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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934


For Quarter Ended
March 31, 2004
 
Commission File Number
15415


A. M. Castle & Co.
(Exact name of registrant as specified in its charter)

Maryland
 
36-0879160
(State or Other Jurisdiction of
Incorporation of organization)
 
(I.R.S. Employer Identification No.)


3400 North Wolf Road, Franklin Park, Illinois
 
60131
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant's telephone, including area code
847/455-7111


None
(Former name, former address and former fiscal year, if changed since last year)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes X No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.


Class
 
Outstanding at March 31, 2004
Common Stock, $0.01 Par Value
 
15,796,439 shares
 
 
 


 

 
     
 

A. M. CASTLE & CO.

Part I. FINANCIAL INFORMATION

 
 
Page Number
Part I. Financial Information
 
 
 
 
Item 1.
Financial Statements (unaudited):
 
 
 
 
Comparative Balance Sheets
3
 
 
 
Comparative Statements of Operations
4
 
 
 
 
Condensed Statements of Cash Flows
5
 
 
 
 
Notes to Comparative Financial Statements
6-11
 
 
 
Item 2.
Management's Discussion and Analysis of Financial
 
Condition and Results of Operations
 
 
12-16
 
 
 
Item 3.
Quantitative and Qualitative Disclosure About Market Risk
16
 
 
 
Item 4.
Control and Procedures
17
 
 
 
 
 
 
Part II. Other Information
 
 
 
 
Item 1.
Legal Proceedings
18
 
 
 
Item 6.
Exhibits and Reports on Form 8-K
18
 
 
 




 
     
 

COMPARATIVE BALANCE SHEETS
  
 
 
 
(Amounts in thousands except per share data)
    
 
    
 
    
 
  
(Unaudited)
    
Mar. 31,

 

 
Dec. 31,

 

 
Mar. 31,
  
 
    
2004

 

 
2003

 

 
2003
  
   
 
 
 
ASSETS
    
 
    
 
    
 
  
                    
Current assets
   
 
    
 
    
 
  
Cash and equivalents
  
$
4,434
 
$
2,455
 
$
1,306
 
Accounts receivable, net
   
77,348
   
54,232
   
42,714
 
Inventories (principally on last-in first-out basis)
    
104,040
   
117,270
   
128,092
 
Income tax receivable
    
652
   
660
   
12,929
 
Assets held for sale
    
1,117
   
1,067
   
-
 
Advances to joint ventures and other current assets
   
6,599
   
7,184
   
7,492
 
   
 
 
 
Total current assets
    
194,190
   
182,868
   
192,533
 
 
    
 
    
 
    
 
  
Investment in joint ventures
    
5,060
   
5,492
   
7,404
 
Goodwill
    
31,935
   
31,643
   
31,978
 
Pension assets
    
42,122
   
42,075
   
40,719
 
Advances to joint ventures and other assets
    
8,265
   
8,688
   
6,534
 
Property, plant and equipment, at cost
    
 
    
 
    
 
  
Land
    
4,767
   
4,767
   
6,027
 
Building
   
46,975
   
45,346
   
53,440
 
Machinery and equipment
    
119,253
   
118,447
   
126,311
 
   
 
 
 
 
    
170,995
   
168,560
   
185,778
 
Less - accumulated depreciation
    
(103,079
)
  
(100,386
)
  
(105,534
)
   
 
 
 
 
    
67,916
   
68,174
   
80,244
 
   
 
 
 
Total assets
  
$
349,488
 
$
338,940
 
$
359,412
 
   
 
 
 
LIABILITIES AND STOCKHOLDER'S EQUITY
    
 
    
 
    
 
  
                    
Current liabilities
    
 
    
 
    
 
  
Accounts payable
  
$
77,056
 
$
67,601
 
$
68,256
 
Accrued liabilities and deferred gains
    
18,665
   
19,145
   
16,834
 
Current and deferred income taxes
   
4,656
   
4,852
   
4,386
 
Current portion of long-term debt
   
8,308
   
8,248
   
9,622
 
   
 
 
 
Total current liabilities
    
108,685
   
99,846
   
99,098
 
 
    
 
    
 
    
 
  
Long-term debt, less current portion
   
98,409
   
100,034
   
103,814
 
Deferred income taxes
    
15,670
   
13,963
   
23,011
 
Deferred gain on sale of assets
    
7,095
   
7,304
   
-
 
Minority interest
    
1,261
   
1,456
   
1,376
 
Post retirement benefits obligations
    
2,765
   
2,683
   
2,222
 
Stockholders' equity
    
 
    
 
    
 
  
Preferred stock
   
11,239
   
11,239
   
11,239
 
Common stock
    
159
   
159
   
158
 
Additional paid in capital
    
35,009
   
35,009
   
35,017
 
Earnings reinvested in the business
    
68,542
   
66,480
   
83,851
 
Accumulated other comprehensive income (loss)
   
928
   
1,042
   
(35
)
Other - deferred compensation
   
(29
)
  
(30
)
  
(109
)
Treasury stock, at cost
   
(245
)
  
(245
)
  
(230
)
   
 
 
 
Total stockholders' equity
    
115,603
   
113,654
   
129,891
 
   
 
 
 
Total liabilities and stockholders' equity
  
$
349,488
 
$
338,940
 
$
359,412
 
   
 
 
 
The accompanying notes are an integral part of these financial statements.
    
 
    
 
    
 
  
 
     
 

COMPARATIVE STATEMENTS OF OPERATIONS
  
 
 
(Amounts in thousands, except per share data)
  
For The Three Months Ended
Unaudited
  
March 31,
   
 

 

 

 

 
2004

 

 
2003
  
   
 
 
Net sales
  
$
175,634
 
$
141,646
 
Cost of material sold
    
(124,481
)
  
(98,444
)
   
 
 
Gross material margin
    
51,153
   
43,202
 
 
    
 
    
 
  
Plant and delivery expense
    
(23,599
)
  
(22,350
)
Sales, general, and administrative expense
    
(19,454
)
  
(18,036
)
Depreciation and amortization expense
    
(2,247
)
  
(2,304
)
   
 
 
Total other operating expense
    
(45,300
)
  
(42,690
)
 
    
 
    
 
  
Operating income
    
5,853
   
512
 
 
    
 
    
 
  
Equity earnings (loss) of joint ventures
    
632
   
(37
)
Interest expense, net
    
(2,314
)
  
(2,443
)
Discount on sale of accounts receivable
    
(283
)
  
(329
)
   
 
 
 
    
 
    
 
  
Income/(loss) before income taxes
    
3,888
   
(2,297
)
 
    
 
    
 
  
Income taxes
    
 
    
 
  
Federal
    
(1,232
)
  
763
 
State
    
(354
)
  
127
 
   
 
 
 
    
(1,586
)
  
890
 
Net income (loss) from operations
    
2,302
   
(1,407
)
 
    
 
    
 
  
Preferred dividends
    
(240
)
  
(238
)
   
 
 
Net income (loss) applicable to common stock
  
$
2,062
 
$
(1,645
)
   
 
 
 
    
 
    
 
  
Basic earnings (loss) per share
 
$
0.13
 
$
(0.10
)
   
 
 
Diluted earnings (loss) per share
  
$
0.13
 
$
(0.10
)
   
 
 
 
    
 
    
 
  
 
    
 
    
 
  
 
    
 
    
 
  
(1) Earnings before interest, discount on sale of accounts receivable, taxes, depreciation and amortization
    
 
    
 
  
 
    
 
    
 
  
 
    
 
    
 
  
 
    
 
    
 
  
The accompanying notes are an integral part of these financial statements.
  
 
  
 
     
 

CONDENSED STATEMENTS OF CASH FLOWS
  
 
 
(Dollars in thousands)
  
For The Three Months Ended
(Unaudited)
  
March 31,
 
    
2004
    
2003
  
   
 
 
 
    
 
    
 
  
Cash flows from operating activities:
    
 
    
 
  
Net Income/(loss)
  
$
2,302
 
$
(1,407
)
Depreciation and amortization
    
2,247
   
2,304
 
Amortization of deferred gain
    
(209
)
  
-
 
Equity (earnings) loss from joint ventures
    
(632
)
  
37
 
Deferred taxes and income tax receivable
    
1,666
   
(1,361
)
Non-Cash pension income and post-retirement benefits
    
105
   
(240
)
Other
    
93
   
12
 
   
 
 
Cash from operating activities before working capital changes
    
5,572
   
(655
)
Net change in accounts receivable sold
    
5,000
   
4,300
 
Other increases in working capital
    
(3,613
)
  
(2,922
)
   
 
 
Net cash from operating activities
    
6,959
   
723
 
 
    
 
    
 
  
Cash flows from investing activities:
    
 
    
 
  
Investments and acquisitions
   
(1,744
)
  
-
 
Advances to joint ventures
    
-
   
(114
)
Capital expenditures
    
(1,430
)
  
(736
)
   
 
 
Net cash from investing activities
   
(3,174
)
  
(850
)
 
    
 
    
 
  
Cash flows from financing activities
    
 
    
 
  
Long-term borrowings, net
   
(1,479
)
  
697
 
Preferred dividends paid
    
(240
)
  
(238
)
Other
   
17
   
-
 
   
 
 
Net cash from financing activities
   
(1,702
)
  
459
 
 
    
 
    
 
  
Effect of exchange rate changes on cash
    
(104
)
  
56
 
   
 
 
 
    
 
    
 
  
 
    
 
    
 
  
Net increase in cash
    
1,979
   
388
 
 
    
 
    
 
  
Cash - beginning of year
    
2,455
   
918
 
   
 
 
Cash - end of period
  
$
4,434
 
$
1,306
 
   
 
 
 
    
 
    
 
  
Supplemental cash disclosure – cash (paid) received during the period:
    
 
    
 
  
Interest
  
$
(2,319
)
$
(2,227
)
   
 
 
Income taxes
  
$
20
 
$
(197
)
   
 
 
 
    
 
    
 
  
 
    
 
    
 
  
 
    
 
    
 
  
The accompanying notes are an integral part of these statements.
    
 
    
 
  
 
    
 
    
 
  
 
     
 

A. M. Castle & Co.
 
Notes to Comparative Financial Statements
(Unaudited)

1.Comparative Financial Statements
The comparative financial statements included herein are unaudited. The balance sheet at December 31,2003 is derived from the audited financial statements at that date. The Company believes that the disclosures are adequate to make the information not misleading. However, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited statements, included herein, contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position, the cash flows, and the results of operations for the periods then ended. It is suggested that these condensed financial statements be read in con junction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K. The 2004 interim results reported herein may not necessarily be indicative of the results of operations for the full year.

2.New Accounting Standards
In compliance with Statement of Financial Accounting Standards (“SFAS”) No. 132 (revised 2003) “Employees’ Disclosures About Pensions and Other Post Retirement Benefits”, the Company has disclosed the interim information required as Footnote 11 herein.

3.Earnings Per Share
Earnings per common share are computed by dividing net income by the weighted average number of shares of common stock (basic) plus common stock equivalents (diluted) outstanding during the year. Common stock equivalents consist of stock options, restricted stock awards and preferred stock shares and have been included in the calculation of weighted average shares outstanding using the treasury stock method. In accordance with SFAS No. 128 "Earnings per Share", the following table is a reconciliation of the basic and fully diluted earnings per share calculations for the periods reported.


 
     
 
 
For The Three Months Ended
March 31 
 (in thousands)  
 
    
2004
    
2003
  
  
 
 
Net income (loss)
 
$
2,302
 
$
(1,407
)
Preferred dividends
    
(240
)
  
(238
)
Net income (loss) applicable to common stock
  
$
2,062
 
$
(1,645
)
   
 
 
Weighted average common shares outstanding
    
15,791
    
15,762
  
Dilutive effect of outstanding employee and
   
 
    
 
  
Directors’ common stock options and preferred stock
    
536
    
—
 
Diluted common shares outstanding
    
16,327
   
15,762
  
   
 
 
 
    
 
    
 
  
Basic and diluted income (loss) per common share
 
$
0.13
  
$
(0.10
)
   
 
 
 
    
 
    
 
  
Outstanding employee and directors' common stock options and restricted and
preferred stock shares having no dilutive effect   
    
3,275
    
3,702
  
   
 
 
  
 
 

   305 thousand shares of Preferred Stock Common Stock equivalents are anti-dilutive to “Net income (loss)” before preferred dividends.

4.  Accounts Receivable Securitization
The Company is utilizing a special purpose, fully consolidated, bankruptcy remote company (Castle SPFD, LLC) for the sole purpose of buying receivables from the parent Company and selected subsidiaries and selling an undivided interest in a base of receivables to a finance company. Castle SPFD, LLC retains an undivided interest in the pool of accounts receivable and bad debt losses are allocated first to this retained interest. The facility, which expires in December 2005, requires early amortization if the special purpose company does not maintain a required minimum equity balance or if certain ratios related to the collectibility of the receivables are not maintained. Funding under the facility is limited to the lesser of a calculated funding base or $60 million. As of March 31, 2004, $18.0 million of accounts receivable were sold to the finance company and an additional $31.5 million could have been sold under the agreement. The amount sold to the financing company at December 31, 2003 and March 31, 2003 was $13.0 million and $30.2 million, respectively.
The sale of accounts receivable is reflected as a reduction of "accounts receivable, net" in the Comparative Balance Sheets and the proceeds received are included in "net cash from operating activities" in the Condensed Statements of Cash Flows. Sales proceeds from the receivables are less than the face amount of the accounts receivable sold by an amount equal to a discount on sales as determined by the financing company. These costs are charged to "discount on sale of accounts receivable" in the Comparative Statements of Operations. The discount rate as of March 31, 2004 was 3.84%.

5.  Goodwill
During the first quarter of 2004 the Company’s Metals Segment purchased the remaining 50% interest in its Mexican joint venture and the Plastics Segment purchased the remaining 40% interest in its Paramont Machine Company subsidiary (both of these entities are now wholly owned). Based on the purchase price of these entities and the valuations required by SFAS 141

 
     
 
“Business Combinations”, additional net goodwill of $0.3 million was reported.
  The Company performs an annual impairment test on Goodwill and other intangible assets
during the first quarter of each fiscal year. Based on the test made during the first quarter of 2004, the Company has determined that there is no impairment to the remaining goodwill balance of $31.9 million.
The changes in carrying amounts of goodwill were as follows (in thousands):

 
  
Metals Segment
Plastics Segment
Total
  
Balance As of December 31, 2003
  
$
18,670
  
$
12,973
  
$
31,643
  
Purchases
    
510
    
(210
)
  
300
  
Currency Valuation
    
(8
)
  
¾
    
(8
)
Balance As Of March 31, 2004
  
$
19,172
  
$
12,763
  
$
31,935
  
   
 
 
 
 
    
 
    
 
    
 
  
  
 
 
 
 
6.  Acquisitions
Effective January 1, 2004 the Company purchased the remaining joint venture partner's interest in Castle de Mexico, S.A. de C.V. for $1.6 million. Castle de Mexico is a distribution company, which targets a wide range of businesses within the durable goods sector throughout Mexico. The results of this entity, now a wholly owned subsidiary, have been consolidated in the Company's financial statements as of the effective date of the acquisition.
On March 31, 2004 Total Plastics Inc. (TPI) purchased the remaining 40% interest in its Paramont Machine Company subsidiary for $0.4 million. Paramont is a manufacturer of plastic parts and components which sells to a variety of businesses basically in the Midwest. Beginning on April 1, 2004 the results of the entity will be reported as a wholly owned subsidiary (the minority interest was previously eliminated from reported results). The acquisition has been reported based on a preliminary allocation of the purchase price.

7.  LIFO
Inventory determination under the LIFO method can only be made at the end of each fiscal year based on the inventory levels and costs at that time. Accordingly, interim LIFO determinations, including those at March 31, 2004 and 2003, must necessarily be based on management’s estimates of inventory levels and costs. Since future estimates of inventory levels and costs are subject to certain forces beyond the control of management, interim financial results are subject to fiscal year-end LIFO inventory valuations.
Current replacement cost of inventories exceeds book value by $55.6 million and $39.0 million at March 31, 2004 and March 31, 2003 respectively. Taxes on income would become payable on any realization of this excess from reductions in the level of inventories.

8.  Stock Options
Valuation Assumptions – As required, the Company has adopted the disclosure provisions of SFAS No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure", for the periods ended March 31, 2004 and 2003. The following table summaries on a pro-forma basis the effects on the Company's net loss had compensation been recognized. The fair value of the options granted had been estimated using the Black Scholes option pricing model with the following assumptions: risk free interest rate of 3.1% to 4.5%, expected dividend yield of zero, option life of 10 years, and expected volatility from 30.0% to 50.0%. There were no options granted in the first quarter of 2004.


 
     
 
Pro-Forma Income (Loss) Information       
 
For The Three Months Ended March 31, 
  
 

 

 
2004

 

 
2003
  
  
 
 
Net income (loss) applicable to common stock, as reported
  
$
2,062
  
$
(1,645
)
Pro-forma effect of stock option compensation
   
 
    
 
  
under fair value based method for all awards
    
(233
)
  
(236
)
Pro-forma net income (loss) applicable to common stock
  
$
1,829
  
$
(1,881
)
   
 
 
 
    
 
    
 
  
Total basic and diluted income (loss) per share, as reported
  
$
0.13
  
$
(0.10
)
   
 
 
 
    
 
    
 
  
Pro-forma income (loss) per share:
   
 
    
 
  
Basic
  
$
0.12
  
$
(0.12
)
   
 
 
Diluted
  
$
0.11
 
$
(0.12
)
   
 
 
 
    
 
    
 
  
  
 
 
 
9.  Segment Reporting
The Company distributes and performs first stage processing on both metals and plastics. Although the distribution process is similar, different products are offered and different customers are served by each of these businesses and, therefore, they are considered segments according to SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". 
    The accounting policies of all segments are as described in the summary of significant accounting policies. Management evaluates performance of its business segments based on operating income. The Company does not maintain separate standalone financial statements prepared in accordance with generally accepted accounting principles for each of its operating segments.
The following is the segment information for the quarters ended March 31, 2004 and 2003:

 
 
(in thousands)
  
Net Sales
Gross Mat’l Margin
Other Oper Exp
Operating Income (Loss)
  
 
 
 
 
2004
    
 
    
 
    
 
    
 
  
Metals Segment
  
$
154,721
  
$
44,264
  
$
(38,370
)
$
5,894
  
Plastics Segment
    
20,913
    
6,889
    
(5,859
)
  
1,030
  
Other
    
—
   
—
   
(1,071
)
  
(1,071
)
Consolidated
  
$
175,634
  
$
51,153
  
$
(45,300
)
$
5,853
  
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
2003
    
 
    
 
    
 
    
 
  
Metals Segment
  
$
125,605
  
$
37,601
  
$
(36,601
)
$
1,000
  
Plastics Segment
    
16,041
    
5,601
    
(5,076
)
  
525
  
Other
    
—
   
—
   
(1,013
)
  
(1,013
)
Consolidated
  
$
141,646
  
$
43,202
  
$
(42,690
)
$
512
  
   
 
 
 
 
 
    
 
    
 
    
 
    
 
  
  
 
 
 
 
 
"Other" — Operating loss includes costs of executive and legal departments and other corporate activities which support both operating segments of the Company.
 
 
     
 
The segment information for total assets at March 31, 2004, December 31, 2003 and March 31, 2003 was as follows:

(in thousands)   
    
March 31,
2004
    
December 31,
2003
    
March 31,
2003
  
  
 
 
 
Metals Segment
  
$
317,154
  
$
306,892
  
$
316,470
  
Plastics Segment
    
31,682
    
31,388
    
30,013
  
Other
    
652
   
660
    
12,929
  
Consolidated
  
$
349,488
  
$
338,940
  
$
359,412
  
   
 
 
 
 
    
 
    
 
    
 
  
  
 
 
 
 
"Other" — The segment's total assets consist solely of the Company's income tax receivable (the segments file a consolidated tax return).

10.  Asset Impairment and Special Charges
After a review of certain of its under-performing operations within its metals segment, the Company initiated a major restructuring program during the second quarter of 2003. The restructuring anticipated the sale or liquidation of several under-performing and cash consuming business units, which were not strategic to the Company’s long-term strategy and were reporting operating losses and/or consuming cash. The restructuring included the closing of KSI, LLC a chrome bar plating operation; the liquidation or sale of the Company’s 50% interest in Laser Precision, a joint venture which produces laser cut parts; the sale of the operating assets of Keystone Honing Company, a subsidiary which processes and sells honed tubes; the disposal of selected pieces of equipment which interfere with more efficient use of the Compan y’s distribution facilities; and the sale of the Company’s 50 % interest in Energy Alloys, a joint venture which distributes tubular goods to the oil and gas field industries.
The following table summarizes the restructure reserve activity:

(in millions)
  
December 31, 2003
Balance
First Quarter 2004
Charges
March 31, 2004
Balance
  
 
 
 
Lease and other contract transition costs
  
$
0.3
  
$
(0.3
)
$
—
 
Environmental clean-up costs
    
0.8
    
(0.8
)
  
—
 
Legal fees on asset sales/divestiture
    
0.1
    
(0.1
)
  
—
 
Total
  
$
1.2
  
$
(1.2
)
$
—
 
   
 
 
 
 
    
 
    
 
    
 
  
  
 
 
 


 
     
 
 
11.   Pension and Post Retirement Benefits
The following are the components of the net pension and post-retirement benefit activities (in thousands):
 
  
Pension Benefits
Other Benefits
Total Benefits
   
 
  
2004
2003
            2004
2003
2004
2003
   
Service cost
  
$ (594.2)
$ (372.1)
$ (29.0)
$ (22.6)
$ (623.2)
$ (394.7)
Interest cost
  
(1,448.1)
(1,060.4)
(38.1)
(34.9)
(1,486.2)
(1,095.3)
Expected return on plan
 
2,396.7
1,782.1
—
—
2,396.7
1,782.1
Amortization of prior service cost
  
(16.9)
(12.4)
(11.9)
(9.5)
(28.8)
(21.9)
Amortization of net (loss) gain
  
(366.3)
(37.2)
2.4
7.0
(363.9)
(30.2)
Net periodic (cost) benefit
  
$ (28.8)
$ 300.0
$ (76.6)
$ (60.0)
$ (105.4)
$ 240.0
   
 
  
 
 
 
 
 
 
  
 
12.   Commitments and Contingent Liabilities
At March 31, 2003 the Company had outstanding guarantees of $5.0 million for bank loans made to one of its unconsolidated affiliates. Also outstanding were $1.8 million of irrevocable letters of credit to comply with the insurance reserve requirements of its workers’ compensation insurance carrier. The letter of credit is secured with a Certificate of Deposit, which is included in “Advances to joint ventures and other current assets” on the Comparative Balance Sheets.
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 the Company’s in-house 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.
 
     
 

Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations.

Financial Review
This discussion should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes.

Executive Overview
Recent Economic Trends and Events
A.M. Castle & Co.’s (the “Company”) increased revenue in the first quarter of 2004, due in part to improving economic activity in the durable goods manufacturing sector. The Purchaser’s Managers Index (“PMI”) provided by the Institute of Supply Managers (see Table 1 below), shows a favorable trend beginning in the third quarter of 2003 and continuing through the first quarter of 2004. Generally speaking, an index above 50.0 indicates growth in the manufacturing sector of the U.S. economy.

Table 1
YEAR
Qtr 1
Qtr 2
Qtr 3
Qtr 4
2003
49.7
48.9
54.1
60.6
2004
62.5
 
 
 

As a measure of the Company’s increased activity in the first quarter of 2004, total lines shipped in the Company’s core metal business are up 9% versus the same quarter of 2003 and total tonnage shipped is 17% ahead of last year.
The global economy has also played a role in driving metal prices up over the last two quarters. The steel supply base has diminished over the last few years as recession related pressures resulted in mill consolidations, closures and manufacturing capacity reductions. Recent surging global demand for steel, primarily in China, improving U.S. demand, and shortages in scrap and coke has resulted in accelerated metal pricing. Price increases as compared to the first quarter of 2003 averaged 9% across all product lines as there was some price erosion in the second quarter of 2003.
The Company was successful in passing through material cost increases to its customers in the first quarter. Normal markups were achieved on a significant portion of the price increases.
 
Current Business Outlook
Stronger economic activity in our customer base, coupled with higher metals pricing drove increased metal sales through the first quarter of 2004. Additionally, the Company’s efforts in 2003 and earlier to lower its operating cost structure along with the sale or disposal of under-performing business units, positioned it to leverage earnings favorably as sales increased. The integration of the Castle’s Mexico operations generated $2.2 million of added sales in its first quarter as a fully consolidated entity in the Castle family. The Company’s plastic subsidiary, TPI (Total Plastics, Inc.) also reported double-digit year-over-year sales and earnings growth, driven by improved demand and geographic market expansion into Florida in 2003. Unlike the metals segment, the plastic business has not experienced dramatic raw material price increases from its supplier base. In summary, the Company was able to return to profitability in the first quarter of 2004.



 
     
 
Risk Factors
As part of its current financing agreements with its various lenders, the Company has specific principal payments required over the next few years as summarized below in Table 2 (dollars in millions):

Table 2
 
  
 
 
2004
 
 
2005
 
 
2006
 
 
2007
2008 and Beyond
  
 
 
 
 
 
Required Principal Payments on Debt
  
$
8.2
  
$
11.4
  
$
16.2
  
$
16.2
  
$
56.3
  
  
 
 
 
 
 

In addition, the Company’s principal source of operating cash is derived from its Accounts Receivable Securitization Agreement, which expires in December 2005.
Despite the recent signs of what appears to be an upswing in the manufacturing sector of the economy, there can be no guarantee as to its magnitude or duration. Additionally, the Company’s ability to continue to pass-through supplier-driven material cost increases to its customer base is also critical to meeting required debt service requirements and remaining in compliance with its debt covenants. Should the economic and market recovery turn out to be short term in length, management could pursue further options to ensure it generates enough cash to facilitate the required payments of principal as outlined in its agreements with its primary lenders. These options could include, but not necessarily be limited to, further operating cost reductions and organizational restructuring, further working capital improvements, deferral of non-critical capital projects, sale o f assets or business units, refinancing of the Company through additional equity or debt infusions, or renegotiating existing loans outstanding. Management cannot guarantee that any of these options will be available if needed. None of these options are under consideration at this time, other than the ongoing analysis and review of operating expense and levels of working capital required in the business.
All current business conditions lead management to believe it will be able to generate sufficient cash from operations and planned working capital improvements, to fund its ongoing capital expenditure program and to meet its debt obligations.


Results of Operations: Year-to-Year Comparisons and Commentary
Consolidated results by business segment are summarized in the following table for the quarter ended March 31, 2004 and 2003.



 
     
 
Operating Results by Segment
(dollars in millions)
 
  
Quarter Ended March 31,
   
 
  
2004
2003
Fav/
(Unfav)
Fav/(Unfav)
% Change
  
Net Sales
  
 
 
 
 
Metals
  
$ 154.7
$ 125.6
$ 29.1
23.2%
Plastics
  
20.9
16.0
4.9
30.6
   
Total Net Sales
  
$ 175.6
$ 141.6
$ 34.0
24.0%
 
  
 
 
 
 
Gross Material Margin
  
 
 
 
 
Metals
  
$ 44.3
$ 37.6
$ 6.7
17.8%
% of Metals
  
28.6%
29.9%
(1.3)%
 
Plastics
  
6.9
5.6
1.3
23.2
% of Plastics
  
33.0%
35.0%
(2.0)%
 
   
Total Gross Material Margin
  
$ 51.2
$ 43.2
$ 8.0
18.5%
% of Total
  
29.2%
30.5%
(1.4)%
 
 
  
 
 
 
 
Operating Expense
  
 
 
 
 
Metals
  
$ (38.3)
$ (36.6)
$ (1.7)
(4.6)%
Plastics
  
(5.9)
(5.1)
(0.8)
(15.6)
Other
  
(1.1)
(1.0)
(0.1)
(10.0)
   
Total Operating Expense
  
$ (45.3)
$ (42.7)
$ (2.6)
(6.1)%
% of Total
  
(25.8)%
(30.2)%
4.4%
 
 
  
 
 
 
 
Operating Income
  
 
 
 
 
Metals
  
$ 6.0
$ 1.0
$ 5.0
500.0%
% of Metals Sales
  
3.9%
0.8%
3.1%
 
Plastics
  
1.0
0.5
0.5
100.0
% of Plastics Sales
  
4.8%
3.1%
1.7%
 
Other
  
(1.1)
(1.0)
(0.1)
(10.0)
   
Total Operating Income
  
$ 5.9
$ 0.5
$ 5.4
1080.0%
% of Total Sales
  
3.4%
0.4%
3.0%
 
 
“Other” includes costs of the executive and legal departments, and other corporate activities which support both operating segments of the Company.
 
Net Sales:
Consolidated net sales of $175.6 million increased 24.0% or $34.0 million versus the first quarter of 2003. Metal segment sales of $154.7 million were $29.1 million or 23.2% ahead of last year. Increased volume and related processing activity accounted for $19.6 million (15.6%) of the increase versus the first quarter of 2003, the newly consolidated Mexico operation added $2.2 million of sales (1.8%) and metal pricing and product mix changes made up the remaining $7.3 million (5.8%). Excluding the impact of product mix, weighted average price per ton rose 9.0% versus last year. Stronger economic activity in the manufacturing sector, coupled with accelerating metal prices, were the primary factors behind the sales growth.
Plastic segment sales of $20.9 million (11.9% of total consolidated sales) were $4.9 million or 30.6% stronger than the same quarter of 2003. This sales growth was driven by improved market demand and the Company’s geographic expansion into Florida in 2003.

 
     
 
 
Gross Material Margins and Operating Profit (Loss):
Consolidated gross material margin of $51.2 million was $8.0 million or 18.5% better than last year. Metal segment gross margin of $44.3 million was $6.7 million or 17.8% ahead of the first quarter of 2003 due to stronger revenue. Plastic segment gross margin increased by $1.3 million or 23.2% to a level of $6.9 million. The incremental increase in metal segment gross margins lags the year-over-year sales increase due to two primary factors: a portion of the Company’s metals segment revenues and gross margin is derived from processing and delivery activity, which is therefore not tied to moving material prices and secondly, there is a time lag associated with the Company’s ability to immediately pass-through mill price increases and normal mark-ups to its program account customers.
Total consolidated operating expenses of $45.3 million increased only 6.1% versus the first quarter of last year on a 24.0% sales increase. Incremental operating expenses of $2.6 million represent 7.6% of the additional sales year-over-year, reflecting the impact of the Company’s prior year restructuring and cost cutting initiatives, plus improved productivity.
The Company's "Other" operating segment includes expenses related to executive, legal and other corporate services which support both segments. This expense remained relatively flat versus the same period of 2003.
Consolidated operating profit of $5.9 million (3.4% of sales) is $5.4 million better than the first quarter of last year.

Other Income and Expense, and Net Results:
Joint venture equity earnings of $0.6 million were $0.6 million ahead of 2003, due in part to the 2003 sale or disposal of non-performing ventures and better economic and business performance within the Company’s sole remaining joint venture, Kreher Steel.
Financing costs (interest expense and discount on sale of accounts receivable) decreased $0.2 million to $2.6 million in the first quarter of 2004 on lower borrowings and accounts receivable sold.
Consolidated net income was $2.1 million or $0.13 per share (after preferred dividends of $0.2 million) in the first quarter of 2004 versus a net loss of $1.6 million or $0.10 per share (after preferred dividends of $0.2 million) in the corresponding period of 2003.

Critical Accounting Policies:
There have been no changes in critical accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Liquidity and Capital Resources
The Company’s principal internal sources of liquidity are earnings from operations and management of working capital. Additionally, the Company utilizes an Accounts Receivable Securitization Facility (see Footnote 4 for more details) as its primary external funding source for working capital needs.
Cash flow from operating activities in the first quarter of 2004 was positive $7.0 million. This included a $5.0 million increase in accounts receivable sold under the Company’s Accounts Receivable Securitization Facility due to funding requirements in support of increased sales activity. Excluding the impact of receivables sold under the Company’s Accounts Receivable Securitization Facility, cash flow from operations was a positive $2.0 million, versus a negative $3.6 million in the same quarter last year.
Working capital, excluding the current portion of long-term debt, of $93.8 million is up $2.5 million since the beginning of the year. Trade receivables of $77.3 million (excluding $18.0 million of receivables sold under the Company’s receivable securitization financing facility) are up $23.1 million due to strong first quarter sales. Days sales outstanding (DSO) declined 4.6 days to a level of 43.4 days reflecting lower past due balances outstanding as a percent of sales. Inventory at net book value of $104.0 million, including LIFO (last-in, first-out) reserves of $55.6 million is
 
     
 
down $13.3 million from the start of 2004. Days sales in inventory (DSI) of 115 days is down substantially versus the December 31, 2003 level of 145 days. Actual stock on hand in the metals segment has dropped significantly from the beginning of the year on strong shipments. Trade payables of $77.1 million are up $9.5 million reflecting increased mill pricing on metal purchases in the quarter.
Capital expenditures in the first quarter of 2004 were $1.4 million versus $0.7 million last year. The Company purchased it’s former partner’s equity interest in a Mexico joint venture for $1.6 million effective January 1, 2004.
At March 31, 2004, $18.0 million of receivables were sold or utilized under the Accounts Receivable Securitization Facility (versus $30.2 million at March 31, 2003). Available funds remaining under this facility are $31.5 million at the end of the first quarter of 2004.
As of March 31, 2004, the Company remains in compliance with the covenants of its financial agreements, which require it to maintain certain funded debt-to-capital ratios, working capital-to-debt ratios and a minimum equity value as defined within the agreement. A summary of covenant compliance is shown below.

 
Required
Actual
3/31/04
Debt-to-Capital Ratio
< .55
.44
Working Capital-to-Debt Ratio
> 1.00
1.20
Minimum Equity Value
$100.8 Million
$115.6 Million

All current business conditions lead management to believe it will be able to generate sufficient cash from operations and planned working capital improvements (principally from reduced inventories), to fund its ongoing capital expenditure programs and meet its debt obligations.

Commitments and Contingencies
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 the Company’s in-house 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.


Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company is exposed to various rate and metal price risks that arise in the normal course of business. The Company finances its operations with fixed and variable rate borrowings and the Accounts Receivable Securitization Facility. Market risk arises from changes in variable interest rates. An increase of 1% in interest rates on the variable rate indebtedness and Accounts Receivable Securitization facility would increase the Company’s annual interest expense and discount on sale of accounts receivable by approximately $0.3 million. The Company’s raw material costs are comprised primarily of highly engineered metals and plastics. Market risk arises from changes in the price of steel, other metals and plastics. Although average selling prices generally increase or decrease as material costs increase or decrease, the impact of a change in the purchase price of m aterials is more immediately reflected in the Company’s cost of goods sold than in is selling price.

 
     
 
Item 4. Controls and Procedures:

(a)Evaluation of Disclosure Controls and Procedures
Castle maintains a system of internal controls designed to provide reasonable assurance that its assets and transactions are properly recorded for the preparation of financial information. The system of internal controls is monitored and tested by Castle’s internal auditor. On a quarterly basis a formal senior management review of internal audit results; systems and procedures; variance reports; safety; physical security; and legal and human resource issues is conducted.

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the ”CEO") and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13s-14 under the Securities Exchange Act of 1934) as of a date within 90 days prior to the filing of this annual report. Based on that review and evaluation, the CEO and CFO have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective in ensuring that the information the Company is required to disclose in this quarterly report is recorded, processed, summarized and reported in the time period required by the rules of the Securities and Exchange Commission.


(b)Changes in Internal Controls
There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no material weaknesses identified in the course of such review and evaluation and, therefore, the Company took no corrective measures.

 
     
 



Part II. OTHER INFORMATION


Item 1.   Legal Proceedings

There are no material legal proceedings other than ordinary routine litigation incidental to the business of the Registrant except for the litigation.

Item 6.   Exhibits and Reports on Form 8-K

               (a) Exhibit 31.1 Certification Pursuant to Section 302 by CEO
           Exhibit 31.2 Certification Pursuant to Section 302 by CFO
           Exhibit 32.1 Certification Pursuant to Section 906 by CEO
           Exhibit 32.2 Certification Pursuant to Section 906 by CFO
               (b) The Company filed a Form 8-K, dated February 24, 2004, on February 24, 2004 in connection with the Company
                dissemination of the Company's press release of fourth quarter and year-end results.


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




      A. M. Castle & Co.
      (Registrant)




Date: May 5, 2004                    By: /ss/ Lawrence A. Boik
                            Lawrence A. Boik
                            Vice President – Controller & Treasurer   
  (Mr. Boik is the Chief Accounting Officer and has been authorized to sign on
    behalf of the Registrant.)

 
     
 
Exhibit 31.1




CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, G. Thomas McKane, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of A. M. Castle & Co.;
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report:
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
    1. Designed such disclosure controls and procedures, or cause such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
    3. Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
  5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
    1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
    2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



    Date: May 5, 2004                   /s/ G. Thomas McKane
           G. Thomas McKane
                                Chairman and Chief Executive Officer

     
         
     
    Exhibit 31.2

    CERTIFICATION PURSUANT TO
    SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



    I, Edward F. Culliton, certify that:

    1. I have reviewed this quarterly report on Form 10-Q of A. M. Castle & Co.;
    2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report:
    3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
    4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have:
      1. Designed such disclosure controls and procedures, or cause such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
      2. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
      3. Disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
    5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
      1. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
      2. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.



      Date: May 5, 2004                    /s/ Edward F. Culliton
              Edward F. Culliton
                                    Vice President and Chief Financial Officer


       
           
       
      Exhibit 32.1




      CERTIFICATION PURSUANT TO
      18 U.S.C. SECTION 1350,
      AS ADOPTED PURSUANT TO
      SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



      In connection with the Quarterly Report of A. M. Castle & Co. (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, G. Thomas McKane, President and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


      (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.



             /s/ G. Thomas McKane
             G. Thomas McKane
             Chairman and Chief Executive Officer
             May 5, 2004




       
           
       
      Exhibit 32.2


      CERTIFICATION PURSUANT TO
      18 U.S.C. SECTION 1350,
      AS ADOPTED PURSUANT TO
      SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002



      In connection with the Quarterly Report of A. M. Castle & Co. (the "Company") on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Edward F. Culliton, Vice President and Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:


      (1)   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.


       

       
                     /s/ Edward F. Culliton
                     Edward F. Culliton
                                Vice President and Chief Financial Officer
                                May 5, 2004