 billion in annual revenues. They are in the aerospace business, the bearings business, chemical processing, defense, hand tools, health care, machine tools, the oil patch, transportation and more - with virtually every production process calling for some application for highly engineered metals. Despite intense foreign competition, our customers operate in what has been THE dominant growth sector of our economy for most of this decade. They've prevailed because they've demonstrated an incredible capacity for restructuring, re-engineering and reinventing themselves time and again to emerge as undisputed global leaders in manufacturing quality, innovation and productivity. Capital investment has been a huge part of this story - over the past five years alone, spending in our sector has increased at a double-digit compound annual pace. And while the RATE of spending will likely slow in 1999, the absolute level remains high, and the long-term trend clear. To continue strengthening competitive A.M. Castle & Co. 1998 Annual Report Page 7 PEOPLE ARE THE KEY [Photo] [Photo] MOST PEOPLE SEE CHROME PLATED TUBING JEFF TIMM SEES A GOLDEN OPPORTUNITY TO SIMPLIFY PURCHASING Page 8 advantage, manufacturers worldwide will need to make larger investments in the tools and equipment that will further advance the quality and efficiency of their products. [PHOTO] Unquestionably, Fortune 500-sized companies are a driving force in the durable equipment business. And in fact, most of these companies are major Castle customers across a wide range of industries and metals applications. But, we have another level of diversity that creates an important balance to our major accounts. We also effectively and productively serve thousands and thousands of middle-sized manufacturers as well as an equally large number of smaller job shops and independent businesses. In total, we serve over 35,000 companies with their highly engineered metals requirements, and have recently developed programs to provide the right level of service for each category of customer. In total, no one company represents more than 2% of our total sales, and no one industry, more than 6%. As for the future, from our perspective, the sheer size, strength and diversity of our customer base continues to create untapped opportunities to increase market share. Remember, we are our industry's leading supplier to a customer base with nearly $700 billion in annual revenues. HOW WE ADD VALUE... At Castle, we have long viewed our customer relationships more as working partnerships rather than as just a supplier of metals. Our mission, with every one of our customers, is to add value and exceed our customers' expectations by helping them reduce their unit costs: in Castle lingo, that's cost per piece rather than price per pound. Today, we're better positioned to create added value that at any point in our history. The investments we've made in opening new market channels and developing new processing technologies are a major part of our story. We've spent over $80 million in the last five years to expand capacity while introducing exciting and unique capabilities such as water jet cutting, plasma bevel cutting and in-line quenching and tempering. The benefit of all this isn't the technology, as impressive as it may be. It's in how we apply it to create custom solutions that will significantly improve our customers' end products and manufacturing processes. Let's look at some examples of this approach. SOMETIMES CUSTOMERS COME TO US WITH A VERY SPECIFIC PROBLEM. For instance, recently, a major aerospace manufacturer invited us, along with six other suppliers, to bid on a supply contract. The product was titanium. Our competitors evaluated the inventory requirements and submitted their bids. We took a different approach. We asked first how they planned to USE the titanium. They told us they were going to cut it up into small pieces and then heat treat it in two separate processes. Our solution? Using our water-jet-cutting technology, we were able to deliver finished pieces that required no further processing, thus eliminating a costly, non-core activity for our customer. Unlike traditional thermal cutting, the beauty of water-jet-cutting is that, by using water rather than heat, there is no heat-effected zone. So the customer gets a higher quality finished product at a lower total cost. We won the contract because, where other suppliers saw simply a material requirement, we saw our customer's production process and the opportunity to create a way to improve quality and reduce cycle time. SOMETIMES WE FILL A NEED WITHIN AN INDUSTRY. Take fluid power for example. It's not only a significant industry on its own, it's also a subset of numerous other major industries. You'll find fluid power in any application that requires absolute flexibility in motion; agricultural equipment, machine tools, road construction, commercial elevators, all sorts of automotive applications, the wing of an airplane. With many of our customers dependent on fluid power, we have always had very strong relationships in supplying the bars that make the pistons for hydraulic cylinders. But we felt that we could do more: we wanted to supply the tubes (or cylinders) as well. Last year we addressed the opportunity with the acquisitions of Keystone Tube and Keystone Honing, two independent companies that now represent a new strategic core product group for us. Just as fluid power is essentially the marriage of bar and tube to very precise tolerances of finish and wearability, we believe the 'marriage' of Keystone and Castle will enable us to emerge as the dominant supplier for fluid power applications. But we're not standing still. In 1998, we took another giant step forward in serving fluid power users with the installation of a new chrome A. M. Castle & Co. 1998 Annual Report Page 9 PEOPLE ARE THE KEY [Photo] [Photo] MOST PEOPLE SEE 20 FEET OF ALLOY BAR MARK DYKSTRA SEES 20 MORE PARTS PER HOUR Page 10 plating line at Keystone Services that quadrupled the capacity of our existing line. But capacity alone did not drive this investment. We went ahead with the new line because it gives [PHOTO] our customers a generational advance in surface finish and consistency over anything else available on the market today. And in fluid power applications, smoothness is critical: the smoother the finish, the less friction. The less friction, the less resistance and the greater the power of the equipment to lift or move more weight. Again, our emphasis is on providing customers with products and services that address critical production issues. The end result for Castle: industry-leading quality and productivity, while providing our employees with the safest production environment in the business. SOMETIMES WE BUILD SOLUTIONS THAT TAKE OUR CUSTOMERS' PRODUCTION PROCESSES TO THE "NEXT LEVEL." The evolution of H-A Industries provides an outstanding example of our commitment to innovative solutions. Launched in 1993 with our first computer-numerically-controlled quench and tempering line, H-A is a 250,000 square foot facility with seven different major bar processing lines. Every single process performed at this facility represents a unique capability that is not available elsewhere in the industry. Our quench and tempering process clearly demonstrates our ability to deliver high value-added quality at lower total cost. What does quench and tempering do? It alters the original condition of alloy and other bars by modifying the mechanical properties so that they become stronger and harder, thus improving their performance in applications such as machine tools, gears and bearings where these characteristics are critical. Under conventional quench and temper processing, the bars are stacked in a batch process to be heated and then cooled under controlled conditions that alter their hardness. Because the bars are processed as a contiguous batch, each one has a slightly different degree of hardness depending on its position in the stack and at what point it was touching another bar. Following conventional quench and tempering the bars normally undergo further processing such as straightening to relieve stresses that are build up during the heating and cooling processes. At Castle, we heat treat alloy bars one at a time in a continuous process that runs approximately half the length of a city block. Each bar moves through series of adjacent heat chambers with computer controlled temperatures, and is then cooled via various compartments incorporated into the same line. Essentially, we've devised a way to take the "art" out of heat treating, and, instead, turn it into a "science" in which every bar emerges from the process exactly the same. Because the bars are constantly being rotated during the quench and temper process, there is no build up of stress. In fact, they actually emerge straighter than they were prior to processing. Our solution to a critical processing application assures customers of performance characteristics that are consistent across each bar, repeatable from bar-to-bar and batch-to-batch. Unique to the industry, we alone can guarantee that the bars will always be the same. For customers, this translates into higher machining through-put and lower reject rates, thus sharply raising productivity levels. WHAT TO EXPECT GOING FORWARD... More innovation, higher value added for our customers, improved productivity, and an unswerving commitment to quality in everything we do. We're using new information technology applications to better understand our customers' requirements and react to them more quickly. We also have in place a comprehensive program to lower our operating costs. It focuses on reengineering many of our processes to reduce both response time and cost per unit. We will continue to be the dominant North American market leader in highly engineered metals. We have strong and respected brands to leverage. And we're only just beginning to see the benefits of the new processing capabilities and platforms that were put in place during the past few years. Seeing the world through our customers' eyes. Delivering great value. That's A.M. Castle & Co. Great processes. Great products. Great ideas. North America's first choice for highly engineered metals. A.M. CASTLE & CO. 1998 Annual Report Page 11 A. M. Castle & Co. and Subsidiaries CONSOLIDATED ELEVEN - YEAR FINANCIAL AND OPERATING SUMMARY
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA - NOTE 7) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands) ........................... 394 378 331 SUMMARY OF Net sales .......................................... $ 792.8 $ 754.9 $ 672.6 EARNINGS Cost of sales ................................... 559.1 540.3 481.4 ----------- ----------- ----------- Gross profit ....................................... 233.7 214.6 191.2 Operating expenses .............................. 185.1 164.3 139.9 ----------- ----------- ----------- Operating profit ................................... 48.6 50.3 51.3 Depreciation and amortization ................... 8.5 6.6 5.3 Interest expense, net ........................... 9.4 4.2 2.9 ----------- ----------- ----------- Income before income taxes ......................... 30.7 39.5 43.1 Income taxes .................................... 12.2 15.7 17.0 ----------- ----------- ----------- Net income ......................................... 18.5 23.8 26.1 Cash dividends ..................................... 10.6 9.2 8.0 ----------- ----------- ----------- Reinvested earnings ................................ $ 7.9 $ 14.6 $ 18.1 ----------- ----------- ----------- ----------- ----------- ----------- - ----------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) 14,043 14,041 14,008 (NOTE 7) Net income per share basic ......................... $ 1.32 $ 1.70 $ 1.86 Net income per share diluted ....................... $ 1.32 $ 1.69 $ 1.86 Cash dividends per share ........................... $ .755 $ .66 $ .57 Book value per share ............................... $ 10.25 $ 9.74 $ 8.70 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital .................................... $ 181.2 $ 119.8 $ 80.0 POSITION Property, plant and equipment, net ................. $ 94.6 $ 77.4 $ 62.7 AT YEAR-END Total assets ....................................... $ 460.0 $ 366.4 $ 261.4 Short-term debt .................................... $ -- $ -- $ -- Long-term debt ..................................... $ 172.3 $ 90.7 $ 40.9 Stockholders' equity ............................... $ 144.0 $ 136.7 $ 121.9 - ----------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales .................................... 2.3% 3.2% 3.9% RATIOS Asset turnover ..................................... 1.7 2.1 2.6 Return on assets ................................... 4.0% 6.5% 10.0% Leverage factor .................................... 3.4 3.0 2.5 Return on opening stockholders' equity ............. 13.5% 19.6% 25.3% Percent earnings reinvested ........................ 42.7% 61.3% 69.3% Percent increase (decrease) in equity .............. 5.3% 12.1% 17.9% - ----------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment ......... $ 30.2 $ 16.2 $ 22.5 Stockholders at year-end ........................... 1,657 1,699 1,613 Employees at year-end .............................. 1,907 1,877 1,505 Per employee data (in thousands) Net sales ........................................ $ 415.7 $ 402.2 $ 446.9 Gross profit ..................................... $ 122.6 $ 114.3 $ 127.0 Operating expenses ............................... $ 97.1 $ 87.5 $ 93.0 Profit from operations ........................... $ 25.5 $ 26.8 $ 34.0 Profit From Operations ........................... $ 25.5 $ 26.8 $ 34.0 - -----------------------------------------------------------------------------------------------------------------
This schedule is prepared reflecting accounting changes as required or allowed to more fairly present the results of operations over the eleven-year period. Statements for years preceding these changes have not been revised to reflect their retroactive application of these changes. Refer to prior year annual reports for specific accounting changes. Page 12
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands) .............................. 343 338 308 249 SUMMARY OF Net sales ............................................. $ 627.8 $ 536.6 $ 474.1 $ 423.9 EARNINGS Cost of sales ...................................... 454.4 391.4 351.8 313.7 ---------- ---------- ---------- ---------- Gross profit .......................................... 173.4 145.2 122.3 110.2 Operating expenses ................................. 121.7 112.1 102.1 94.9 ---------- ---------- ---------- ---------- Operating profit ...................................... 51.7 33.1 20.2 15.3 Depreciation and amortization ...................... 4.5 4.6 4.8 4.9 Interest expense, net .............................. 2.9 3.2 3.8 4.3 ---------- ---------- ---------- ---------- Income before income taxes ............................ 44.3 25.3 11.6 6.1 Income taxes ....................................... 17.5 9.9 4.7 2.7 ---------- ---------- ---------- ---------- Net income ............................................ 26.8 15.4 6.9 3.4 Cash dividends ........................................ 6.0 3.6 2.9 2.9 ---------- ---------- ---------- ---------- Reinvested earnings ................................... $ 20.8 $ 11.8 $ 4.0 $ 0.5 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) 13,945 13,850 13,646 13,643 (NOTE 7) Net income per share basic ............................ $ 1.93 $ 1.12 $ .50 $ .25 Net income per share diluted .......................... $ 1.93 $ 1.11 $ .50 $ .25 Cash dividends per share .............................. $ .43 $ .26 $ .22 $ .22 Book value per share .................................. $ 7.41 $ 5.94 $ 5.10 $ 4.80 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital ....................................... $ 84.4 $ 76.0 $ 86.1 $ 75.3 POSITION Property, plant and equipment, net .................... $ 44.5 $ 41.2 $ 41.0 $ 43.2 AT YEAR-END Total assets .......................................... $ 222.5 $ 213.1 $ 204.2 $ 195.2 Short-term debt ....................................... $ -- $ -- $- $- Long-term debt ........................................ $ 28.0 $ 38.5 $ 58.0 $ 53.0 Stockholders' equity .................................. $ 103.4 $ 82.2 $ 69.5 $ 65.5 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales ....................................... 4.3% 2.9% 1.5% 0.8% RATIOS Asset turnover ........................................ 2.8 2.5 2.3 2.2 Return on assets ...................................... 12.0% 7.2% 3.4% 1.7% Leverage factor ....................................... 2.7 3.1 3.1 3.0 Return on opening stockholders' equity ................ 32.6% 22.2% 10.5% 5.2% Percent earnings reinvested ........................... 77.6% 76.6% 58.0% 14.7% Percent increase (decrease) in equity ................. 25.8% 18.3% 6.1% 1.2% - ------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment ............ $ 11.8 $ 7.9 $ 4.6 $ 1.8 Stockholders at year-end .............................. 1,618 1,639 1,625 1,670 Employees at year-end ................................. 1,231 1,185 1,204 1,196 Per employee data (in thousands) Net sales ........................................... $ 510.0 $ 452.8 $ 393.8 $ 354.4 Gross profit ........................................ $ 140.8 $ 122.5 $ 101.6 $ 92.1 Operating expenses .................................. $ 98.9 $ 94.6 $ 84.8 $ 79.3 Profit from operations .............................. $ 41.9 $ 27.9 $ 16.8 $ 12.8 - -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN MILLIONS, EXCEPT EMPLOYEE AND PER SHARE DATA-NOTE 7) 1991 1990 1989 1988 - ------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL Tons sold (in thousands) ........................... 234 248 255 277 SUMMARY OF Net sales .......................................... $ 436.4 $ 478.9 $ 501.1 $ 499.3 EARNINGS Cost of sales ................................... 331.1 363.6 380.6 375.1 ---------- ---------- ---------- ---------- Gross profit ....................................... 105.3 115.3 120.5 124.2 Operating expenses .............................. 92.8 97.5 96.7 92.6 ---------- ---------- ---------- ---------- Operating profit ................................... 12.5 17.8 23.8 31.6 Depreciation and amortization ................... 5.3 5.2 4.4 3.9 Interest expense, net ........................... 6.8 6.8 5.1 5.1 ---------- ---------- ---------- ---------- Income before income taxes ......................... .4 5.8 14.3 22.6 Income taxes .................................... .2 2.7 5.6 8.9 ---------- ---------- ---------- ---------- Net income ......................................... .2 3.1 8.7 13.7 Cash dividends ..................................... 3.9 4.9 4.7 3.5 ---------- ---------- ---------- ---------- Reinvested earnings ................................ $ (3.7) $ (1.8) $ 4.0 $ 10.2 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- - ------------------------------------------------------------------------------------------------------------------------------- SHARE DATA Number of shares outstanding at year-end (in thousands) 13,643 13,616 13,538 13,481 (NOTE 7) Net income per share basic ......................... $ .02 $ .23 $ .64 $ 1.02 Net income per share diluted ....................... $ .02 $ .23 $ .64 $ 1.01 Cash dividends per share ........................... $ .29 $ .36 $ .34 $ .26 Book value per share ............................... $ 4.74 $ 5.02 $ 5.15 $ 4.86 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL Working capital .................................... $ 79.7 $ 89.9 $ 75.8 $ 89.0 POSITION Property, plant and equipment, net ................. $ 47.4 $ 54.8 $ 45.3 $ 39.4 AT YEAR-END Total assets ....................................... $ 190.4 $ 226.6 $ 202.3 $ 211.9 Short-term debt .................................... $ .2 $ 11.9 $ .5 $- Long-term debt ..................................... $ 63.3 $ 76.7 $ 51.0 $ 61.0 Stockholders' equity ............................... $ 64.7 $ 68.3 $ 69.7 $ 65.5 - ------------------------------------------------------------------------------------------------------------------------------- FINANCIAL Return on sales .................................... 0.1% 0.7% 1.7% 2.7% RATIOS Asset turnover ..................................... 2.3 2.1 2.5 .4 Return on assets ................................... 0.1% 1.4% 4.3% 6.5% Leverage factor .................................... 2.8 3.3 3.1 3.8 Return on opening stockholders' equity ............. 0.3% 4.5% 13.2% 24.7% Percent earnings reinvested ........................ -% -% 46.3% 74.8% Percent increase (decrease) in equity .............. (5.3%) (2.0%) 6.4% 18.5% - ------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Additions to property, plant and equipment ......... $ 3.3 $ 13.4 $ 10.4 $ 7.8 Stockholders at year-end ........................... 1,750 1,730 1,747 1,732 Employees at year-end .............................. 1,268 1,379 1,371 1,373 Per employee data (in thousands) Net sales ........................................ $ 344.2 $ 347.3 $ 365.5 $ 363.7 Gross profit ..................................... $ 83.0 $ 83.6 $ 87.9 $ 90.5 Operating expenses ............................... $ 73.2 $ 70.7 $ 70.5 $ 67.5 Profit from operations ........................... $ 9.8 $ 12.9 $ 17.4 $ 23.0 - -------------------------------------------------------------------------------------------------------------------------------
A. M. Castle & Co. 1998 Annual Report Page 13 FINANCIAL REVIEW This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes. OVERVIEW 1998 results produced new records for total sales and gross profit, but lower overall earnings due to the weakening in market demand and pricing that occurred in the second half of the year. According to DRI-McGraw Hill's preliminary figures, the total annual output of the Company's primary market - -- the North American producer durable equipment sector -- amounted to $686 billion in 1998. On average, DRI estimates that the sub-sectors that Castle serves grew about 9.5% during the past year. This supports the Company's contention that there is a global need for continued investment in plant and equipment to strengthen relative competitive position. However, in response to the difficulties in Asia and their rippling effect on some key markets, Castle's customers began liquidating inventories in the second half of the year, which sharply curtailed their purchases of highly engineered metals. Reflecting these economic conditions, activity levels at Castle were strong in the first six months of the year, but considerably slower in the second half, and particularly in the fourth quarter. The record sales and gross profit levels were achieved primarily due to contributions from recent acquisitions. Castle also continued to pursue internal growth initiatives through aggressive expansion of existing locations and processing capabilities. Operating earnings were strong during the first six months of the year, outperforming 1997's first half. During the second half of the year, weakened demand and pricing put considerable short-term pressure on earnings which adversely impacted Castle's year-to-year operating results. 1998 COMPARED WITH 1997 Revenues for 1998 reached a record $792.8 million, a gain of 5.0% from 1997's $754.9 million primarily due to acquisitions completed during the past two years. Excluding sales generated from Castle's recent acquisitions, sales in its core business were relatively flat, showing a slight decline of 0.6% from 1997. Carbon and stainless steels generated 75% of total sales, with the balance provided by non-ferrous metals. Gross profit rose 9% to a record $233.8 million as compared to the $214.6 million recorded in the prior year. The gross profit gain reflects the higher value-added contribution from recent acquisitions and investments in leading-edge processing technologies. Gross margin percentage was 29.5% versus 28.4% a year ago. Excluding gross margins generated from recent acquisitions, total gross margin in its core business increased by 0.9% in spite of the slight total sales decline noted above. Substantially all inventories are valued using the LIFO (last-in, first-out) method. In 1998, LIFO had the effect of decreasing Castle's cost of sales by $5.0 million, compared with what it would have been on a FIFO basis. Total operating expenses for 1998 were $185.1 million, as compared to $164.3 million last year, a 12.7% increase. Excluding the expenses of the acquired businesses, 1998 operating expenses were up 4.3% over last year's levels, with the increase occurring primarily in the plant areas, due to higher year to year transaction-activity. As a percentage of sales, consolidated operating expenses rose to 23.3% in 1998 as compared to 21.8% in 1997. Depreciation and amortization expense increased by $1.9 million or 28.9% over the prior year, reflecting both internal and external expansion initiatives. Net interest expense increased by $5.3 million over the 1997 level due to increased borrowing used to fund investments and working capital requirements. Castle's 1998 effective income tax rate, at 39.7%, remained relatively unchanged from the prior year. Net earnings totalled $18.5 million for 1998 as compared to last year's net income of $23.8 million. Basic earnings per share declined 22% to $1.32 per share for 1998 as compared to $1.70 in 1997. 1997 COMPARED WITH 1996 Net sales for 1997 totalled $754.9 million, an increase of 12.2% over 1996+s $672.6 million. Excluding sales generated from its 1997 and 1996 acquisitions, sales in Castle's core business increased by 5.0%. Carbon and stainless steels generated 73% of total sales, with the balance provided by non-ferrous metals. In 1997, gross margin percentage remained very strong at 28.4% as compared to the same 28.4% for 1996. Castle's value-added service strategy continued to yield positive results on overall gross margins. Total gross profit was $214.6 million in 1997, up 12.2% from 1996+s level of $191.2 million. Excluding gross margins generated from its 1996 and 1997 acquisitions, total gross margin increased by 4.2%. In 1997, LIFO had the effect of decreasing Castle's cost of sales by $1.1 million as compared with what it would have been on a fifo basis. Total operating expenses for 1997 were $164.3 million, compared with $139.9 million for the prior year, a 17.4% increase. Excluding the expenses of its acquired businesses, 1997 operating expenses were up 9.8% as compared to 1996. As a percentage of sales, consolidated operating expenses were 21.8% in 1997 as compared to 20.8% of sales in 1996. Depreciation and amortization increased by $1.3 million from 1996 primarily due to the expense associated with the acquired companies. Net interest expense increased by $1.3 million due to higher average borrowings in support of recent acquisitions. The company's income tax rate at 39.7% was up slightly from the prior year's effective rate of 39.5%. Increased sales, and earnings contributions from recently acquired businesses helped offset some of the earnings erosion experienced due to inflationary pressures in a relatively flat pricing Page 14 environment. Earnings for the year totalled $23.8 million as compared to $26.1 million in 1996. Basic earnings per share for 1997 were $1.70 as compared to $ 1.86 for 1996. CAPITAL EXPENDITURES Capital expenditures for 1998 totalled $30.2 million as compared to $16.2 million in 1997. The 1998 expenditures included approximately $11.5 million expended for new or expanded facilities at subsidiary locations in Canada, Michigan, and Indiana. The Company also expanded production capabilities at its H-A Industries processing facility located in Hammond, Indiana and added further processing capabilities in several other Company facilities including its Franklin Park headquarters location. The 1997 capital expenditures totalled $16.2 million as compared with $22.5 million expended in 1996. Capital expenditures in 1997 included approximately $4.1 million for additional processing equipment at H-A Industries along with $8.3 million expended for processing and material handling equipment throughout the rest of the Company. The remaining expenditures were aimed at enhancing existing facilities and maintaining property and equipment in good working order. During 1998 and 1997, Castle sold and leased back approximately $9.6 million and $2.4 million of fixed assets respectively, which added to cash flow and reduced long-term borrowing. LIQUIDITY AND CAPITAL RESOURCES Castle strives to maintain a strong balance sheet and financial position. During the past three years, Castle has invested close to $128 million in new facilities, equipment, and acquired businesses. Earnings strength and cash flow from operations, along with planned debt financing, have provided funds for this strategic expansion. Long-term borrowings and debt ratios have generally been maintained at, or below, the Company's target range, with the exception of the second half of 1998. Total borrowings were $176.1 million at year-end 1998 as compared to $93.4 million at 1997 year end. Its debt-to-capital ratio was 55.0% at year-end 1998 as compared to 40.6% at the end of 1997. Based on expectations for a strong positive cash flow during 1999, management plans for a 10% reduction in its debt-to-capital ratio down to the target ratio of 45%. Working capital was $181.2 million as of December 31, 1998 as compared to $119.8 million at 1997 year end. Accounts receivable declined by $2.8 million from the prior year end. The number of days outstanding at the end of 1998 was slightly increased from 1997, while collections remain strong and in line with target levels. Management believes that the net accounts receivable at December 31, 1998 are of a very good quality. Inventory levels increased $65.1 million from year end 1997. The increase has been the result of a combination of acquisitions, increases designed to support market initiatives, and the adverse effect of weaker than anticipated fourth quarter demand. Castle had unused committed and uncommitted lines of bank credit of $137.9 million at December 31, 1998, compared with $109.5 million at December 31, 1997. Management believes that funds generated from operations, existing lines of credit and additional borrowing capacity should provide adequate funding for current and anticipated business operations. Castle has not entered into any market risk agreements of a material nature. Fixed interest rate debt outstanding as of December 31, 1998 totalled $107.9 million with an average interest rate of 6.9%. Variable interest rate debt outstanding as of December 31, 1998 totalled $68.2 million with an average interest rate of 5.1%. YEAR-2000 ISSUES Castle and its subsidiaries are currently modifying their computer systems in order to properly process transactions in the Year-2000. Expenditures for these modifications are being expensed as incurred. The Company expects to have substantially all necessary modifications completed by third quarter 1999 with no significant impact on its operations. The Company identified its communications systems, financial systems, and transactional systems as the major Year-2000 risk areas and began addressing these issues starting in 1997. Year-2000 compliant communication software is operational in Franklin Park, Illinois and will be installed in all other locations over the next six months. The financial software upgrades are progressing well and are nearing completion. As of this date, 40% of the 90,000 lines of transaction system code requiring changes have been modified, tested, and put into production. The remaining 60% is scheduled for completion by the third quarter. The "most reasonably likely worst case Year-2000 scenarios" would involve a partial failure in one or more of the above systems requiring that the particular transaction or process be handled manually until the problem is corrected. The impact of this type of problem would not be likely to have a material effect on results of operations, liquidity or financial condition. The Company is in the process of reassessing its non-information technology systems and identifying risks from third party relationships. Castle is well diversified from a customer, product, and supplier standpoint and, consequently, isolated disruptions in any one area, with the exception of prolonged power interruptions at any of its four largest facilities, are not likely to have a significant impact on total company results. The Company's Year-2000 activities are expected to cost between $1.8 and $2.0 million with approximately 33% being incurred as of year-end 1998. A. M. Castle & Co. 1998 Annual Report Page 15 COMMON STOCK INFORMATION Symbol CAS
DIVIDENDS STOCK PRICE RANGE 1998 1997 1998 1997 - ----------------------------------------------------------------------------------- First Quarter ....... $ .170 $ .150 21 1/2 24 7/8 17 1/4 20 7/8 Second Quarter ...... .195 .170 21 1/2 24 1/2 16 3/4 23 5/8 Third Quarter ....... .195 .170 14 3/4 22 21 3/4 26 1/2 Fourth Quarter ...... .195 .170 14 19 3/8 22 1/2 26 1/2 ------ ------ $ .755 $ .660 ------ ------ ------ ------
[GRAPHS] COMPOUND RATE OF RETURN VS. INFLATION
BASE CASTLE S&P500 INFLATION 1984 1,000.0 1,000.0 1,000.0 1985 1,349.0 1,318.0 1,036.0 1986 1,098.1 1,564,5 1,055.7 1987 1,392.4 1,647.4 1,093.7 1988 2,248.7 1,920.8 1,138.5 1989 2,293.7 2,529.8 1,193.2 1990 2,082.6 2,451.3 1,257.6 1991 2,136,8 3,199.0 1,310.4 1992 2,391.1 3,445.3 1,349.7 1993 3,629.6 3,789.8 1,390.2 1994 4,483,3 3,839.1 1,428.4 1995 9,262.1 5,282.6 1,466.3 1996 8,159.0 6,497.6 1,510.3 1997 9,688.0 8,854.8 1,545.0 1998 6,675.0 11,104.2 1,569.8
CASTLE'S DIVIDEND RECORD
Castle S&P 84 100.00 100.00 85 137.63 104.78 86 150.32 109.96 87 150.13 116.73 88 168.73 129.46 89 226.48 146.22 90 239.29 160.48 91 190.20 161.75 92 140.95 164.54 93 140.98 166.93 94 173.71 175.30 95 284.64 183.27 96 276.33 198.01 97 435.78 205.84 98 498.88 215.07
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) 1998 1997 1996 - ----------------------------------------------------------------------------- Current assets Cash ................................... $123.0 $122.8 $121.8 Accounts receivable, net ............... 85.7 88.5 68.8 Inventories, at latest cost ............ 269.2 209.1 152.1 ------ ------ ------ Total current assets ................. 357.9 300.4 222.7 Less-current liabilities ............... (145.4) (146.4) (107.4) ------ ------ ------ Net current assets ....................... 212.5 154.0 115.3 Fixed and other assets, net .............. 154.2 123.1 97.4 Total assets, less current liabilities 366.7 277.1 212.7 Long-term debt ........................... (172.3) (90.7) (40.9) Deferred income taxes .................... (15.1) (12.5) (11.4) Other liabilities ........................ (4.0) (2.9) (3.2) Unrecognized inventory gain, net of taxes (31.3) (34.3) (35.3) ------ ------ ------ Stockholders' equity ..................... $144.0 $136.7 $121.9 ------ ------ ------ ------ ------ ------ - -----------------------------------------------------------------------------
Page 16 A. M. Castle & Co. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, - ------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------- Net sales .................................... $792,846 $754,865 $672,617 Cost of material sold ........................ 559,084 540,286 481,451 -------- -------- -------- Gross profit on sales ...................... 233,762 214,579 191,166 -------- -------- -------- Operating expenses ........................... 185,109 164,284 139,904 -------- -------- -------- Operating profit ............................. 48,653 50,295 51,262 -------- -------- -------- Depreciation and amortization expense (Note 1) 8,486 6,581 5,248 Interest expense, net (Notes 2 and 4) ........ 9,438 4,183 2,878 -------- -------- -------- Income before income taxes ................... 30,729 39,531 43,136 -------- -------- -------- Income taxes (Notes 1 and 3) Federal - currently payable .................. 7,517 10,152 12,845 - deferred ........................... 2,420 2,469 934 State ...................................... 2,270 3,065 3,253 -------- -------- -------- 12,207 15,686 17,032 -------- -------- -------- Net income ................................. $ 18,522 $ 23,845 $ 26,104 -------- -------- -------- -------- -------- -------- Basic income per share (Notes 1 and 7) ..... $ 1.32 $ 1.70 $ 1.86 -------- -------- -------- -------- -------- -------- Diluted income per share (Notes 1 and 7) ... $ 1.32 $ 1.69 $ 1.86 -------- -------- -------- -------- -------- -------- - -------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF REINVESTED EARNINGS
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year .................................................. $ 114,709 $ 100,124 $ 81,998 Net income .................................................................... 18,522 23,845 26,104 Cash dividends-$.755 in 1998, $.66 in 1997, and $.57 per share in 1996 (Note 7) (10,602) (9,260) (7,978) --------- --------- --------- Balance at end of year ........................................................ $ 122,629 $ 114,709 $ 100,124 --------- --------- --------- --------- --------- --------- - ---------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A. M. Castle & Co. 1998 Annual Report Page 17 A. M. Castle & Co. and Subsidiaries CONSOLIDATED BALANCE SHEETS
Years Ended December 31, - ------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSAND) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash (Note 1) ............................................................... $ 2,954 $ 2,775 $ 1,805 Accounts receivable, less allowances of $600 in 1998, $600 in 1997, and $700 in 1996 .......................................................... 85,688 88,478 68,791 Inventories - principally on last-in, first-out basis (latest cost higher by approximately $52,100 in 1998, $57,100 in 1997 and $58,800 in 1996)(Note 1) 217,152 152,028 93,315 --------- --------- --------- Total current assets .................................................... 305,794 243,281 163,911 --------- --------- --------- Other assets (Note 1) ......................................................... 59,547 45,684 34,742 --------- --------- --------- Property, plant and equipment, at cost (Notes 1 and 5) Land ........................................................................ 5,955 5,915 5,775 Buildings ................................................................... 51,323 48,366 40,817 Machinery and equipment ..................................................... 120,502 99,359 82,265 --------- --------- --------- 177,780 153,640 128,857 Less - accumulated depreciation ........................................... 83,158 76,230 66,140 --------- --------- --------- 94,622 77,410 62,717 --------- --------- --------- Total assets .................................................................. $ 459,963 $ 366,375 $ 261,370 --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ............................................................ $ 98,835 $ 98,813 $ 63,860 Accrued payroll and employee benefits (Note 6) .............................. 11,199 12,554 10,663 Accrued liabilities ......................................................... 7,337 5,522 4,442 Current and deferred income taxes (Notes 1 and 3) ........................... 3,445 3,934 2,455 Current portion of long-term debt (Note 4) .................................. 3,765 2,688 2,482 --------- --------- --------- Total current liabilities ............................................... 124,581 123,511 83,902 --------- --------- --------- Long-term debt, less current portion (Note 4) ................................. 172,313 90,735 40,934 --------- --------- --------- Deferred income taxes (Notes 1 and 3) ......................................... 15,105 12,543 11,427 --------- --------- --------- Other liabilities (Notes 1 and 6) ............................................. 3,952 2,877 3,181 --------- --------- --------- Stockholders' equity (Notes 1 and 7) Common stock, without par value-authorized 30,000,000 shares; issued and outstanding 14,043,505 in 1998, 14,040,924 in 1997 and 14,008,792 in 1996 ................................................... 27,465 27,293 26,681 Earnings reinvested in the business ......................................... 122,629 114,709 100,124 Other ....................................................................... (681) 85 257 Treasury stock, at cost (845,938 shares in 1998, 845,019 shares in 1997 and 834,439 shares in 1996) ................................................ (5,401) (5,378) (5,136) --------- --------- --------- Total stockholders' equity ............................................. 144,012 136,709 121,926 --------- --------- --------- Total liabilities and stockholders' equity .................................... $ 459,963 $ 366,375 $ 261,370 --------- --------- --------- --------- --------- --------- - -------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. Page 18 A. M. Castle & Co. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSAND) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income ..................................................................... $ 18,522 $ 23,845 $ 26,104 Adjustments to reconcile net income to net cash provided from operating activities Depreciation and amortization ................................................ 8,486 6,581 5,248 Gain) loss on sale of facilities/equipment ................................... (47) 22 (112) Increase in deferred taxes ................................................... 2,562 670 458 Increase) in prepaid expenses and other assets ............................... (3,593) (438) (3,628) Increase (decrease) in other liabilities ..................................... 78 (1,187) 362 Other ........................................................................ (25) 207 198 -------- -------- -------- Cash provided from operating activities before changes in current accounts ....... 25,983 29,700 28,630 -------- -------- -------- Increase (decrease) from changes in: Accounts receivable .......................................................... 9,437 (12,590) 2,619 Inventories .................................................................. (54,467) (43,507) 10,835 Accounts payable ............................................................. (3,850) 28,787 (8,727) Accrued payroll and employee benefits ........................................ (1,669) 1,300 160 Accrued liabilities .......................................................... 1,527 188 216 Current and deferred income taxes ............................................ (489) 1,287 1,182 -------- -------- -------- Net increase (decrease) from changes in current accounts ......................... (49,511) (24,535) 6,285 -------- -------- -------- Net cash provided from (used by) operating activities ............................ (23,528) 5,165 34,915 -------- -------- -------- Cash flows from investing activities Investments and acquisitions (Note 9) .......................................... (26,171) (29,265) (17,984) Proceeds from sales of facilities/equipment (Note 5) ........................... 9,640 2,470 2,521 Capital expenditures ........................................................... (30,236) (16,182) (22,544) -------- -------- -------- Net cash from investing activities ............................................... (46,767) (42,977) (38,007) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of long-term debt ....................................... 84,639 50,838 23,060 Repayments of long-term debt ................................................... (2,944) (2,787 (11,091) Dividends paid ................................................................. (10,602) (9,260) (7,978) Net proceeds from issuance of stock ............................................ 43 161 211 Other .......................................................................... (662) (170) 28 -------- -------- -------- Net cash provided from (used by) financing activities ............................ 70,474 38,782 4,230 -------- -------- -------- Net increase (decrease) in cash .................................................. 179 970 1,138 Cash - beginning of year ......................................................... 2,775 1,805 667 -------- -------- -------- Cash - end of year ............................................................... $ 2,954 $ 2,775 $ 1,805 -------- -------- -------- -------- -------- -------- Supplemental disclosures of cash flow information Cash paid during the year for- Interest ..................................................................... $ 7,987 $ 4,209 $ 2,997 -------- -------- -------- Income taxes ................................................................. $ 10,134 $ 13,729 $ 15,268 -------- -------- -------- - ---------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. A. M. Castle & Co. 1998 Annual Report Page 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) PRINCIPAL ACCOUNTING POLICIES AND BUSINESS DESCRIPTION NATURE OF OPERATIONS - The Company is an industrial distributor of specialty metals including carbon, alloy, and stainless steels; nickel alloys; aluminum; titanium; copper and brass; throughout the United States and Canada. The customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized ones in various industries primarily within the producer durable equipment sector. The Company also distributes industrial plastics through its subsidiary Total Plastics, Inc. BASIS OF PRESENTATION - The financial statements include A. M. Castle & Co. (the Company) and its subsidiaries. All intercompany accounts and transactions have been eliminated. USE OF ESTIMATES - The financial statements have been prepared in accordance with generally accepted accounting principles which necessarily include amounts based on estimates and assumptions by management. Actual results could differ from those amounts. CASH - For the purposes of these statements, short-term investments which have a maturity of 90 days or less are considered cash equivalents. INVENTORIES - Substantially all inventories are stated at the lower of last-in, first-out (LIFO) cost or market. The Company values its LIFO increments using the costs of its latest purchases during the years reported. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost and include assets held under capitalized leases. Major renewals and betterments are capitalized, while maintenance and repairs which do not substantially improve or extend the useful lives of the respective assets are expensed currently. 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)
- ----------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------- Net income ........................ $18,522 $23,845 $26,104 Weighted average common shares outstanding ................ 14,043 14,026 14,000 Dilutive effect of outstanding employee and directors' common stock options .............. 40 49 68 ------- ------- ------- Diluted common shares outstanding . 14,083 14,075 14,068 Basic earnings per share .......... $ 1.32 $ 1.70 $ 1.86 ------- ------- ------- ------- ------- ------- Diluted earnings per share ........ $ 1.32 $ 1.69 $ 1.86 ------- ------- ------- ------- ------- ------- Outstanding employee and directors' common stock options having no dilutive effect ................ 140 8 8 ------- ------- ------- ------- ------- ------- - -----------------------------------------------------------------------
GOODWILL - Cost in excess of net assets of acquired companies is amortized on a straight-line basis over a 40 year period. As required, the Company continually evaluates whether later events or circumstances warrant a revision in the remaining useful life and recoverability of the unamortized balance. Net book value of goodwill included in other assets as of December 31, 1998, 1997, and 1996 was $29.7 million, $20.1 million, and $11.0 million respectively. Accumulated amortization at December 31, 1998, 1997, and 1996 was $1.7 million, $0.9 million, and $0.4 million. NEW ACCOUNTING STANDARD - The company has reviewed the business activities of its divisions and subsidiaries in accordance with the requirements of SFAS No. 131. The Company has concluded that its business activities fall into one identifiable business segment as approximately 95% of all revenues are derived from the distribution of its specialty metal products. These products are purchased, warehoused, processed, and sold using essentially the same systems, facilities, sales force, and distribution network. Approximately 75% of current year revenues from these products came from the sale of carbon and stainless steel, with the balance provided from the sale of non-ferrous metal products. (2) SHORT-TERM DEBT Short-term borrowing activity was as follows (in thousands):
- ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Maximum borrowed .... $22,000 $ 8,500 $ 5,000 Average borrowed .... 4,979 1,003 884 Average interest rate During the year ... 5.8% 5.8% 5.5% - -----------------------------------------------------------
(3) INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts Page 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) used for income tax purposes. Significant components of the Company's Federal and state deferred tax liabilities and assets as of December 31, 1998, 1997 and 1996 are as follows (in thousands):
- ------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------- Deferred tax liabilities: Depreciation ................. $ 9,790 $ 7,688 $ 6,547 Inventory, net ............... 6,566 4,912 2,858 Pension ...................... 5,793 5,608 5,743 Other, net ................... (950) (1,173) (1,612) -------- -------- -------- Net deferred liabilities ... 21,199 17,035 13,536 Deferred tax assets: Postretirement benefits ...... 952 937 1,426 -------- -------- -------- Net deferred tax liabilities $ 20,247 $ 16,098 $ 12,110 -------- -------- -------- -------- -------- -------- - -------------------------------------------------------------------------
The components of the provision (benefit) for deferred Federal income tax for the years ended December 31, 1998, 1997 and 1996, are as follows (in thousands):
- -------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------- Depreciation .................. $ 1,526 $ 257 $ 537 Inventory, net ................ 1,424 1,753 125 Pension/Postretirement benefits 157 428 621 Other, net .................... (687) 31 (349) ------- ------- ------- $ 2,420 $ 2,469 $ 934 ------- ------- ------- ------- ------- ------- - --------------------------------------------------------------------
A reconciliation between the statutory Federal income tax amount and the effective amounts at which taxes were actually provided is as follows (in thousands):
- -------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------- Federal income tax at statutory rates ... $ 10,755 $ 13,836 $ 15,098 State income taxes, net of Federal income tax benefits ............................ 1,448 1,864 2,103 Other ................................... 4 (14) (169) -------- -------- -------- $ 12,207 $ 15,686 $ 17,032 -------- -------- -------- -------- -------- -------- - --------------------------------------------------------------------------------
(4) LONG-TERM DEBT Long-term debt consisted of the following at December 31, 1998, 1997 and 1996 (in thousands):
- --------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------- Revolving credit agreement (a) (c) .. $ 49,179 $ 25,838 $ -- 6.49% insurance company term loan, due in equal installments from 2004 through 2008 ................. 20,000 20,000 20,000 9.3% insurance company term loan, due in equal installments through 2000 ...................... 3,310 4,980 6,650 7.53% insurance company term loan due in equal installments from 1999 through 2005 ...................... 4,600 4,600 4,600 industrial development revenue bonds at variable rates, due in varying amounts through 2010 (b) (c) ...... 16,225 10,791 11,058 7.54% insurance company loan due in equal installments from 2005 through 2009 ...................... 25,000 25,000 -- 6.54% average rate insurance company loan due in varying installments from 2001 through 2012 ............ 55,000 -- -- Other ............................... 2,764 2,214 1,108 --------- --------- --------- Total ............................... 176,078 93,423 43,416 Less-current portion ................ (3,765) (2,688) (2,482) --------- --------- --------- Total long-term portion ............. $ 172,313 $ 90,735 $ 40,934 --------- --------- --------- --------- --------- --------- - ---------------------------------------------------------------------------------
The carrying value of long term debt does not differ materially from their estimated fair value as of December 31, 1998. (a) The Company has revolving credit agreements of $100.0 million domestically and $26.4 million with foreign (primarily Canadian) banks. The credit facilities are five-year revolvers, extended annually by mutual agreement. Under these credit arrangements all borrowings are considered to be long-term debt for balance sheet presentation purposes. Interest rate options on the domestic facility are based on Eurodollar Interbank Rates, Reference Rates or competitive Bid Rates from five participating banks. A commitment fee of .22% of the unused portion of the commitment is required on the domestic facility. (b) The industrial revenue bonds are based on a variable rate demand bond structure and are backed by a letter of credit. (c) The most restrictive provisions of the loan agreements require the Company to maintain minimum funded debt to total capitalization ratios. At December 31, 1998, the Company was in compliance with all restrictive covenants. (d) Aggregate annual principal payments required on the noncurrent portion of long-term debt (including obligations under capital leases) are due as follows (in thousands): 2000 $3,179 2001 $3,425 2002 $3,321 2003 $3,299 ------ ------ ------ ------ ------ ------ ------ ------
Total net book value of assets collateralized under financing arrangements approximated $1.8 million at December 31, 1998. Net interest expense reported on the accompanying Consolidated Statements of Income was reduced by interest income of $0.1 million in 1998, $0.2 million in 1997, and $0.3 million in 1996. (5) LEASE AGREEMENTS (a) Description of leasing arrangements - The Company has capital and operating leases covering certain warehouse facilities, equipment, automobiles and trucks, with lapse of time as the basis for all rental payments plus a mileage factor included in the truck rentals. (b) Capital leases - Obligations under capitalization of leases are not significant. (c) Operating leases - Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1998, are as follows (in thousands):
- ------------------------------------------------- Year ending December 31, - ------------------------------------------------- 1999 $ 6,921 2000 5,348 2001 4,533 2002 3,811 2003 3,492 Later years 15,474 ------- Total minimum payments required $39,579 ------- ------- - -------------------------------------------------
A. M. Castle & Co. 1998 Annual Report Page 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) Rental expense - Total rental payments charged to expense were $9.8 million in 1998, $9.5 million in 1997 and $8.9 million in 1996. (e) Sale and leaseback of assets - During 1998, 1997 and 1996 the Company sold and leased back equipment under operating leases with terms ranging from five to eight years. The assets sold at approximately net book value for proceeds of $9.6, $2.4 and $2.5 million respectively. The 1998 leases allow for a purchase option at the end of the lease term of $2.6 million. The 1997 and 1996 leases allow for a purchase option at the end of the lease term of $0.7 and $0.8 million respectively. Annual rentals are $1.3 million for the 1998 leases, $0.3 million for the 1997 lease and $0.3 million for the 1996 leases. (6) RETIREMENT, PROFIT-SHARING AND INCENTIVE PLANS Substantially all employees who meet certain requirements of age, length of service and hours worked per year are covered by Company-sponsored retirement plans. These retirement plans are defined benefit, noncontributory plans. Benefits paid to retirees are based upon age at retirement, years of credited service and average earnings. The assets of the Company-sponsored plans are maintained in a single trust account. The majority of the trust assets are invested in common stock mutual funds, insurance contracts, real estate funds and corporate bonds. The Company's funding policy is to satisfy the minimum funding requirements of ERISA. Components of net pension benefit cost for 1998, 1997, and 1996 (in thousands):
- --------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------- Service cost ........................ $ 1,769 $ 1,475 $ 1,798 Interest cost ....................... 4,497 4,327 4,261 Expected return on assets ........... (6,832) (5,964) (5,599) Amortization of transition assets ... -- -- (976) Amortization of prior service cost .. 69 60 206 Amortization of actuarial loss (gain) 80 112 568 ------- ------- ------- Net periodic benefit cost ........... $ (417) $ 10 $ 258 ------- ------- ------- ------- ------- ------- - ---------------------------------------------------------------------------
Status of the plans at December 31, 1998, 1997, and 1996 is as follows (in thousands):
- ---------------------------------------------------------------------------------------- 1998 1997 1996 - ---------------------------------------------------------------------------------------- Change in projected benefit obligation: Benefit obligation at beginning of year ................................... $ 63,969 $ 56,575 $ 58,106 Service cost ................................ 1,769 1,475 1,798 Interest cost ............................... 4,497 4,327 4,261 Benefit payments ............................ (3,338) (3,229) (3,171) Actuarial losses/(gains) .................... 2,142 5,748 (4,419) Plan amendments ............................. 96 (927) -- -------- -------- -------- Benefit obligation at end of year ........... $ 69,135 $ 63,969 $ 56,575 -------- -------- -------- -------- -------- -------- Change in plan assets: Fair value of assets at beginning of year ................................... $ 77,957 $ 65,511 $ 57,058 Actual return on assets ..................... 15,372 15,662 7,332 Employer contributions ...................... 13 13 4,292 Benefit payments ............................ (3,338) (3,229) (3,171) -------- -------- -------- Fair value of plan assets at year end ................................. $ 90,004 $ 77,957 $ 65,511 -------- -------- -------- -------- -------- -------- Reconciliation of funded status: Funded status ............................... $ 20,869 $ 13,988 $ 8,936 Unrecognized prior service cost ............. (91) (119) 942 Unrecognized actuarial loss/(gain) .......... (5,989) 489 4,477 -------- -------- -------- Net amount recognized ....................... $ 14,789 $ 14,358 $ 14,355 -------- -------- -------- -------- -------- -------- Amounts recognized in balance sheet consist of: Prepaid benefit cost ........................ $ 16,964 $ 16,013 $ 15,501 Accrued benefit liability ................... (2,994) (2,133) (1,379) Intangible assets ........................... 236 304 233 Accumulated comprehensive income ...................................... 583 174 -- -------- -------- -------- Net amount recognized ....................... $ 14,789 $ 14,358 $ 14,355 -------- -------- -------- -------- -------- -------- - ----------------------------------------------------------------------------------------
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:
- ------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------ Discount rate ...................... 7.00% 7.25% 8.00% Projected annual salary increases .. 4.75% 4.75% 4.75% Expected long-term rate of return on plan assets ........................ 9.50% 9.50% 9.50% - ------------------------------------------------------------------
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):
- --------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------- Profit sharing and 401-K $1,211 $2,304 $2,469 Management incentive ... $1,360 $2,670 $2,664 - ---------------------------------------------------------
The Company also provides declining value life insurance to its retirees and a maximum of three years of medical coverage to qualified individuals who retire between the ages of 62 and 65. The Company does not fund these plans. During 1997, the Company elected to terminate the plan providing medical coverage to non-union employees who retire between the ages of 62 and 65 after March 31, 1998. During 1997 the Company recognized a pre-tax gain of $1,449,000 as a result of this curtailment in coverage. Page 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Components of net postretirement benefit cost for 1998, 1997, and 1996 (in thousands):
- --------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------- Service ............................. $ 79 $ 169 $ 214 Interest cost ....................... 150 283 311 Amortization of prior service cost .. 22 21 22 Amortization of actuarial loss/(gain) (35) (3) 25 ----- ----- ----- Net periodic benefit cost ........... $ 216 $ 470 $ 572 ----- ----- ----- ----- ----- ----- - ---------------------------------------------------------------------
The status of the plans at December 31, 1998, 1997, and 1996 is as follows (in thousands):
- ------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------ Change in projected benefit obligations: Benefit obligation at beginning of year ............................ $ 2,750 $ 4,486 $ 5,238 Service cost ......................... 79 169 214 Interest cost ........................ 150 283 311 Benefit payments ..................... (180) (224) (210) Actuarial losses/(gains) ............. (506) (516) (1,067) Curtailments ......................... -- (1,449) -- ------- ------- ------- Benefit obligation at end of year .... $(2,293) $(2,749) $(4,486) ------- ------- ------- ------- ------- ------- Change in plan assets: Fair value of assets at beginning of year ............................ $- $- $- Employer contributions ............... 180 224 210 Benefit payments ..................... (180) (224) (210) ------- ------- ------- Fair value of plan assets at year end ........................... $- $- $- ------- ------- ------- ------- ------- ------- Reconciliation of funded status: Funded status ........................ $(2,293) $(2,750) $(4,486) Unrecognized prior service cost ...... 441 437 459 Unrecognized actuarial loss/(gain) ... (578) (81) 431 ------- ------- ------- Net amount recognized ................ $(2,430) $(2,394) $(3,596) ------- ------- ------- ------- ------- ------- Amounts recognized in balance sheet consist of: Accrued benefit liabilities .......... $(2,430) $(2,393) $(3,597) ------- ------- ------- Net amount recognized ................ $(2,430) $(2,393) $(3,597) ------- ------- ------- ------- ------- ------- - ------------------------------------------------------------------------------
Future benefit costs were estimated assuming medical costs would increase at a 10.75% annual rate for the current year, with annual increases decreasing by 1% per year thereafter until an ultimate trend rate of 5.75% is reached. A 1% increase in the health care cost trend rate assumptions would have increased the accumulated postretirement benefit obligation at December 31, 1998 by $117,000 with no significant effect on the 1998 postretirement benefit expense. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.00% in 1998, 7.25% in 1997 and 8.00% in 1996. (7) COMMON STOCK On April 23, 1996, the Company declared a 25% stock dividend which was accounted for as a 5-for-4 stock split and had no effect on common stock or reinvested earnings. All per share amounts presented reflect the effect of the 25% stock dividend on a retroactive basis. Changes in the common and treasury stock accounts during 1998, 1997 and 1996 were as follows (dollars in thousands):
- ------------------------------------------------------------------------------------ Common Stock Treasury Stock - ------------------------------------------------------------------------------------ Shares Issued Amount Shares Amount - ------------------------------------------------------------------------------------ December 31, 1995 ..... 14,743,972 $ 25,441 799,267 $ 4,305 Stock options exercised 90,944 1,064 35,141 831 Other ............... 8,225 176 (59) -- ---------- ---------- -------- ---------- December 31, 1996 ..... 14,843,141 $ 26,681 834,349 $ 5,136 Stock options exercised 31,732 405 10,639 242 Other ............... 11,070 207 31 -- ---------- ---------- -------- ---------- December 31, 1997 ..... 14,885,943 $ 27,293 845,019 $ 5,378 Stock options exercised 3,500 65 918 23 Other ............... -- 107 1 -- ---------- ---------- -------- ---------- December 31, 1998 ..... 14,889,443 $ 27,465 845,938 $ 5,401 - ------------------------------------------------------------------------------------
The Company has long-term stock incentive and stock option plans for the benefit of officers, directors, and key management employees. The plans and related activity are summarized below. The 1989 Long-Term Incentive Plan authorized up to 421,875 shares of common stock for use under the plan. Compensation expense is recognized ratably over the vesting period as determined by the plan. Activity under the plan for 1998, 1997 and 1996 is as follows:
- ----------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------- Compensation expense $190,000 $362,000 $330,000 Shares awarded ..... -- 11,070 8,945 - -----------------------------------------------------------
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, 1995 181,118 11.53 6.27-12.07 Granted ....... 184,255 18.95 18.75-23.38 Exercised ..... (90,944) 11.70 6.27-12.07 ------- ----- ----------- December 31, 1996 274,429 16.44 6.27-23.38 Granted ....... 111,400 21.88 21.88 Forfeitures ... (23,625) 15.79 6.27-21.88 Exercised ..... (37,520) 13.95 6.60-18.75 ------- ----- ----------- December 31, 1997 324,684 18.64 6.60-21.88 Granted ....... 270,610 20.51 20.25-23.13 Forfeitures ... (3,869) 6.60 6.60 Exercised ..... (3,500) 18.52 12.07-18.75 ------- ----- ---------- December 31, 1998 587,925 19.58 12.07-23.38 - -------------------------------------------------------------
As of December 31, 1998, 317,315 of the 587,925 options outstanding, were currently exercisable and had a weighted average contractual life of 2.52 years with a weighted average exercise price of $18.79. The remaining 270,610 shares were not exercisable and had a weighted average contractual life of 4.5 years, with a weighted average exercise price of $20.51. The weighted average fair value of the current year's option grant is estimated to be $5.12 per share. The fair value has been estimated on the A. M. Castle & Co. 1998 Annual Report Page 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) day of the grant using the Black Scholes option pricing model with the following assumptions, risk free interest rate of 4.65%, expected dividend yield of 3.0%, option life of 5 years, and expected volatility of 30 percent. The Company has chosen to account for the stock option plans in accordance with APB Opinion No. 25 under which no compensation expense has been recognized. Had compensation cost for these plans been determined under SFAS No. 123, the Company's 1998 net income would have been reduced by approximately $1.0 million or $0.07 per share, 1997 net income would have been reduced by approximately $0.8 million or $0.06 per share, and 1996 net income would have been reduced by approximately $0.5 million or $0.03 per share. (8) CONTINGENT LIABILITIES At December 31, 1998 total exposure under guarantees issued for banking facilities of unconsolidated affiliates was $12.5 million. The Company was contingently liable as endorser on discounted trade acceptances aggregating $7.5 million at December 31, 1998. Also, the Company has $1.3 million of irrevocable letters of credit outstanding to comply with the insurance reserve requirements of its workers+ compensation insurance carrier. The Company is the defendant in several lawsuits arising out of the conduct of its business. These lawsuits are incidental and occur in the normal course of the Company's business affairs. It is the opinion of counsel that no significant uninsured liability will result from the outcome of the litigation, and thus there is no material financial exposure to the Company. (9) ACQUISITIONS During 1998 the Company and its subsidiaries purchased three distribution businesses and acquired a 50% interest in another metals distributor. The aggregate cash consideration paid was $26.2 million including certain transaction costs. The acquisitions have been accounted for as purchases and are included in the financial statements from the date of acquisition. The company's interest in the joint venture has been accounted for using the equity method and the company's share of the operating results of the joint venture has been included in the company's financials since the date of acquisition. Pro-forma results are not presented as the amounts do not significantly differ from historical results. (10) SELECTED QUARTERLY DATA (unaudited) The unaudited quarterly results of operations for 1998 and 1997 are as follows (dollars in thousands, except per share data - Note 7):
- -------------------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter - -------------------------------------------------------------------- 1998 quarters Net sales .... $211,728 $205,068 $195,512 $180,538 Gross profit . 61,635 60,570 58,027 53,530 Net income ... 7,133 6,319 3,779 1,291 Net income per share basic .. $ .51 $ .45 $ .27 $ .09 Net income per share diluted $ .51 $ .45 $ .27 $ .09 1997 quarters Net sales .... $177,326 $187,981 $192,735 $196,823 Gross profit . 50,931 53,445 54,836 55,367 Net income ... 6,182 6,136 5,734 5,793 Net income per share basic .. $ .44 $ .44 $ .41 $ .41 Net income per share diluted $ .44 $ .44 $ .41 $ .41 - --------------------------------------------------------------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of A.M. Castle & Co.: We have audited the accompanying consolidated balance sheets of A.M. Castle & Co. (a Delaware corporation) and Subsidiaries as of December 31, 1998, 1997 and 1996, and the related consolidated statements of income, reinvested earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A.M. Castle & Co. and Subsidiaries as of December 31, 1998, 1997 and 1996, and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Chicago, Illinois, February 2, 1999. Page 24 DIRECTORS DANIEL T. CARROLL Chairman The Carroll Group, Inc. a management consulting firm EDWARD F. CULLITON Vice President and Chief Financial Officer WILLIAM K. HALL President & Chief Executive Officer Falcon Building Products, Inc. a diversified manufacturing company ROBERT S. HAMADA Dean Graduate School of Business University of Chicago PATRICK J. HERBERT, III President Simpson Estates, Inc. a private management firm JOHN P. KELLER President Keller Group an industrial manufacturing & coal mining company JOHN W. MCCARTER, JR. President The Field Museum a natural history museum JOHN MCCARTNEY Vice Chairman Datatec, Ltd. RICHARD G. MORK President and Chief Executive Officer JOHN PUTH Principle J.W. Puth Associates a consulting firm MICHAEL SIMPSON Chairman of the Board OFFICERS MICHAEL SIMPSON Chairman of the Board RICHARD G. MORK President and Chief Executive Officer ALAN D. RANEY Executive Vice President and Chief Operating Officer MARC BIOLCHEN Vice President- Tubular Group EDWARD F. CULLITON Vice President and Chief Financial Officer SVEN G. ERICSSON Vice President- Business Development M. BRUCE HERRON Vice President- Sales STEPHEN V. HOOKS Vice President- Merchandising TIM N. LAFONTAINE Vice President- Alloy Group JOHN NORDIN Vice President and Chief Information Officer FRITZ OPPENLANDER Vice President- Operations ROBERT A. ROSCNOW Vice President- Carbon Group GISE VAN BAREN Vice President- H-A Industries CRAIG R. WILSON Vice President- Business Process Improvement and Quality PAUL J. WINSAUER Vice President- Human Resources JAMES A. PODOJIL Treasurer-Controller JERRY M. AUFOX Secretary- Legal Counsel HY-ALLOY STEELS CO. GISE VAN BAREN President and General Manager TOTAL PLASTICS, INC. JOHN A. KOZACKI President KEYSTONE TUBE COMPANY MARC BIOLCHIN President OLIVER STEEL PLATE COMPANY JAMES M. FLEMING President GENERAL OFFICES 3400 North Wolf Road Franklin Park IL 60131 847/455-7111 GENERAL COUNSEL Mayer, Brown & Platt TRANSFER AGENT & REGISTRAR American Stock Transfer and Trust Company COMMON STOCK TRADED American Stock Exchange Chicago Stock Exchange INDEPENDENT AUDITORS Arthur Andersen LLP DIVIDEND REINVESTMENT PLAN All registered holders of A. M. Castle & Co. Common stock are eligible to participate in a convenient and economical Dividend Reinvestment Plan. Participants may also make voluntary cash payments. The company pays all commissions and fees associated with stock purchased under the Plan. If you own Castle common stock in "street name" (no certificates), please contact your brokerage firm for further information. DIVIDEND PAYMENT DATES Dividends are paid approximately four weeks following the regular Board meeting that is held on the fourth Thursday of January, April, July and October. ANNUAL MEETING The Annual Meeting of the Company's shareholders will be held at our corporate headquarters on Thursday, April 22, 1999 at 10 a.m. Central Daylight Savings Time. Our corporate headquarters address is 3400 North Wolf Road, Franklin Park, Illinois 60131. FORM 10-K A. M. Castle & Co. will be pleased to make its annual report on Form 10-K, filed with the Securities and Exchange Commission, available at no cost to interested stockholders on written request to the corporate secretary. A CAUTION CONCERNING FORWARD-LOOKING STATEMENTS UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE COMPANY CAUTIONS INVESTORS THAT ANY FORWARD-LOOKING STATEMENTS OR PROJECTIONS, INCLUDING THOSE MADE IN THIS DOCUMENT, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPECTED. EX-27 3 EX-27
5 1,000 4-MOS YEAR DEC-31-1998 DEC-31-1998 DEC-31-1998 DEC-31-1998 2,887 2,887 67 67 86,326 86,326 (638) (638) 217,152 217,152 305,794 305,794 177,780 177,780 (83,158) (83,158) 459,963 459,963 124,581 124,581 172,313 172,313 0 0 0 0 27,465 27,465 116,547 116,547 459,963 459,963 180,538 792,846 180,538 792,846 (127,008) (559,084) (48,136) (192,991) 0 0 (396) (604) (2,910) (9,438) 2,088 30,729 (797) (12,207) 1,291 18,522 0 0 0 0 0 0 1,291 18,522 0.09 1.32 0.09 1.32
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