Back to GetFilings.com




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarter Ended
March 31, 2005
or,
o    Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from
 
to
  


 Commission File Number  1-5415

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

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

 
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

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, 2005
Common Stock, $0.01 Par Value
  
15,823,079 shares
Preferred Stock, No Par Value
  
12,000 shares





 


A. M. CASTLE & CO.
Part I. FINANCIAL INFORMATION
 Part I. Financial Information
 
Page Number
Item 1.
Consolidated Financial Statements (unaudited):
 
 
 
Consolidated Balance Sheets
 
3
 
Consolidated Statements of Income
 
4
 
Condensed Statements of Cash Flows
 
5
 
Notes to Consolidated Financial Statements
 
6-11
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
12-15
Item 3
Quantitative and Qualitative Disclosure About Market Risk
 
15-16
Item 4
Control and Procedures
 
16-17
Part II. Other Information
    
Item 1
Legal Proceedings
 
18
Item 6
Exhibits and Reports on Form 8-K
 
18


 
CONSOLIDATED BALANCE SHEETS
  
Period Ended
  
(Dollars in thousands)
  
Mar. 31
  
Dec. 31
  
Mar. 31
  
Unaudited*
  
2005*
  
2004
  
2004*
  
                     
ASSETS
                    
Current assets
                   
Cash and equivalents
  
$
4,945
  
$
3,106
  
$
4,434
  
Accounts receivable, less allowances of $1,877 in March 2005,
                    
$1,760 in December 2004 and $526 in March 2004 (Note 4)
    
95,194
   
80,323
   
77,348
 
Inventories (principally on last-in first-out basis)
                    
(latest cost higher by approximately $95,700 in March 2005,
                    
$92,500 in December 2004 and $55,600 in March 2004)
    
139,219
   
135,588
   
104,040
 
Income tax receivable
    
162
   
169
   
652
 
Assets held for sale
    
995
   
995
   
1,117
 
Advances to joint ventures and other current assets
   
7,624
   
7,325
   
6,599
 
Total current assets
    
248,139
   
227,506
   
194,190
 
Investment in joint ventures
    
9,204
   
8,463
   
5,060
 
Goodwill
    
32,196
   
32,201
   
31,935
 
Pension assets
    
41,933
   
42,262
   
42,122
 
Advances to joint ventures and other assets
    
6,967
   
7,586
   
8,265
 
Property, plant and equipment, at cost
                   
Land
    
4,770
   
4,771
   
4,767
 
Building
   
45,495
   
45,514
   
46,975
 
Machinery and equipment
    
125,339
   
124,641
   
119,253
 
     
175,604
   
174,926
   
170,995
 
Less - accumulated depreciation
    
(111,931
)
  
(109,928
)
  
(103,079
)
     
63,673
   
64,998
   
67,916
 
Total assets
  
$
402,112
  
$
383,016
  
$
349,488
  
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
                    
Current liabilities
                    
Accounts payable
  
$
96,595
  
$
93,342
  
$
77,056
  
Accrued liabilities and deferred gains
    
22,695
   
23,016
   
18,665
 
Current and deferred income taxes
   
10,235
   
4,349
   
4,656
 
Current portion of long-term debt
   
16,390
   
11,607
   
8,308
 
Total current liabilities
    
145,915
   
132,314
   
108,685
 
Long-term debt, less current portion
   
82,706
   
89,771
   
98,409
 
Deferred income taxes
   
20,462
   
19,668
   
15,670
 
Deferred gain on sale of assets
   
6,251
   
6,465
   
7,095
 
Minority interest
    
1,653
   
1,644
   
1,261
 
Post retirement benefits obligations
    
2,901
   
2,905
   
2,765
 
Stockholders' equity
                   
Preferred stock, no par value - 10,000,000 shares
                    
authorized; 12,000 shares issued and outstanding
    
11,239
   
11,239
   
11,239
 
Common stock, $0.01 par value - authorized 30,000,000
                    
shares; issued and outstanding 15,823,079 at March 2005,
                    
15,806,366 at December 2004 and 15,788,442 at March 2004
    
159
   
159
   
159
 
Additional paid in capital
    
35,150
   
35,082
   
35,009
 
Earnings reinvested in the business
    
94,278
   
82,400
   
68,542
 
Accumulated other comprehensive income
    
1,643
   
1,616
   
928
 
Other - deferred compensation
   
-
   
(2
)
  
(29
)
Treasury stock, at cost - 63,331 shares at March 2005, 62,065
                    
shares at December 2004 and 57,019 shares at March 2004
    
(245
)
  
(245
)
  
(245
)
Total stockholders' equity
   
142,224
   
130,249
   
115,603
 
Total liabilities and stockholders' equity
  
$
402,112
  
$
383,016
  
$
349,488
  
 
The accompanying notes are an integral part of these statements
 
 
CONSOLIDATED STATEMENTS OF INCOME
  
 
For the Three
  
(Dollars in thousands, except per share data)
  
Months Ended
  
Unaudited   
Mar. 31
     
2005
 
 
2004
  
               
Net sales
  
$
246,203
  
$
175,634
  
Cost of material sold
    
(173,300
)
  
(124,481
)
Gross material margin
    
72,903
   
51,153
 
               
Plant and delivery expense
    
(26,368
)
  
(23,599
)
 
Sales, general, and administrative expense
    
(22,955
)
  
(19,454
)
Depreciation and amortization expense
    
(2,273
)
  
(2,247
)
Total operating expense
    
(51,596
)
  
(45,300
)
               
Operating income
   
21,307
   
5,853
 
               
Interest expense, net
    
(2,083
)
  
(2,314
)
Discount on sale of accounts receivable
    
(536
)
  
(283
)
               
Income before income tax and equity in unconsolidated subsidiaries
    
18,688
   
3,256
 
               
Income taxes
             
Federal
   
(6,009
)
  
(1,025
)
State
    
(1,476
)
  
(312
)
     
(7,485
)
  
(1,337
)
               
Net income before equity in unconsolidated subsidiaries
   
11,203
   
1,919
 
               
Equity earnings of joint ventures, net of tax
    
915
   
383
 
 
Net income
    
12,118
   
2,302
 
               
Preferred Dividends
    
(240
)
  
(240
)
Net income applicable to common stock
  
$
11,878
  
$
2,062
  
               
Basic earnings per share
 
$
0.75
  
$
0.13
  
 
Diluted earnings per share
  
$
0.70
  
$
0.13
  


The accompanying notes are an integral part of these statements




 
CONDENSED STATEMENTS OF CASH FLOWS
  
For the Three Months
  
(Dollars in thousands)
  
Ended Mar. 31
  
 Unaudited    
2005
 
 
2004
  
               
Cash flows from operating activities:
              
Net income
 
$
12,118
  
$
2,302
  
Adjustments to reconcile net income to net cash from operating activities:
              
Depreciation
   
2,273
   
2,247
 
Amortization of deferred gain
    
(214
)
  
(209
)
Equity in (earnings) from joint ventures
    
(1,509
)
  
(632
)
Deferred taxes and income tax receivable
    
807
   
1,666
 
Non-cash pension loss and post-retirement benefits
    
562
   
105
 
Other
    
383
   
93
 
Cash from operating activities before working capital changes
    
14,420
   
5,572
 
Increase (decrease) from changes in:
              
Accounts receivable sold
    
13,500
   
5,000
 
Accounts receivable
   
(28,429
)
  
(26,883
)
Inventory
    
(3,718
)
  
14,962
 
Accounts payable and accrued liabilities
    
3,075
   
8,212
 
Other current assets
    
(300
)
  
240
 
Income tax payable
    
5,885
   
(143
)
Net cash from operating activities
    
4,433
   
6,959
 
               
Cash flows from investing activities:
              
Investments and acquisitions
    
-
   
(1,744
)
Cash from joint ventures
    
767
   
-
 
Capital expenditures
    
(989
)
  
(1,430
)
Net cash from investing activities
   
(222
)
  
(3,174
)
               
Cash flows from financing activities:
              
Repayment of long-term debt
    
(2,217
)
  
(1,479
)
Preferred stock dividend
    
(240
)
  
(240
)
Other
    
68
   
17
 
Net cash from financing activities
   
(2,389
)
  
(1,702
)
               
Effect of exchange rate changes on cash
    
17
   
(104
)
               
Net increase in cash
    
1,839
   
1,979
 
               
Cash - beginning of year
    
3,106
   
2,455
 
Cash - end of period
  
$
4,945
  
$
4,434
  
               
Supplemental cash disclosure - cash (paid) received during the period:
              
Interest
  
$
(2,357
)
$
(2,319
)
Income taxes
 
$
(880
)
$
20
  


The accompanying notes are an integral part of these statements 




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


1.  
Consolidated Financial Statements
The consolidated financial statements included herein are unaudited. The balance sheet at December 31, 2004 is derived from the audited financial statements at that date. A.M. Castle & Co. (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 conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K. The 2005 interim results reported herein may not necessarily be indicative of the results of operations for the full year.

2.  
New Accounting Standards
New Accounting Standards— In December 2004 the Financial Accounting Standards Board (FASB) issued a revised Statement of Financial Accounting Standards (SFAS) No. 123, "Share Based Payment". The revised SFAS No. 123 requires that the fair value of stock options be recorded in the results of operations beginning no later than January 1, 2006. The effect of adopting the new rule on reported diluted earnings per share is dependent on the number of opti granted in the future; the terms of those awards and their fair values. The Company expects to adopt the revised rules on January 1, 2006.
In May 2003, the FASB issued SFAS No. 150 - "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". This Statement provides guidance as to the appropriate classification of certain financial statement instruments that have characteristics of both liabilities and equity. This Statement was effective at the beginning of the first interim period after June 15, 2003. Adoption of this Statement has not had an impact on the Company's financial position or results of operations.
   In March 2003, the FASB issued Interpretation No. 46. This Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", addresses consolidation by business enterprises of variable interest entities. This Interpretation applies to variable interest entities created after January 1, 2002, and to variable interest entities in which an enterprise obtains an interest after that date. The Company has no investments in or known contractual arrangements with variable interest entities and therefore, this Interpretation has no impact on the Company’s financial statements and related disclosures.
 
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,
  
(dollars in thousands, except per share data)
  
2005
 
2004
  
           
Net income
  
$
12,118
  
$
2,302
  
Preferred dividends
    
(240
)
  
(240
)
Net income applicable to common stock
  
$
11,878
  
$
2,062
  
 
Weighted average common shares outstanding
    
15,819
    
15,791
  
Dilutive effect of outstanding employee and
             
directors’ common stock options and preferred stock
    
1,610
    
536
  
Diluted common shares outstanding
    
17,429
    
16,327
  
               
Basic income per common share
 
$
0.75
  
$
0.13
  
 
              
Diluted income per common share
 
$
0.70
  
$
0.13
  
               
Outstanding employee and directors' common stock options and restricted and preferred stock shares having no dilutive effect
    
2,086
    
3,275
  
               

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, 2005, $30.0 million of accounts receivable were sold to the finance company and an additional $28.0 million could have been sold under the agreement. The amount sold to the financing company at December 31, 2004 and March 31, 2004 was $16.5 million and $18.0 million, respectively.
The sale of accounts receivable is reflected as a reduction of "accounts receivable, net" in the Consolidated 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 Consolidated Statements of Income. The discount rate as of March 31, 2005 was 5.6%.

5.  
Goodwill 
During the first quarter of 2004 the Company purchased the remaining 50% interest in its Mexican joint venture in its metal segment and Total Plastics, Inc. purchased the remaining 40% interest in its Paramont Machine Company subsidiary in the Company’s plastics segment (both of these entities are now wholly owned). Based on the purchase price of these entities and the valuations required by SFAS 141 åBusiness Combinationsæ, 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 2005, the Company has determined that there is no impairment to the remaining goodwill balance of $32.2 million.
The changes in carrying amounts of goodwill were as follows (in thousands):

   
Metals Segment
  
Plastics Segment
  
Total
  
Balance As of December 31, 2004
  
$        19,228
  
$        12,973
  
$        32,201
  
Purchases
    
—
    
—
    
—
  
Currency Valuation
    
(5
)
  
¾
    
(5
)
Balance As Of March 31, 2005
  
$
19,223
  
$
12,973
  
$
32,196
  
                     

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, the Company’s wholly-owned subsidiary, 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 Paramont were reported as a wholly owned subsidiary (the minority interest was previously eliminated from reported results). The acquisition has been reported based on an allocation of the purchase price.

7.  
LIFO
Inventory determination under the last-in first-out (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, 2005 and 2004, 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 exceeded book value by $95.7 million and $55.6 million at March 31, 2005 and March 31, 2004, 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, 2005 and 2004. The following table summarizes on a pro-forma basis the effects on the Company's net income had compensation expense 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 2005.
 
 
 
Pro-Forma Income Information
 
(dollars in thousand, except per share data)
  
For The Three Months Ended March 31,
  
   
2005
  
2004
  
Net income applicable to common stock, as reported
  
$            11,878
  
$            2,062
  
Pro-forma effect of stock option compensation
             
under fair value based method for all awards
    
(469
)
  
(233
)
Pro-forma net income applicable to common stock
  
$
11,409
  
$
1,829
  
               
Total basic income per share, as reported
  
$
0.75
  
$
0.13
  
               
Total diluted income per share, as reported
  
$
0.70
  
$
0.13
  
               
Pro-forma income per share:
              
Basic
  
$
0.72
  
$
0.12
  
 
Diluted
  
$
0.67
  
$
0.11
  
               

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 critical accounting policies in the Company’s Form 10-K for year ended December 31, 2004. 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, 2005 and 2004:

 
 
(dollars in thousands)
  
Net Sales
  
Gross Mat’l Margin
  
Other Oper Exp
  
Operating Income (Loss)
  
2005
                          
Metals Segment
  
$
220,005
  
$
64,326
    
(43,361
)
$
20,965
  
Plastics Segment
    
26,198
    
8,577
    
(7,080
)
  
1,497
  
Other
    
—
    
—
    
(1,155
)
  
(1,155
)
Consolidated
  
$
246,203
  
$
72,903
  
$
(51,596
)
$
21,307
  
                           
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
  
                           

"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, 2005, December 31, 2004 and March 31, 2004 was as follows:

 
(dollars in thousands)
  
March 31,
2005
  
December 31,
2004
  
March 31,
2004
  
Metals Segment
  
$                       353,893
  
$                       338,558
  
$                       317,154
  
Plastics Segment
    
48,057
    
44,289
    
31,682
  
Other
    
162
    
169
    
652
  
Consolidated
  
$
402,112
  
$
383,016
  
$
349,488
  
                     

"Other" — The segment's total assets consist solely of the Company's income tax receivable (the segments file a consolidated tax return).

10.
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
  
 
  
March 31,
  
March 31,
  
March 31,
  
   
 
2005
  
 
2004
  
 
2005
  
 
2004
  
 
2005
  
 
2004
  
 
Service cost
  
$
(685.9
)
$
(594.2
)
$
(34.6
)
$
(29.0
)
$
(720.5
)
$
(623.2
)
 
Interest cost
    
(1,548.3
)
  
(1,448.1
)
  
(44.7
)
  
(38.1
)
  
(1,593.0
)
  
(1,486.2
)
 
Expected return on plan
    
2,394.2
    
2,396.7
    
—
    
—
    
2,394.2
    
2,396.7
  
 
Amortization of prior service cost
    
(15.8
)
  
(16.9
)
  
(11.9
)
  
(11.9
)
  
(27.7
)
  
(28.8
)
 
Amortization of net (loss) gain
    
(614.7
)
  
(366.3
)
  
0.1
    
2.4
    
(614.6
)
  
(363.9
)
 
Net periodic cost
  
$
(470.5
)
$
(28.8
)
$
(91.1
)
$
(76.6
)
$
(561.6
)
$
(105.4
)
                             
 
  As of March 31, 2005 the Company has not made any cash contributions to its pension plans for this fiscal year nor does it anticipate any cash contributions being made to these plans for the balance of 2005.

11.
Commitments and Contingent Liabilities
At March 31, 2005 the Company had $1.8 million of irrevocable letters of credit outstanding and $0.7 million of cash on deposit to comply with the insurance reserve requirements of its workers’ compensation insurance carrier. This letter of credit is secured with a certificate of deposit, which is included in "Advances to joint ventures and other current assets" on the Company’s consolidated 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 that would have a material adverse effect on the consolidated financial position of the Company. 
 
 
Item 2. Management’s 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
Economic Trends and Current Business Conditions
The Company continues to enjoy favorable demand for its metal and plastic products through the first quarter of 2005. The North American durable goods manufacturing sector, the Company’s primary market, continues to exhibit demand requirements above the already high levels of 2004. The aerospace, oil and gas, mining and construction equipment and truck and railroad equipment sectors are showing particular strength. The Company’s pricing in aggregate is running at levels slightly in excess of the levels experienced at the end of 2004. Much has been published in recent months about global steel supply and demand, and global steel pricing. Most of what has been written describes the steel industry in general terms, and is largely driven by carbon flat-rolled products which dominate the tonnage figures. It is important to note that the Company does not purchase or sell carbon flat-rolled products in any meaningful quantity. The Company’s metal product offerings are predominantly in carbon bar or tubing, alloy bar, high-end specialty metals (such as nickel alloy, stainless steel and aluminum), and carbon plate up to twenty inches thick. The Company’s product offerings and customer demand do not necessarily correlate with the carbon flat-rolled markets or its economics.
Historically, the Company has used The Purchaser’s Managers Index ("PMI") provided by the Institute of Supply Managers to track general demand trends in its customer markets. Table 1 below shows recent PMI trends from the first quarter of 2004 through the first quarter of 2005. Generally speaking, an index above 50.0 indicates growth in the manufacturing sector of the U.S. economy. As the table indicates, there has been sustained growth in the manufacturing sector for several quarters. The Company’s revenue growth, in real terms or net of material price increases, has improved over these same quarters. First quarter 2005 volume growth for the Company on a consolidated basis is approximately 5% ahead of the same quarter in 2004.

Table 1
YEAR
Qtr 1
Qtr 2
Qtr 3
Qtr 4
2004
62.4
62.0
60.1
57.5
2005
55.6
      

Additionally, global steel supply and demand dynamics have driven metal pricing upwards. These dynamics include supplier consolidations, the impact of China on global demand, and global shortages of steel-making raw materials. By year-end 2004, metal prices increased by 40% as compared to year-end 2003.  In the first quarter of 2005, the Company’s metal pricing has stabilized somewhat, but remains slightly higher than year-end 2004 and about 37% ahead of first quarter 2004 levels. Pricing in the specialty metals of nickel alloys, stainless steel and aluminum has increased during the period.
The Company’s plastic segment has also recently benefited from increases in its material pricing. Management estimates that the first quarter 2005 revenue growth in this segment of 25% versus the same period in 2004 includes a 16% favorable material price impact. The volume growth in this business is significantly impacted by a planned long-term geographic expansion that continues in 2005.
 
Company Financial Condition
In addition to several consecutive quarters of solid earnings performance, the Company continues its efforts to reduce overall borrowings and de-leverage its balance sheet, thus positioning itself towards a higher-grade credit rating status. The Company’s primary short-term borrowing needs are funded through its Accounts Receivable Securitization Facility ("RPF") which expires at the end of 2005. Management has started the process to replace the RPF with a more traditional revolving credit facility to meet its future needs. The Company’s outstanding long-term notes provide for an interest rate reduction in the event the Company does replace the RPF with a revolving facility meeting the requirements under the notes. Management believes the Company is well-positioned at this time for a successful refinancing of the RPF in 2005.

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
   
 
2005
  
 
2006
  
 
2007
  
 
2008
  
2009 and Beyond
  
Required Principal Payments on Debt
  
$
9.4
  
$
16.4
  
$
16.4
  
$
19.3
  
$
37.6
  

In addition, the Company’s principal source of operating cash is derived from earnings and its RPF, which as stated above, expires in December 2005.
Despite the upswing in the manufacturing sector of the economy, there can be no guarantee as to its magnitude or duration. Additionally, as a distributor, the Company’s ability to pass-through supplier-driven material cost increases to its customer base remains critical to meeting debt service requirements and remaining in compliance with its debt covenants. Should economic and market conditions dramatically worsen, management could pursue further options to generate enough cash to fund the required principal payments as outlined in its agreements with its primary lenders. These options could include, but not are not limited to, further operating cost reductions and organizational restructuring, further working capital improvements, deferral of non-essential capital projects, sale of assets or business units, refinancing of the Company through additional equity or debt infusions, or renegotiating existing outstanding indebtedness. Management cannot guarantee that any of these options will be available if needed. Outside of the planned replacement of the RPF with a customary revolving credit facility and normal course management of the business that seeks continuous improvements in commercial and operating performance, none of these options are under consideration at this time. All current business conditions lead management to believe that 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, 2005 and 2004.

 
Operating Results by Segment
(dollars in millions)


   
Quarter Ended March 31,
  
Fav/(Unfav)
  
   
 
2005
 
 
2004
 
 
Fav/
(Unfav
)
 
% Change
  
 
Net Sales
                          
Metals
  
$
220.0
  
$
154.7
  
$
65.3
    
42.2
%
Plastics
    
26.2
    
20.9
    
5.3
    
25.4
  
Total Net Sales
  
$
246.2
  
$
175.6
  
$
70.6
    
40.2
%
                           
Gross Material Margin
                          
Metals
  
$
64.3
  
$
44.3
  
$
20.0
    
45.1
%
 % of Metals
    
29.2
%
  
28.6
%
  
0.6
%
      
Plastics
    
8.6
    
6.9
    
1.7
    
24.6
%
% of Plastics
    
32.8
%
  
33.0
%
  
(0.2
)%
      
Total Gross Material Margin
  
$
72.9
  
$
51.2
  
$
21.7
    
42.4
%
% of Total Net Sales
    
29.6
%
  
29.2
%
  
0.5
%
      
                           
Operating Expense
                          
Metals
  
$
(43.4
)
$
(38.3
)
$
(5.1
)
  
13.3
%
Plastics
    
(7.1
)
  
(5.9
)
  
(1.2
)
  
20.3
%
Other
    
(1.1
)
  
(1.1
)
  
—
    
—
  
Total Operating Expense
  
$
(51.6
)
$
(45.3
)
$
(6.3
)
  
13.9
%
% of Total Net Sales
    
(21.0
)%
  
(25.8
)%
  
4.8
%
      
                           
Operating Income
                          
Metals
  
$
21.0
  
$
6.0
  
$
15.0
    
250.0
%
% of Metals Sales
    
9.5
%
  
3.9
%
  
5.7
%
      
Plastics
    
1.5
    
1.0
    
0.5
    
50.0
%
 % of Plastics Sales
    
5.7
%
  
4.8
%
  
0.9
%
      
Other
    
(1.2
)
  
(1.1
)
  
(0.1
)
  
(9.1
)%
Total Operating Income
  
$
21.3
  
$
5.9
  
$
15.4
    
261.0
%
% of Total Net Sales
    
8.7
%
  
3.4
%
  
5.3
%
      
*Otheræ 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 $246.2 million increased 40.2%, or $70.6 million, versus the first quarter of 2004. Metal segment sales of $220.0 million were $65.3 million, or 42.2%, ahead of last year. Product mix attributed to the strengthening of demand in the aerospace, and oil and gas industries are key factors in 2005. Increased volume accounted for approximately $8 million, or 5%, of the change with the balance (37%) due to price.
Plastic segment sales of $26.2 million (10.6% of total consolidated sales) were $5.3 million, or 25.4%, stronger than the same quarter of 2004. We estimate that 16% of the year-over-year sales increase is price related with the balance being real volume growth, principally attributed to planned geographic expansion.


 
Gross Material Margins and Operating Profit:
Consolidated gross material margin of $72.9 million was $21.7 million, or 42.4%, better than last year. Metal segment gross margin of $64.3 million was $20.0 million, or 45.1%, ahead of the first quarter of 2004. Plastic segment gross margin increased by $1.7 million, or 24.6%, to a level of $8.6 million. The Company has been able to maintain its material margin percentages during this period material cost increases.
Total consolidated operating expenses of $51.6 million increased 13.9% versus the first quarter of last year on a 40.2% increase in net sales. Operating expense increased $6.3 million and was 8.9% of incremental net sales period-over-period, reflecting continued strong operating leverage.
The Company's "Other" operating segment includes expenses related to executive, legal and other corporate services which support both the metal and plastic segments. This expense remained relatively flat versus the same period of 2004.
Consolidated operating profit of $21.3 million (8.7% of sales) is $15.4 million better than the first quarter of last year.

Other Income and Expense, and Net Results:
Joint venture equity earnings of $1.5 million were $0.9 million ahead of 2004, reflecting previously mentioned metal market dynamics within the Company’s sole remaining joint venture, Kreher Steel.
Financing costs, which consists of interest expense and discount on sale of accounts receivable, were $2.6 million in the first quarter of 2005 which was equal to the same period in 2004.
Consolidated net income was $11.9 million or $0.75 per basic share (after preferred dividends of $0.2 million) in the first quarter of 2005 versus a consolidated net income of $2.1 million or $0.13 per share (after preferred dividends of $0.2 million) in the corresponding period of 2004.

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, 2004.

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 its RPF, as described in more detail in footnote 4 to our consolidated financial statements included in this report, as its primary external funding source for working capital needs.
Cash flow from operating activities in the first quarter of 2005 was a positive $4.4 million. This included a $13.5 million increase in accounts receivable sold under the RPF due to funding requirements in support of increased sales activity.
Working capital, excluding the current portion of long-term debt, of $118.6 million is up $11.8 million since the beginning of the year. Trade receivables of $95.2 million (excluding $30.0 million of receivables sold under the RPF) are up $14.9 million due to strong first quarter sales. However, days sales outstanding (DSO) declined 3.6 days to a level of 42.2 days reflecting lower past due balances outstanding as a percent of sales. Inventory at net book value of $139.2 million, including LIFO (last-in, first-out) reserves of $95.7 million is up $3.6 million from the start of 2005. Days sales in inventory (DSI) of 123 days is up slightly versus the December 31, 2004 level of 120 days.



Capital expenditures in the first quarter of 2005 were $1.0 million versus $1.4 million in the same period last year. Major expenditures included equipment and machinery purchases and information system upgrades and improvements. The Company purchased its former partner’s equity interest in a Mexico joint venture for $1.6 million effective January 1, 2004.
At March 31, 2005, $30.0 million of receivables were sold or utilized under the RPF versus $18.0 million at March 31, 2004. The increased sales under the RPF were a result of an increase in inventory at the end of 2004. Available capacity remaining under this facility was $28.0 million at the end of the first quarter of 2005.
As of March 31, 2005, 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
          3/31/05
 
Debt-to-Capital Ratio
 
<0.55
 
0.34
 
Working Capital-to-Debt Ratio
 
>1.00
 
1.92
 
Minimum Equity Value
 
$111.6 Million
 
$142.2 Million
 
    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
At March 31, 2005 the Company had $1.8 million of irrevocable letters of credit outstanding and $0.7 million of cash on deposit to comply with the insurance reserve requirements of its workers’ compensation insurance carrier. This letter of credit is secured with a certificate of deposit, which is included in "Advances to joint ventures and other current assets" on the Company’s consolidated 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 that would have a material adverse effect on the consolidated financial position of the Company.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company is exposed to the risks of increases in interest rates and increased in the cost of metals and plastics, which are the Company’s primary raw materials, that arise in the normal course of business. The Company finances its operations with fixed and variable rate borrowings and the RPF. Changes in interest rates affect the Company’s variable borrowing costs and the cost of utilizing the RPF. An increase of 1% in interest rates on the variable rate indebtedness and the RPF 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 materials is more immediately reflected in the Company’s cost of goods sold than in its selling price.


 
Item 4. Controls and Procedures
 
(a)  
Evaluation of Disclosure Controls and Procedures
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 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report.
In its annual report on Form 10-K for the year ended December 31, 2004, the Company reported that it had identified certain material weaknesses in its system of internal controls over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange act of 1934, as amended. Specifically, in conducting its evaluation of the Company’s internal control over financial reporting at December 31, 2004, management found a material weakness in the area of inventory controls.
In the third quarter of 2004 the Company replaced its historical procedures of inventory verification with improved procedures for physical inventory counts. This change in internal control over inventory was reported in the Company’s quarterly report on Form 10-Q for the period ended September 30, 2004. As a result of initiating improved procedures in the second half of 2004, material inventory adjustments were identified and recorded during the third and fourth quarters of 2004.
In addition, at year-end 2004 a weakness involving controls over inventory stored at third-party processors was identified. The post year-end implementation of expanded procedures identified additional inventory adjustments that were also recorded.
Lastly, management determined that significant deficiencies in the financial close and reporting process existed as of December 31, 2004. As a result of applying more rigorous post year-end procedures, material errors in the Company’s financial statements were identified and appropriate correcting adjustments were recorded. In management’s opinion, those significant deficiencies, in the aggregate, also constituted a material weakness in the Company’s internal controls over financial reporting as of December 31, 2004.
As part of its evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report, management has (i) identified no material weaknesses other than those described above and (ii) evaluated whether the material weaknesses described above continue to exist. Although the Company believes that the changes in internal controls discussed below address the reported material weaknesses, management cannot conclude that these weaknesses are eliminated until the Company performs further testing of internal controls over financial reporting in subsequent periods. Therefore, the CEO and CFO conclude that the Company’s current disclosure controls and procedures, as designed and implemented, were not 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
In response to deficiencies in internal control over financial reporting as identified above, management implemented the following changes in the Company’s internal controls over financial reporting during the period ended March 31, 2005.
The Company has adopted procedures requiring certified reporting of Company inventory on-hand by each of the Company’s outside processors not less frequently than on a quarterly basis. Upon receipt of the certified report the Company will perform a reconciliation of the inventory reported by the outside processors to its own internal records. Additionally, each outside processor will be required to provide a certified report of Company inventory on hand to each of the Company’s
 
 
facilities having inventory at the outside processor in concert with scheduled physical inventory counts to be performed at the Company’s own facilities.
Additionally, management has modified its analysis of certain financial statement accounts during the quarter. Specifically, the Company has adopted the analysis and review methodology used in the audit of its year-end 2004 accrual for insurance reserves and allowance for doubtful accounts as part of its quarterly procedures beginning with the quarter ended March 31, 2005.
Lastly, in 2005 the Company has expanded the scope of services to be performed by its third-party professional tax services firm to include a more thorough analysis and review of its tax provision and related tax filings.



 
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
   
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 & CFO
     
   

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, 2005
By:
/s/ Henry J. Veith
   
Henry J. Veith
Controller
   
(Mr. Veith 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)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)] for the Registrant and have:
a)  
Designed such disclosure controls and procedures, or caused 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;
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)  
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
d)  
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):
a)  
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
b)  
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, 2005
  
By:
/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, Lawrence A. Boik, 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)] and internal control over financial reporting [as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)] for the Registrant and have:
a)  
Designed such disclosure controls and procedures, or caused 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;
b)  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)  
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
d)  
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):
a)  
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
b)  
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, 2005
  
By:
/s/ Lawrence A. Boik
   
Lawrence A. Boik
   
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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), G. Thomas McKane, President and Chief Executive Officer (Principal Executive Officer) and Lawrence A. Boik, Vice President and Chief Financial Officer (Principal Financial Officer) of the Company, respectively, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

 
(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 and its subsidiaries.


   
/s/ G. Thomas McKane
   
G. Thomas McKane
   
Chairman and Chief Executive Officer
   
(Principal Executive Officer)
   
May 5, 2005
     
     
   
/s/ Lawrence A. Boik
   
Lawrence A. Boik
   
Vice President and Chief Financial Officer
   
(Principal Financial Officer)
   
May 5, 2005