SECURITIES AND EXCHANGE COMMISSION

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

A. M. CASTLE & CO.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code (847) 455-7111

Securities registered pursuant to Section 12(g) of the Act: None

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

Yes [X]           No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] .

The approximate aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on February 24, 2004 was $75,173,938.

The number of shares outstanding of the registrant’s common stock on February 24, 2004 was 15,796,439 shares.

DOCUMENTS INCORPORATED BY REFERENCE

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Table of Contents

ITEM 1 — Business

A. M. Castle & Co. is a specialty metals and plastics distribution company serving the North American market. The registrant (Company) provides a broad range of inventories as well as preprocessing services to a wide variety of customers.

     The Company distributes and performs first stage processing on both metals and plastics. Although the distribution processes are similar, different markets are served with different products and, therefore these businesses are considered segments according to Statement on Financial Accounting Standards (SFAS) No. 131 “Disclosures about Segments of an Enterprise and Related Information”. In 2003 the plastics segment accounted for over 12 percent of the Company’s revenue and therefore is disclosed as a separate segment. In the last three years, the percentage of total sales of the two segments were approximately as follows:

     Within the Metals segment, inventory takes many forms including round, hexagon, square and flat bars; plates; tubing; and sheet and coil. Metal products include carbon, alloy and stainless steels; nickel alloys; and aluminum.

     Depending on the size of the facility and the nature of the markets it serves, the Metals segment service centers are equipped as needed with Bar Saws, Plate Saws, Oxygen and Plasma Arc Flame Cutting Machinery, Water-Jet Cutting, Stress Relieving and Annealing Furnaces, Surface Grinding Equipment, Sheet Shears and Coil Processing Equipment. This segment also performs specialized fabrications for customers through pre-qualified subcontractors.

     The Company’s market strategies focus on the more highly engineered grades and alloys of metals, supported by a strong service commitment to meeting the needs of users of those metals.

     The Company has its main office, and largest metals distribution center, in Franklin Park, Illinois. This center serves metropolitan Chicago and, approximately, a nine-state area. In addition, there are distribution centers in various other cities (see Item 2). The Chicago, Los Angeles and Cleveland distribution centers together account for approximately 40% of all core metal sales.

     In North America, the Company serves a wide range of industrial companies within the producer durable equipment sector of the economy from locations throughout the United States, Canada and Mexico. Its customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized firms spread across the entire spectrum of metals using industries. The Company’s customer base is well diversified with no single industry accounting for more than 5% of the Company’s total business and no one customer more than 4%. The Company’s coast-to-coast network of metals service centers provides next day delivery to most of the markets it serves, and two-day delivery to virtually all of the rest. Listed below are the operating subsidiaries and divisions included in the Company’s Metals segment, along with a brief summary of their business activities.

     Keystone Tube Company, LLC is a distributor of tubular products serving Midwest customers directly from its Chicago area facility. Oliver Steel Plate Company processes and distributes heavy steel plate from its Cleveland area plant. The Company’s value-added bar processing center, H-A Industries, thermally processes, turns and straightens alloy and carbon bar.

     The Company has a 50% interest in Castle de Mexico, S.A. de C.V., a joint venture, which targets a wide range of businesses within the producer durable goods sector. The Company also holds a one-half joint venture interest in Kreher Steel Co., a Midwest distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, SBQ and stainless bars. In 1998, Castle formed Metal Express, a small order distribution company in which it had a 60% interest. On May 1, 2002 the Company purchased the remaining interest in Metal Express from its joint venture partner.

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     The Plastics segment includes Total Plastics, Inc. (TPI) headquartered in Michigan which includes two majority owned joint ventures, Advanced Fabricating Technology and Paramont Machine Company. TPI has locations throughout the Midwest and East (see Item 2) where it services a wide variety of users of industrial plastics.

     In general, the Company purchases metals and plastics from many producers. Satisfactory alternative sources are available for all metals and plastics that the Company buys and its business would not be materially adversely affected by the loss of any one supplier. Purchases are made in large lots and held in the distribution centers until sold, usually in smaller quantities. The Company’s ability to provide quick delivery, frequently overnight, of a wide variety of metal and plastic products allows customers to reduce their inventory investment because they do not need to order the large quantities required by producing mills.

     Approximately 82% of 2003 net sales were from materials owned by the Company. The materials required to fill the balance of such sales were obtained from other sources, such as direct mill shipments to customers or purchases from other distributors. Sales are primarily through the Company’s own sales organization and are made to many thousands of customers in a wide variety of industries. Deliveries are made principally by leased trucks. Common carrier delivery is used in areas not serviced directly by the Company’s fleet.

     The Company encounters strong competition both from other metals and plastics distributors and from large distribution organizations, some of which have substantially greater resources.

     At December 31, 2003 the Company had 1,409 full-time employees in its operations throughout the United States and Canada. Of these 278 are represented by collective bargaining units, principally the United Steelworkers of America.

     The Company makes available free of charge on or through its Web site at www.amcastle.com the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

ITEM 2 — Properties

     The Company’s principal executive offices are at its Franklin Park plant near Chicago, Illinois. All properties and equipment are well maintained and in good operating condition and sufficient for the current level of activities. Distribution centers and sales offices are maintained at each of the following locations, all of which are owned, except as indicated:

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(1)

Leased: See Note 3 in the Consolidated Notes to Financial Statements for information regarding lease agreements.

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ITEM 3 — Legal Proceedings

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

ITEM 4 — Submission of Matters to a Vote of Security Holders

No items were submitted to vote of security holders during the fourth quarter of fiscal 2003.

PART II

ITEM 5 — Market for the Registrant’s Common Equity and Related Stockholder Matters

A. M. Castle & Co.’s Common Stock trades on the American and Chicago Stock Exchanges under the ticker symbol “CAS”. As of February 24, 2004 there were approximately 1,388 shareholders of record and an estimated 1,758 beneficial shareholders. The Company has paid no dividends in the past two years.

     The following table sets forth for the periods indicated the range of the high and low stock price:

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ITEM 6 — Selected Financial Data

ITEM 7 — 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

Recent History and Trends

A. M. Castle & Co.’s (the “Company”) operating results from 2001 through most of 2003 reflect the impact of a prolonged downturn in the durable goods manufacturing sector of the economy that began in the second half of 2000. Evidence of the market depression can be found in a review of the history of the Purchaser’s Managers Index (“PMI”) provided by the Institute of Supply Managers (see Table 1 directly below). Generally speaking, an index above 50.0 indicates growth in the manufacturing sector of the U.S. economy. The following table shows what the average PMI has been for each quarter during those years.

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Table 1

The index shows declining activity to flat growth in the manufacturing sector of the economy since the third quarter of 2000, that generally continued until the final quarter of 2003. In early 2002, the index rose above 50.0 indicating some growth, however, it was not sustained.

Management Initiatives

Reacting to this prolonged downturn in the markets the Company serves, management implemented a series of initiatives in its metals segment to increase operating margins and improve asset management. As a result, over time, the Company lowered its consolidated breakeven level by reducing operating expense in its metals segment while increasing worker productivity. To illustrate worker productivity, Table 2 shows a comparison of lines sold per employee for the years 2000 through 2003. “Lines” as used in this context represent a single grade and size item on a customer invoice, which is a common workflow-related volume measurement at Castle. Management frequently reviews lines sold against its total employee base, including executive management, sales and support personnel, as an internal measurement of productivity.

Table 2

Throughout 2001, 2002 and 2003, the Company aggressively pursued permanent cost saving initiatives, which included exiting non-strategic and/or non-performing business’s units and flattening its overall organization, eliminating areas of redundant effort and related costs. The combination of volume reductions, productivity improvements and cost savings reduced quarterly operating expenses as shown in Table 3 (dollars in millions).

Table 3

The full annual impact of the savings resulting from the cost reduction actions taken in the middle to latter half of 2003 are expected to materialize in 2004.

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     Additionally, in the last three years, the Company aggressively lowered its investment in inventory and sold unused facility space in select operations. The cash generated from these actions, along with the previously mentioned sale of certain non-performing business units, allowed the Company to reduce its total debt and other financing arrangements (including its accounts receivable securitization facility) by $43.3 million since the end of 2000 as illustrated in Table 4 (dollars in millions).

Table 4

     In summary, the Company’s results have suffered in recent years due largely to the economics within its primary customer markets. Management initiated several actions that served to generate cash, which in turn, reduced the Company’s debt load and restructured its base operating costs to better position itself to favorably leverage incremental sales in the future. Many of the actions initiated resulted in charges being taken against current year earnings in the form of impairment or other special charges ($11.5 million in 2003).

Current Business Outlook

In the fourth quarter of 2003, the marketplace and hence, the Company began to show signs of some economic recovery. Specifically, fourth quarter sales in 2003 were 6.6% ahead of the corresponding period in 2002. This increase was broad-based across most of our product lines, further confirming improving business conditions in the manufacturing sector of the U.S. economy. Operating expenses excluding the impact of impairment charges, declined $3.5 million or 8.1% versus the first quarter of 2003, to a level of 29.6% of sales. Additionally, material costs from our suppliers have surged in recent months, resulting in immediate price increases on the Company’s transactional business.

     The Company’s plastic subsidiary, Total Plastics Inc., grew its revenue base by 12.0% in 2003 and currently represents more than 12% of the Company’s consolidated sales. This growth was achieved in part through the start-up of two new facilities in the New York and Florida markets. More detail on this business segment can be found in the year-to-year comparisons included in this section of the 10-K.

     In the very early weeks of 2004, the evidence of a manufacturing sector recovery continues through both increased demand and pricing. The January 2004 PMI was reported at 63.6, which is the highest it has been since late 1983. These market-driven factors, coupled with the Company’s lower cost structure due to actions completed in 2003, give management optimism concerning the Company’s 2004 business plan and its return to profitability.

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 5 (dollars in millions):

Table 5

     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 pass-through recently accelerating supplier-driven material cost increases to its customer base on a timely basis 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

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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 of 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

On May 1, 2002 the Company acquired its joint venture partner’s remaining interest in Metal Express. The results of this entity, a wholly owned subsidiary, have been consolidated into Castle’s financial statements as of the date of acquisition.

     In the second quarter of 2003, the Company initiated a major restructuring program that included the sale or closing of several under-performing and cash consuming business units. Management believes the restructuring will better posture the Company to participate in the economic recovery by shedding business units that have in recent years either produced operating losses, consumed disproportionate amounts of cash, or both, and are not strategic fits with the Company’s core business.

     In the fourth quarter of 2003, the Company incurred additional non-recurring charges associated with equipment lease buyout provisions for assets included in the sale of a non-strategic business unit and for the negotiated early property lease buyout and related write-off of leasehold improvements of a vacated facility.

     Total restructuring related charges for 2003 were $11.5 million on a pretax basis. The following table summarizes the charges by category. Further details on these charges can be found in Footnote 8.

Summary of 2003 Special Charges
(Dollars in millions)

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2003 Results Compared to 2002

Consolidated results by business segment are summarized in the following table for years 2003 and 2002. Impairment and other special charges are shown separately for clarification purposes.

Operating Results by Segment
(dollars in millions)

“Other” includes costs of executive and legal departments which are shared by both operating segments of the Company.

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Net Sales:

Consolidated net sales in 2003 of $543.0 million were $4.9 million, or 0.9%, ahead of the prior year. Most of this year-to-year increase was realized in the fourth quarter during which consolidated sales were up $8.2 million, or 6.6%, versus the corresponding quarter of 2002. This reflects improving market activity, principally in the Metals segment, as the manufacturing sector of the U.S. economy appears to be showing signs of sustained recovery from its three-year lull. Metals segment net sales of $475.3 million (approximately 87.6% of consolidated sales) for the year are slightly down versus 2002. Most of this decline is due to the Company’s decision to exit certain non-performing business units in 2003. Plastics segment sales of $67.7 million (approximately 12.4% of consolidated sales) were up $7.3 million, or 12.1%, over 2002, due in part to the Company expanding operations into New York and Florida.

Gross Material Margins and Operating Profit (Loss):

Consolidated gross material margin of $157.0 million, including special charges of $1.6 million, is $3.1 million lower than last year. The year-to-year decline in the Metals segment was due primarily to product mix and competitive pricing. The Plastics segment margins remain strong and ahead of last year on higher sales volume.

     The Company incurred a $13.7 million operating loss on a consolidated basis, including $8.1 million of impairment and other special charges associated with management’s decision to exit certain business units and dispose of certain capital assets. The company also recorded a $2.4 million unfavorable net LIFO (Last-In, Last-Out) charge (LIFO loss less inventory revaluation gain) in 2003, compared to a $1.3 million charge in 2002.

     The Company’s “Other” operating segment includes expenses related to executive and legal services that benefit both segments. This expense decreased to $2.6 million in 2003 from $2.9 million in 2002.

Other Income and Expense, and Net Results:

The Company recorded a $3.5 million impairment charge in 2003 associated with certain joint venture investments which management elected to sell or exit (see Footnote 8 for more details).

     Interest expense increased $2.2 million to $9.7 million in 2003. This reflects the higher interest rates agreed to as part of the Company renegotiating its lending agreements in late 2002. The revised lending agreements allowed for more flexibility within the financial covenants that the Company needed in order to restructure its operating base and exit non-strategic or non-performing business units. Due to lower amounts sold under its Accounts Receivable Securitization Facility in 2003, the Company recorded a $1.2 million discount on receivables sold versus $3.4 million in 2002.

     Consolidated net loss from continuing operations was $17.9 million in 2003 versus a loss of $9.3 million in the previous year. In the fourth quarter of 2003, the Company recorded an additional $0.2 million loss (net of taxes) on the disposal of its United Kingdom subsidiary (sold in May 2002) associated with an outstanding customer product liability claim. This loss is shown in Discontinued Operations in the Company’s Statement of Operations. Preferred dividends in 2003 of $1.0 million reflects a full year of dividends associated with the November 2002 private placement of cumulative convertible preferred stock by the Company’s largest shareholder.

     The Company reported a net loss of $19.0 million or $1.20 per share in 2003 versus a net loss of $10.2 million, or $0.68 per share one year ago.

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2002 Compared with 2001

Consolidated results by business segment are summarized in the following table for years 2002 and 2001.

Operating Results by Segment
(dollars in millions)

“Other” includes costs of executive and legal departments which are shared by both operating segments of the Company.

Net Sales:

Consolidated net sales for 2002 of $538.1 million were 9.3% below the $593.3 million generated in 2001. Excluding the effects of Metal Express, the decrease in sales was 10.7% due to lower Metals segment shipments, lower mill price levels, a product mix shift away from higher priced aerospace metals towards lower priced carbon products and intense price competition within the metal distribution industry. Approximately 89% of all revenues were derived from the Company’s core metals businesses with the remaining 11% from the distribution of plastics.

     Revenue for the Metals segment decreased by $60.6 million, or 11.3% in 2002. Excluding the acquisition of Metal Express, which was consolidated effective May 2002, sales decreased by $69.1 million (12.8%). The decrease reflects a 5.4% decline in tons sold.

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     Conversely, net sales in the Plastics segment increased by $5.4 million, or 9.8% over 2001. Although the segment experienced similar recessionary pressures as the Metals segment did early in 2002, a strong fourth quarter recovery (25% ahead of 2001 fourth quarter results) produced a favorable year-to-year sales comparison.

Gross Material Margins and Operating Profit (Loss):

Consolidated gross material margin on sales decreased by 9.1% to $160.1 million from $176.2 million in 2001. Gross margin percentages were relatively flat versus the prior year. During 2002 gross material margin was negatively impacted by a net LIFO (last-in, first-out) loss adjustment of $1.3 million as compared to a $3.3 million net LIFO loss adjustment in 2001. LIFO is the Company’s primary method of valuing inventory. Excluding the effects of the acquisition of Metal Express, gross material margin declined 11.4% and the gross margin percentage decreased to 29.5% in 2002 from 29.7% in 2001. Declining sales volume, product mix, margin compression and lower mill price levels were the main reasons for the reduction in gross material margins.

     Total operating expenses in 2002 were $164.5 million as compared to $173.3 million in 2001, a decrease of $8.8 million, or 5.1%. Excluding the acquisition of Metal Express, the decrease was $13.2 million, or 7.6%. This reduction in operating expense was achieved despite only a 2.9% reduction in line items sold (order activity) in the metals segment, reflecting the Company’s ongoing emphasis on cost reduction and operating efficiencies. During 2001, depreciation and amortization expense included $1.0 million of amortization of goodwill. Due to the adoption of SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill is no longer amortized.

     In 2002, the Company generated an operating loss of $4.4 million compared with an operating profit of $2.8 million in 2001.

     The Metals segment operating profit decreased $9.0 million to a $3.9 million loss from a profit of $5.1 million in 2001. Gross material margins decreased $17.3 million while gross material margin percentage increased slightly to 29.1% from 29.0% in 2001. Other operating expenses for the same period decreased by $8.2 million. Excluding the effects of the acquisition of Metal Express, operating profit decreased by $8.7 million with gross material margins decreasing $21.2 million resulting in a gross material margin percentage of 28.8%. The reduction in gross material margin was partially offset by a decrease in other operating expenses of $12.5 million (excluding Metal Express), or 8.3%. Although sales volume decreased 12.9%, the number of lines handled (booked, processed, shipped and billed) declined by only 2.9% reflecting a 10% reduction in average order size. In order to mitigate the effects of the declining sales and order size, major cost cutting and efficiency programs were put in place over the past two years. The result of these programs has been to increase productivity as measured by lines per employee by 14%.

     The Plastics segment operating profit increased $1.4 million to $2.4 million in 2002. For the year, gross material margins increased $1.2 million even as gross material margin percentage decreased to 35.1% from 36.4% in 2001. The decrease in margin rates reflects the highly competitive pressures existing in the market place. Despite the increase in sales activity, continuing cost containment programs throughout the year resulted in a reduction in other operating expenses of $0.2 million.

     The Company’s “Other” operating segment includes expenses related to executive and legal services that benefit both segments. This expense decreased to $2.9 million in 2002 from $3.3 million in 2001.

Other Income and Expenses, and Net Results:

In November 2002 the Company amended its debt covenants with its institutional and banking lenders. In consideration for those changes, the Company agreed to an increase of 200 basis points in interest rates. In December 2002 the existing accounts receivable securitization agreement was terminated and a new three-year commitment was established with another institution. The discount pricing on the new facility carries a comparable rate. A fee of $2.2 million was expensed during the year for establishment of the new facility ($0.9 million was expensed in 2001 for the initial setup and sales of receivables under the previous agreement). Total financing costs (interest expense, net and discount on sale of accounts receivable) increased by $0.2 million. Excluding the net difference in the initiation costs of the two receivable securitization facilities, financing expenses decreased by $1.1 million which is reflective of decreased short term rates which effect the accounts receivable securitization discount, the change from a higher priced revolver borrowing agreement in September 2001 to the lower cost accounts receivable

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securitization facility, along with an overall reduction in debt and accounts receivable sold (see Liquidity and Capital Resources section).

     During the second quarter of 2002, the Company sold its United Kingdom subsidiary for $6.5 million consisting of $3.3 million received in cash and $3.2 million to settle amounts owed by the United Kingdom subsidiary. The after-tax loss on the sale totalled $0.8 million. The financial statements for all periods have been restated to present the subsidiary as a discontinued operation in accordance with generally accepted accounting principles.

     In November 2002 the Company’s largest stockholder purchased, through a private placement, $12.0 million ($11.2 million net of transaction expenses) of eight-percent cumulative convertible preferred stock. Dividends of $0.1 million had been accrued in 2002 from the date of the purchase.

     The net loss applicable to common stock for 2002, including $0.1 million of preferred dividends, was $10.2 million, or $0.68 per share, as compared to last year’s net loss of $5.0 million, or $0.36 per share, reflecting the continuing recessionary conditions in most of the industries Castle serves.

Recent Accounting Pronouncements

A description of recent accounting pronouncements is included in Footnote 1 “Notes to Consolidated Financial Statements” under the caption “New Accounting Standards”.

Critical Accounting Policies

The financial statements have been prepared in accordance with generally accepted accounting principals, which necessarily include amounts that are based on estimates and assumptions. The following is a description of some of the more significant valuation policies:

Accounts Receivable – Accounts receivable are evaluated on a quarterly basis and any significant customers with delinquent balances are reviewed to determine future collectibility. Assessments are based on legal issues (bankruptcy status), past history, current financial and credit agency reports, and the experience of the credit representatives. Accounts judged to be uncollectible are reserved or written off in the quarter in which the determination is made. Additional reserves are maintained based on the Company’s historical bad debt experience.

Inventory – Substantially all inventories are valued using the last-in first-out (LIFO) method. Under this method, the current value of material sold is recorded as cost of material sold rather than the actual cost in the order in which it was purchased. This means that older costs are included in inventory, which may be higher or lower than current costs. This method of valuation is subject to year-to-year fluctuations in cost of material sold, which is influenced by the inflation or deflation existing within the metals or plastics industry. The use of LIFO for inventory valuation was chosen to better match replacement cost of inventory with the current pricing used to bill customers.

Retirement Plans – The Company values retirement plan assets and liabilities based on assumptions and valuations established by management following consultation with its independent actuary. Future valuations are subject to market changes, which are not in the control of the Company and could differ materially from the amounts currently reported.

Insurance Plans – The Company is self-insured for a portion of worker’s compensation and automobile insurance. Self-insurance amounts are capped for individual claims, and, in the aggregate, for each policy year by an insurance company. Self-insurance reserves are based on unpaid, known claims (including related administrative fees assessed by the insurance company for claims processing) and a reserve for incurred but not reported claims based on the Company’s historical claim experience and development.

Revenue Recognition – Revenue from product sales is largely recognized upon shipment, whereupon title passes and the Company has no further obligations to the customer. The Company has entered into consignment inventory agreements with a few select customers whereby revenue is not recorded until the customer has consumed product from the consigned inventory and title has passed. Provisions for sales discounts and rebates to customers, and returns and other adjustments are provided for in the same period the related sales are recorded. Shipping and handling charges are recorded as operating expenses in the period incurred.

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Goodwill Impairment – The carrying value of Goodwill is evaluated annually during the first quarter of each fiscal year or when certain events (e.g. the potential sale of an entity) occur which require a more current valuation. The valuation is based on the comparison of an entity’s discounted cash flow (equity valuation) to its carrying value. If the carrying value exceeds the equity valuation the Goodwill is impaired appropriately. The equity valuation is based on historical data and management assumptions of future cash flow. Since the assumptions are forward looking actual results could differ materially from those used in the valuation process.

Income Taxes – Income tax provisions are based on income reported for financial statement purposes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for reporting purposes and the amounts used for income tax purposes. The Company records valuation allowances or adjustments against its deferred tax assets when it is more likely than not that the amounts will not be recognized.

Capital Expenditures:

Capital expenditures for 2003 totalled $5.1 million as compared to $1.4 million in 2002. Major expenditures included the replacement and upgrading of machinery and equipment, and enhancements to information processing systems. It is anticipated that capital expenditures will be approximately $3.0 million in 2004, mainly in the area of repair and replacement of existing machinery and equipment.

     Capital expenditures for 2002 totalled $1.4 million as compared to $6.8 million in 2001. Major expenditures included replacement of machinery and equipment, increased processing capabilities and enhancements to a warehouse management system.

     During 2002 and 2001, the Company sold and leased back approximately $2.0 million and $2.5 million of fixed assets respectively, which added to cash flow and minimized other financing requirements. The leaseback transactions are recorded as operating leases and therefore are not reflected as debt on the accompanying Consolidated Financial Statements.

Liquidity and Capital Resources

The Company’s operating results have suffered in recent years due largely to the economic conditions within its primary customer markets. Management initiated several actions that served to generate cash, which in turn, reduced the Company’s debt load and restructured its base operating costs to better position itself to favorably leverage incremental sales in the future. Many of the actions initiated resulted in charges being taken against current year earnings in the form of impairment or other special charges ($11.5 million in 2003).

     Additionally, in the last three years, the Company aggressively lowered its investment in inventory and sold unused facility space in select operations. The cash generated from these actions along with the previously mentioned sale of certain non-performing business units, allowed the Company to reduce its total debt and other financing arrangements (including its accounts receivable securitization facility) by $43.3 million since the end of 2000 as well as fund its ongoing operations.

     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 9 for more details) as its primary external funding source for working capital needs.

     Cash flow from operating activities in 2003 was a negative $1.1 million. This included a $12.9 million reduction in accounts receivable sold under the Company’s Accounts Receivable Securitization Facility due to reduced funding requirements for operations. Excluding the impact of reduced receivables sold under the Company’s Accounts Receivable Securitization Facility, cash flow from operations was a positive $11.8 million.

     Working capital, excluding the current portion of long-term debt, of $91.3 million is down $8.8 million, or 8.8%, since the start of 2003. Average inventory levels have declined throughout the year until late in the fourth quarter when management elected to increase the level of material stocked due to increasing demand and in expectation of the Company’s historically stronger first quarter sales. Additionally, the Company received $9.9 million of income tax refunds in the second quarter of 2003. The refund was due to the carry-back of net operating losses for federal income tax purposes. Gross trade receivables (prior to the impact of receivables sold under the Securitization Facility) increased $7.1 million

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through December 31, 2003 largely due to higher than normal year-end sales demand. The days sales outstanding (DSO) remained constant at 48 days year-over-year.

     At December 31, 2003, $13.0 million of receivables were sold or utilized under the Accounts Receivable Securitization Facility (versus $25.9 million at December 31, 2002). Available funds remaining under this facility are $20.1 million at year-end 2003.

     As part of management’s decision to sell underutilized or non-performing assets, a total of $16.2 million of cash was received during 2003. During the third quarter of 2003, the Company received cash of $1.5 million on the sale of its joint venture interest in Energy Alloys, $0.8 million on the sale of assets of its honing business and $10.5 million on the sale of its Los Angeles facility. During the fourth quarter of 2003, the Company received $3.4 million on the sale of its Kansas City facility. The Company entered into a long-term operating lease at its Los Angeles and Kansas City facilities subsequent to the sale of these properties, incurring rental expense only for the floor space needed for its operations.

     As of December 31, 2003, 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.

     *Decreases to .55 on March 31, 2004

     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.

Cash Commitments

The following is a schedule of cash commitments for long-term debt and non-cancelable lease payments:

Item 7a – Quantitative and Qualitative Disclosures 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 $0.2 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 prices.

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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.

     Equity Plan Disclosures:

     The following table includes information regarding the Company’s equity compensation plans:

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 annual 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.

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ITEM 8 — Financial Statements and Supplementary Data

Consolidated Statements of Operations

The accompanying notes to financial statements are an integral part of these statements

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Consolidated Balance Sheets

The accompanying notes to consolidated financial statements are an integral part of these statements.

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Consolidated Statements of Cash Flow