UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2006

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 incorporation or organization)		(I.R.S. Employer Identification No.)

3400 North Wolf Road, Franklin Park, Illinois		60131
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (847) 455-7111
Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock — $0.01 par value		American and Chicago Stock Exchanges
Series A Cumulative Convertible Preferred Stock – 0.01 par value		Not Registered

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

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 þ No o

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. o

Indicate by check mark whether the registrant is a large accelerated filer; an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large Accelerated Filer o      Accelerated Filer þ      Non-Accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter is $262,197,563.

The number of shares outstanding of the registrant’s common stock on March 14, 2007 was 17,047,591 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Documents Incorporated by Reference		Applicable Part of Form 10-K
Proxy Statement furnished to Stockholders in connection with registrant’s Annual Meeting of Stockholders		Part III

 

 

PART I

ITEM 1 — Business

In this annual report on Form 10-K, “the Company,” “we” or “our” refer to A. M. Castle & Co., a Maryland corporation, and its subsidiaries included in the consolidated financial statements, except as otherwise indicated or as the context otherwise requires.

Business and Markets

The Company is a specialty metals and plastics distribution company serving principally the North American market, but with a significantly growing global presence. The Company provides a broad range of product inventories as well as value-added processing and supply chain services to a wide array of customers, principally within the producer durable equipment sector of the economy. Particular focus is placed on the aerospace and defense, oil and gas, mining and heavy earth moving equipment segments as well as general engineering applications.

     On September 5, 2006, the Company acquired Transtar Intermediate Holdings #2, Inc. (“Transtar”), a wholly owned subsidiary of H.I.G. Transtar Inc.. Transtar is a leading supplier of high performance aluminum alloys to the aerospace and defense industries, supporting the on-going requirements of those markets with a broad range of inventory, processing and supply chain services. As a result of the acquisition, the Company has increased its access to aerospace customers and avenues to cross-sell its other products into this growth market. The acquisition also provides the Company the benefits of deeper access to certain inventories and purchasing synergies, as well as providing the Company an existing platform to sell to markets in Europe and other international markets. The assets of Transtar are included in the Company’s Metals segment because Transtar has similar economic and other characteristics of the Metals segment.

     As part of the Company’s restructuring over the past five years, during 2004-2005, the Company purchased its joint venture partners’ interests in Castle de Mexico, S.A. de C.V., and two small Plastics segment subsidiaries.

     The Company purchases metals and plastics from many producers. Satisfactory alternative sources are available for all inventory purchased by the Company and the business of the Company would not be adversely affected in a material way by the loss of any one supplier.

     Purchases are made in large lots and held in distribution centers until sold, usually in smaller quantities and often with some value-added processing services performed. The Company’s ability to provide quick delivery, frequently overnight, of a wide variety of specialty metals and plastic products, along with its processing capabilities, allow customers to lower their own inventory investment by reducing their need to order the large quantities required by producing mills or performing additional material processing services. In connection with certain customer programs, principally in the aerospace and defense market, the Company’s business is covered by long-term contracts and commitments.

     Approximately 90% of 2006’s consolidated net sales included materials shipped from Company stock. The materials required to fill the balance of sales were obtained from other sources, such as direct mill shipments to customers or purchases from other distributors. Thousands of customers from a wide array of industries are serviced primarily through the Company’s own sales organization. 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. Metals service centers act as supply chain intermediaries between primary metals producers, which necessarily deal in bulk quantities of metals in order to achieve economies of scale, and end-users in a variety of industries that require specialized metal products in significantly smaller quantities. Service centers manage the differences in lead times that exist in the supply chain. While OEMs and other customers often demand delivery within hours, the lead time required by primary metal producers can be as long as several months. Metals service centers also add value to their customers by aggregating purchasing, warehousing and distribution services across a number of end users and by processing metals to meet specific customer needs often with little or no further modification. Metals service centers accounted for approximately one quarter of U.S. steel shipments in 2005 based on volume and generated more than $115 billion in net sales in 2005 according to purchasing.com.

     In order to capture scale efficiencies and remain competitive, many primary metal producers are consolidating their operations and focusing on their core production activities. These producers have increasingly outsourced metals distribution and inventory management to metals service centers. This process of outsourcing allows them to work with a relatively small number of intermediaries rather than many end customers. As a result, metals service centers are now providing a range of services for their customers, including metal purchasing, processing and supply chain management services. As of May 2005, over 300,000 North American OEMs, contractors and fabricators purchase some or all of their metal requirements from metals service centers.

     These end users of metal products benefit from the inventory management and just-in-time delivery capabilities of metals service centers, which enable them to reduce inventory and labor costs and to decrease capital requirements. These services, which help end users optimize production, are not generally provided by the primary producers.

     At December 31, 2006, the Company had 2,016 full-time employees in its operations throughout the United States, Canada, Mexico, France and the United Kingdom. Of these, 284 are represented by collective bargaining units, principally the United Steelworkers of America.

Business Segments

The Company distributes and performs processing on both metals and plastics. Although the distribution processes are similar, different customer markets, supplier bases and types of products exist. Additionally, our Chief Executive Officer reviews and manages these two businesses separately. As such, these businesses are considered reportable segments according to the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 131 “Disclosures about Segments of an Enterprise and Related Information” and are reported accordingly in the Company’s various public filings. None of the Company’s reportable segments has any special working capital requirements.

     In 2006, the Metals segment accounted for approximately 90% of the Company’s revenues, and its Plastics segment the remaining 10%. The Company’s customer base is well diversified with no single customer accounting for more than 3% of total 2006 net sales. In the last three years, the percentages of total sales of the two segments were approximately as follows:

		2006				2005				2004
Metals			90	%			89	%			88	%
Plastics			10	%			11	%			12	%
			100	%			100	%			100	%

Metals Segment

In its metals business, the Company’s market strategy focuses on highly engineered specialty grades and alloys of metals as well as specialized processing services geared to meet very tight specifications. Core products include nickel alloys, aluminum, stainless steels and carbon. Inventories of these products assume many forms such as plate, sheet, extrusions round bar, hexagon, square and flat bars, tubing and coil. Depending on the size of the facility and the nature of the markets it serves, distribution centers are equipped as needed with bar saws, plate saws, oxygen and plasma arc flame cutting machinery, water-jet cutting equipment, stress relieving and annealing furnaces, surface grinding equipment, cut-to-length levelers and sheet shearing equipment. This segment also performs various specialized fabrications for its customers through a network of pre-qualified subcontractors, and the Company’s H-A Industries division, which thermally processes, turns, polishes and straightens alloy and carbon bar.

     The Company has its primary metals distribution center and corporate headquarters in Franklin Park, Illinois. This center serves metropolitan Chicago and a nine-state area. In addition, there are 45 distribution centers in various other cities in North America and Europe (see Item 2).

     Our customer base includes many Fortune 500 companies as well as thousands of medium and smaller sized firms. The coast-to-coast network of metals service centers within North America provides next-day delivery to most of the segments’ markets, and two-day delivery to virtually all of the rest.

The Company’s Plastics segment consists exclusively of Total Plastics, Inc. (“TPI”), headquartered in Kalamazoo, Michigan. This segment stocks and distributes a wide variety of plastics in forms that include plate, rod, tube, clear sheet, tape, gaskets and fittings. Processing activities within this segment include cut to length, cut to shape, bending and forming according to customer specifications.

     The Plastics segment’s diverse customer base consists of companies in the retail (point-of-purchase), marine, office furniture and fixtures, transportation and general manufacturing industries. TPI has locations throughout the upper Northeast and Midwest portions of the U.S. and one facility in Florida (see Item 2) from which it services a wide variety of users of industrial plastics.

Joint Venture

The Company holds a 50% joint venture interest in Kreher Steel Co., a Midwest metals distributor, focusing on customers whose primary need is for immediate, reliable delivery of large quantities of alloy, special bar quality and stainless bars. The Company’s equity in the earnings from this joint venture is reported separately in the Company’s consolidated statement of operations.

Access to SEC Filings

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 (the “SEC”).

ITEM 1A — Risk Factors

Our business, operations and financial condition are subject to various risks and uncertainties. Current or potential investors should carefully consider the risks and uncertainties described below, together with all other information in this annual report on Form 10-K and other documents filed with the SEC, before making any investment decisions with respect to the Company’s securities.

Our future operating results depend on a number of factors beyond our control, such as the prices for metals, which could cause our results to be adversely affected.
The prices we pay for raw materials, both metals and plastics, and the prices we charge for products may fluctuate depending on many factors not in our control, including general economic conditions (both domestic and international), competition, production levels, import duties and other trade restrictions and currency fluctuations. To the extent metals prices decline, we would generally expect lower sales and possibly lower net income, depending on the timing of the price changes. To the extent we are not able to pass on to our customers any increases in our raw materials prices, our results of operations may be adversely affected. In addition, because we maintain substantial inventories of metals in order to meet the just-in-time delivery requirements of our customers, a reduction in our selling prices could result in lower profit margins or, in some cases, losses, either of which would reduce our profitability.

We service industries that are highly cyclical, and any downturn in our customers’ industries could reduce our revenue and profitability.
Many of our products are sold to customers in industries that experience significant fluctuations in demand based on economic conditions, energy prices, consumer demand and other factors beyond our control. As a result of this volatility in the industries we serve, when one or more of our customers’ industries experiences a decline, we may have difficulty increasing or maintaining our level of sales or profitability if we are not able to divert sales of our products to customers in other industries. We have made a strategic decision to focus sales resources on certain industry segments, specifically the aerospace and defense segments. As a result, there is some risk that adverse business conditions in these segments could be detrimental to our sales. We are also particularly sensitive to market trends in the manufacturing sector of the North American economy.

We may not be able to realize the benefits we anticipate from the Transtar acquisition.
We may not be able to realize the benefits we anticipate from the Transtar acquisition. Achieving those benefits depends on the timely, efficient and successful execution of a number of post-acquisition events, including our integration of Transtar. Factors that could affect our ability to achieve these benefits include:

•		difficulties in integrating and managing personnel, financial reporting and other systems used by Transtar;
•		the failure of Transtar to perform in accordance with our expectations;
•		any future goodwill impairment charges that we may incur with respect to the assets of Transtar;
•		failure to achieve anticipated synergies between our business units and the business units of Transtar; and
•		the loss of Transtar’s customers.

If Transtar’s business does not operate as we anticipate, it could materially harm our business, financial condition and results of operations. In addition, as a result of the Transtar acquisition, we assumed all of Transtar’s liabilities. We may learn additional information about Transtar’s business that adversely affects us, such as unknown or contingent liabilities, issues relating to internal controls over financial reporting and issues relating to compliance with the Sarbanes-Oxley Act or other applicable laws. As a result, there can be no assurance that the Transtar acquisition will be successful or will not, in fact, harm our business. Among other things, if Transtar’s liabilities are greater than projected, or if there are obligations of Transtar of which we were not aware at the time of completion of the acquisition, our business could be materially adversely affected.

A substantial portion of our sales are concentrated in the aerospace and defense industries and thus our financial performance is highly dependent on the conditions of those industries.
A substantial portion of our sales are concentrated to customers in the aerospace and defense industries. The aerospace and defense industries tend to be highly cyclical, and capital spending by airlines, aircraft manufacturers, governmental agencies and defense contractors may be influenced by a variety of factors including current and predicted traffic levels, aircraft fuel pricing, labor issues, competition,

the retirement of older aircraft, regulatory changes, the issuance of contracts, terrorism and related safety concerns, general economic conditions, worldwide airline profits and backlog levels. Additionally, a significant amount of work that we perform under contract in these industries tends to be for a few large customers. A reduction in capital spending in the aerospace, aviation or defense industries could have a significant effect on the demand for our products, which could have an adverse effect on our financial performance or results of operations.

Our substantial indebtedness could restrict our operating flexibility, adversely affect our financial position, decrease our liquidity and impair our ability to operate our business.
As of December 31, 2006, we had $226.1 million in total indebtedness. We incurred approximately $147.0 million in bank borrowings in connection with our acquisition of Transtar. Our high level of debt could adversely affect our operating flexibility and adversely affect our financial position in several significant ways, including the following:

•		a substantial portion of our cash flows from operations will be dedicated to paying interest and principal on our debt and, therefore, will not be available for other purposes;
•		our ability to borrow additional funds or capitalize on significant business opportunities may be limited; and
•		a portion of our debt will be subject to fluctuating interest rates, which could adversely affect our profits if interest rates increase.

We are vulnerable to interest rate fluctuations on our indebtedness, which could hurt our operating results.
We are exposed to various interest rate risks that arise in the normal course of business. We finance our operations with fixed and variable rate borrowings. Market risk arises from changes in variable interest rates. Under our revolving credit facility, our interest rate on borrowings is subject to changes based on fluctuations in the LIBOR and prime rates of interest.

Disruptions in the supply of raw materials could adversely affect our ability to meet our customer demands and our revenues and profitability.
We have few long-term contracts to purchase metals. Accordingly, if for any reason our primary suppliers of metals should curtail or discontinue their delivery of raw materials to us at competitive prices and in a timely manner, our business could suffer. Unforeseen disruptions in our supply bases could materially impact our ability to deliver products to customers. The number of available suppliers could be reduced by factors such as industry consolidation and bankruptcies affecting steel and metal producers. If we are unable to obtain sufficient amounts of raw materials from our traditional suppliers, we may not be able to obtain such raw materials from alternative sources at competitive prices to meet our delivery schedules, which could have an adverse impact on our revenues and profitability.

Our industry is highly competitive, which may force us to lower our prices and may have an adverse effect on net income.
The principal markets that we serve are highly competitive. Competition is based principally on price, service, quality, production capabilities, inventory availability and timely delivery. We compete in a highly fragmented industry. Competition in the various markets in which we participate comes from a large number of value-added metals processors and service centers on a regional and local basis, some of which have greater financial resources than we do and some of which have more established brand names in the local markets we serve. We also compete to a lesser extent with primary metals producers who typically sell to very large customers requiring shipments of large volumes of metal. Increased competition could force us to lower our prices or to offer increased services at a higher cost to us, which could reduce our operating profit and net income.

Our business could be adversely affected by a disruption to our primary distribution hub.
Our largest facility, in Franklin Park, Illinois, serves as a primary distribution center that ships product to our other facilities as well as external customers. This same facility also serves as our headquarters and houses our primary information systems. Our business could be adversely impacted by a major disruption at this facility in the event of:

•		damage to or inoperability of our warehouse or related systems;
•		a prolonged power or telecommunication failure;
•		a natural disaster such as fire, tornado or flood;
•		a work stoppage; or
•		an airplane crash or act of war or terrorism on-site or nearby as the facility is located within seven miles of O’Hare International Airport (a major U.S. airport) and lies below certain take-off and landing flight patterns.

We have data storage and retrieval procedures that include off-site system capabilities. However, a prolonged disruption of the services and capabilities of our Franklin Park facility and operation could adversely impact our financial performance. Additionally, we are in the process of implementing new information technology systems and any disruption relating to our current or new information technology systems may have an adverse affect on our financial performance.

We operate in international markets, which expose us to a number of risks.
We serve and operate in certain international markets, which expose us to political, economic and currency related risks. We operate in Canada, Mexico, France, and the United Kingdom. An act of war or terrorism could disrupt international shipping schedules, cause additional delays in importing our products into the United States or increase the costs required to do so. Fluctuations in the value of the U.S. dollar versus foreign currencies could reduce the value of these assets as reported in our financial statements, which could reduce our stockholders’ equity. If we do not adequately anticipate and respond to these risks and the other risks inherent in international operations, it could have a material adverse effect on our operating results.

Some of our workforce is represented by labor unions, which may lead to work stoppages.
Approximately 284 of our employees are unionized, which represented approximately 14.1% of our employees at December 31, 2006, including our primary distribution center in Franklin Park. We cannot predict how stable our relationships with these labor organizations will be or whether we will be able to meet union requirements without impacting our financial condition. The unions may also limit our flexibility in dealing with our workforce. Work stoppages and instability in our union relationships could negatively impact the timely processing and shipment of our products, which could strain relationships with customers and cause a loss of revenues that would adversely affect our results of operations.

We could incur substantial costs in order to comply with, or to address any violations under, environmental and employee health and safety laws, which could significantly increase our operating expenses and reduce our operating income.
Our operations are subject to various environmental statutes and regulations, including laws and regulations governing materials we use. In addition, certain of our operations are subject to international, federal, state and local environmental laws and regulations that impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. Our operations are also subject to various employee safety and health laws and regulations, including those concerning occupational injury and illness, employee exposure to hazardous materials and employee complaints. Certain of our facilities are located in industrial areas, have a history of heavy industrial use and have been in operation for many years and, over time, we and other predecessor operators of these facilities have generated, used, handled and disposed of hazardous and other regulated wastes. Currently unknown cleanup obligations at these facilities, or at off-site locations at which materials from our operations were disposed of, could result in future expenditures that cannot be currently quantified but which could have a material adverse effect on our financial position, results of operations or cash flows.

Antidumping and other duties could be imposed on us, our suppliers and our products.
The imposition of an antidumping or other increased duty on any products that we import could have a material adverse effect on our financial condition. For example, under United States law, an antidumping duty may be imposed on any imports if two conditions are met. First, the Department of Commerce must decide that the imports are being sold in the United States at less than fair value. Second, the International

Trade Commission, the “ITC”, must determine that a United States industry is materially injured or threatened with material injury by reason of the imports. The ITC’s determination of injury involves a two-pronged inquiry: first, whether the industry is materially injured and second, whether the dumping, and not other factors, caused the injury. The ITC is required to analyze the volume of imports, the effect of imports on United States prices for like merchandise, and the effects the imports have on United States producers of like products, taking into account many factors, including lost sales, market share, profits, productivity, return on investment and utilization of production capacity.

Increases in energy prices would increase our operating costs and we may be unable to pass these increases on to our customers in the form of higher prices, which may reduce our profitability.
We use energy to process and transport our products. Our operating costs increase if energy costs, including electricity, gasoline and natural gas, rise. During periods of higher energy costs, we may not be able to recover our operating cost increases through price increases without reducing demand for our products. In addition, we generally do not hedge our exposure to higher prices via energy futures contracts. Increases in energy prices will increase our operating costs and may reduce our profitability if we are unable to pass the increases on to our customers.

We may not be able to retain or expand our customer base if the United States manufacturing industry continues to erode.
Our customer base primarily includes manufacturing and industrial firms in the United States, some of which are, or have considered, relocating production operations outside the United States or outsourcing particular functions to locations outside the United States. Some customers have closed as they were unable to compete successfully with foreign competitors. Our facilities are located in the United States and to the extent our customers close or relocate operations to locations where we do not have a presence, we could lose all or a portion of their business.

Any prolonged disruption of Company processing centers could harm its business.
We have dedicated processing centers that permit us to produce standardized products in large volumes while maintaining low operating costs. Any prolonged disruption in the operations of any of these facilities, whether due to labor or technical difficulties, destruction or damage to any of the facilities or otherwise, could materially adversely affect our business and results of operations.

Our operating results are subject to the seasonal nature of our customers’ businesses.
A portion of our customers experience seasonal slowdowns. Our revenues in the months of July, November and December traditionally have been lower than in other months because of a reduced number of shipping days and holiday or vacation closures for some customers. Consequently, our sales in the first two quarters of the year are usually higher than in the third and fourth quarters. As a result, analysts and investors may inaccurately estimate the effects of seasonality on our results of operations in one or more future quarters and, consequently, our operating results may fall below expectations.

We may face product liability claims that are costly and create adverse publicity.
If any of the products we sell cause harm to any of our customers, we could be exposed to product liability lawsuits. If we were found liable under product liability claims, we could be required to pay substantial monetary damages. Further, even if we successfully defended ourself against this type of claim, we could be forced to spend a substantial amount of money in litigation expenses, our management could be required to spend valuable time in the defense against these claims and its reputation could suffer, any of which could harm our business.

ITEM 1B — Unresolved SEC Staff Comments

None

ITEM 2 — Properties

The Company’s principal executive offices are located in its Franklin Park facility near Chicago, Illinois. All properties and equipment are sufficient for the Company’s 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:

		Approximate
		Floor Area in
Locations		Square Feet
Metals Segment
Bedford Heights, Ohio			374,400
Birmingham, Alabama			76,000
Charlotte, North Carolina			116,500
Dallas, Texas			78,000
Edmonton, Alberta			38,300	(1)
Fairfield, Ohio			166,000	(1)
Franklin Park, Illinois			522,600
Hammond, Indiana (H-A Industries)			243,000	(1)
Houston, Texas			109,100
Kansas City, Missouri			118,000	(1)
Kent, Washington			31,100	(1)
Minneapolis, Minnesota			65,200
Mississauga, Ontario			60,000	(1)
Monterrey, Mexico			55,000	(1)
Montreal, Quebec			38,760	(1)
Paramount, California			155,500	(1)
Philadelphia, Pennsylvania			71,600
Riverdale, Illinois			115,000	(1)
Stockton, California			60,000	(1)
Twinsburg, Ohio			120,000	(1)
Wichita, Kansas			58,800	(1)
Winnipeg, Manitoba			50,000
Worcester, Massachusetts			56,000
Sales Offices (1)
Cincinnati, Ohio
Milwaukee, Wisconsin
Phoenix, Arizona
Tulsa, Oklahoma
Metal Express, LLC
Hartland, Wisconsin			4,000	(1)
Other Locations (15)			112,000	(1)
Transtar
United States
Kennesaw, Georgia			87,500	(1)
Orange, Connecticut			32,144	(1)
Orange, Connecticut			25,245	(1)
Dallas, Texas			74,880	(1)
Torrance, California			12,171	(1)
Gardena, California			33,435	(1)
Gardena, California			117,000	(1)
Wichita, Kansas			42,000	(1)
Wichita, Kansas			48,000	(1)
Kent, Washington			65,000	(1)
Europe
Due Pre’ Cadeau, France			25,600	(1)
Letchworth, England			40,000	(1)
Total Metals Segment			3,497,835

		Approximate
		Floor Area in
Locations		Square Feet
Plastics Segment
Baltimore, Maryland			24,000	(1)
Cleveland, Ohio			8,600	(1)
Detroit, Michigan			22,000	(1)
Elk Grove Village, Illinois			22,500	(1)
Fort Wayne, Indiana			9,600	(1)
Grand Rapids, Michigan			42,500
Harrisburg, Pennsylvania			13,900	(1)
Indianapolis, Indiana			13,500	(1)
Kalamazoo, Michigan			81,000	(1)
Mt. Vernon, New York			30,000	(1)
New Philadelphia, Ohio			15,700	(1)
Pittsburgh, Pennsylvania			8,500	(1)
Rockford, Michigan			53,600	(1)
Tampa, Florida			17,700	(1)
Trenton, New Jersey			6,000	(1)
Worcester, Massachusetts			11,000
Total Plastics Segment			380,100
GRAND TOTAL			3,877,935

ITEM 3 — Legal Proceedings

The Company is a defendant in several lawsuits arising from the operation 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, based on current knowledge, that no uninsured liability will result from the outcome of this litigation that would have a material adverse effect on the consolidated results of operations, financial condition or cash flows of the Company.

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

No items were submitted to a vote of security holders during the fourth quarter of fiscal 2006.

PART II

ITEM 5 — Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

A. M. Castle & Co.’s common stock trades on the American and Chicago Stock Exchanges under the ticker symbol “CAS”. As of March 2, 2007 there were approximately 1,161 shareholders of record and an estimated 4,311 beneficial shareholders. The Company paid $4.1 million in cash dividends on its common stock in 2006. There were no dividends paid in 2005.

     See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management”, for information regarding common stock authorized for issuance under equity compensation plans.

     See Part III, Item 11, “Executive Compensation” for information regarding comparison of five year cumulative total return.

     The Company did not purchase any of its equity securities during the fourth quarter of 2006.

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

		—STOCK PRICE RANGE—
		2006								2005
		Low				High				Low				High
First Quarter		$	22.16			$	31.31			$	11.35			$	17.25
Second Quarter		$	23.61			$	44.25			$	11.05			$	16.11
Third Quarter		$	25.34			$	34.86			$	13.88			$	17.97
Fourth Quarter		$	24.15			$	34.20			$	15.02			$	24.52

ITEM 6 — Selected Financial Data

(dollars in millions, except per share data)		2006				2005				2004				2003				2002
Net sales		$	1,177.6			$	959.0			$	761.0			$	543.0			$	538.1
Net income (loss) (continuing operations)			55.1				38.9				15.4				(19.9	)			(10.8	)
Earnings (loss) per diluted share (continuing operations)			2.89				2.11				0.82				(1.32	)			(0.74	)
Cash dividends declared per common share			0.24				—				—				—				—
Data as of December 31:
Total assets			655.1				423.7				383.0				338.9				352.6
Long-term debt			90.1				73.8				89.8				100.0				108.8
Total debt			226.1				80.1				101.4				108.3				112.3
Stockholders’ equity			215.9				175.5				130.4				113.7				130.9

ITEM 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

EXECUTIVE OVERVIEW

2006 marked several major accomplishments for our company including record financial results, the launch of a new strategy for our metals business and the largest acquisition in our history.

Acquisition of Transtar

On September 5, 2006, the Company acquired all of the issued and outstanding capital stock of Transtar Intermediate Holdings #2, Inc. (“Transtar”), a wholly owned subsidiary of H.I.G. Transtar Inc. The results of Transtar’s operations have been included in the consolidated financial statements since that date. These results and the assets of Transtar are included in the Company’s Metals segment.

Transtar is a leading supplier of high performance aluminum alloys to the aerospace and defense industries, supporting the on-going requirements of those markets with a broad range of inventory, processing and supply chain services. As a result of the acquisition, the Company has expanded access to aerospace customers and avenues to cross-sell its other products into this high-growth market. The acquisition also provides the Company the benefits of deeper access to certain inventories and purchasing synergies, as well as providing the Company an existing platform to markets in Asia and other international markets.

The aggregate purchase price, net of cash acquired, was $175.6 million which includes the assumption of $0.7 million of foreign debt and $0.6 million of capital leases of Transtar. An escrow in the amount of $18 million funded from the purchase price was established to satisfy HIG Transtar Inc.’s indemnification obligations under the Stock Purchase Agreement. The purchase price is subject to adjustment based on a final calculation of Transtar’s working capital at the date of acquisition. See Note 2 to the consolidated financial statements for additional information relating to the acquisition of Transtar.

Recent Market and Pricing Trends

In 2006, the Company’s primary markets exhibited continued strong underlying demand. Consolidated net sales for 2006 of $1,177.6 million were $218.6 million, or 22.8%, higher than 2005. The acquisition of Transtar contributed $77.9 million of the total net sales increase. Material price increases accounted for 8.0% of the growth with volume and product mix accounting for the balance of the year-over-year sales growth. The aerospace, oil and gas, mining and heavy equipment sectors were especially robust. Metals material pricing increased an average of 8.6% in 2006. Nickel-based product pricing was particularly high, increasing 21% during 2006. The overall 2006 metals supply was generally steady and reliable, with the exception of nickel steels and certain aerospace aluminum alloys, which continue to be rapidly consumed by the aerospace, oil and gas industries.

Suppliers’ delivery lead times stretched in some cases to 22 weeks by year-end 2006 for certain nickel steels. The Company believes that its strong presence in the nickel steels marketplace niche and its relationships with primary nickel steels suppliers have the Company well-positioned to competitively service customer demand for these products. Select pricing for nickel sheet rose during 2006 and conversely, certain carbon steel prices have declined, but the overall mix of products within the Metals segment resulted in lower price volatility than in 2005.

     The Company’s Plastics segment reported 6.8% sales growth in 2006. Volume increased 3.9% and material price increases accounted for the balance of the year-over-year sales growth. Demand for the Company’s plastic products comes from different markets than those within the Metals segment, and tends to be more stable and less cyclical than the Metals segment historically. Plastic material prices were at high levels as 2006 came to a close. It is difficult to determine how long they will remain at the year-end 2006 levels. The Company will continue to assess its growth initiatives for this segment and may consider further geographic expansion alternatives as it has in the last few years.

Current Business Outlook

Historically, management has used the Purchaser’s Managers Index (“PMI”) provided by the Institute of Supply Management (website is www.ism.ws) as one data point for tracking general demand trends in its customer markets. Table 1 below shows PMI trends from the first quarter of 2004 through the fourth quarter of 2006. Generally, an index above 50.0 indicates continuing growth in the manufacturing sector of the U.S. economy. As the data indicates, the U.S. manufacturing economy was still growing at a modest pace as of 2006 year-end. The Company’s revenue, net of material price increases, has grown over this same time period.

Table 1

YEAR		Qtr 1				Qtr 2				Qtr 3				Qtr 4
2004			62.4				62.4				59.5				57.6
2005			55.7				53.2				55.8				57.2
2006			55.6				55.2				53.8				50.9

     A favorable 2006 year-end PMI suggests that demand for the Company’s products and services should continue at their current high levels at least in the near-term. Though the PMI does offer some insight, management typically relies on its relationships with the Company’s supplier and customer base to assess continuing demand trends. As of December 31, 2006, indicators generally point to a continued healthy demand for the Company’s specialty products in 2007. To date, metals pricing, in the aggregate, for the products the Company sells remains stable with nickel alloy prices still on the rise. Material pricing in both the metal and plastic segments of the Company’s business are difficult to predict. Nickel alloy prices are at record high levels. The Company believes these prices are not sustainable at these levels over the long term. In two of the areas of the U.S. economy currently experiencing significant decline, the automotive and residential construction markets, the Company’s market presence is limited.

RESULTS OF OPERATIONS: YEAR-TO-YEAR COMPARISONS AND COMMENTARY

Our discussion of comparative period results is based upon the following components of the Company’s consolidated statements of operations.

Net Sales —The Company derives its revenues from the sale and processing of metals and plastics. Pricing is established with each customer order and includes charges for the material, processing activities and delivery. The pricing varies by product line and type of processing. The Company typically does not enter into any long-term fixed price arrangements with a customer without obtaining a similar agreement with its suppliers. Such arrangements are typical of customers in the aerospace and defense markets.

Cost of Materials—Cost of materials consists of the costs we pay suppliers for metals, plastics and related inbound freight charges. It excludes depreciation and amortization which are included in Other operating costs and expenses discussed below. The Company accounts for inventory primarily on a last-in-first-out (“LIFO”) basis. LIFO adjustments are calculated as of December 31 of each year. Interim estimates of the year-end LIFO charge or credit are determined based on inflationary or deflationary purchase cost trends and estimated year-end inventory levels. Interim LIFO estimates may require significant year-end adjustments. (See Note 14 to the consolidated financial statements.)

Other operating costs and expenses—Other operating costs and expenses primarily consist of (1) warehouse, processing and delivery expenses, which include occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs; (2) selling expenses, which include compensation and employee benefits for sales personnel, (3) general and administrative expenses, which include compensation for executive officers and general management, expenses for professional services primarily attributable to accounting and legal advisory services, data communication and computer hardware and maintenance; and (4) depreciation and amortization expenses, which include depreciation for all owned property and equipment, and amortization of various long-lived intangible assets.

2006 Results Compared to 2005

Consolidated results by business segment are summarized in the following table for years 2006 and 2005.

Operating Results by Segment (dollars in millions)

		Year Ended December 31,
		2006				2005				Fav/(Unfav)				% Change
Net Sales
Metals		$	1,062.6			$	851.3			$	211.3				24.8	%
Plastics			115.0				107.7				7.3				6.8
Total Net Sales		$	1,177.6			$	959.0			$	218.6				22.8	%
Cost of Materials
Metals		$	762.3			$	603.9			$	(158.4	)			(26.2	)%
% of Metals Sales			71.7	%			70.9	%			(0.8	)%
Plastics			76.9				73.3				(3.6	)			(4.9	)%
% of Plastics Sales			66.9	%			68.1	%			1.2	%
Total Cost of Materials		$	839.2			$	677.2			$	(162.0	)			(23.9	)%
% of Total Sales			71.3	%			70.6	%			(0.7	)%
Other Operating Costs and Expenses
Metals		$	205.3			$	172.0			$	(33.3	)			(19.4	)%
Plastics			30.8				28.9				(1.9	)			(6.5	)
Other			9.8				9.7				(0.1	)			—
Total Other Operating Costs & Expenses		$	245.9			$	210.6			$	(35.3	)			(16.8	)%
% of Total Sales			20.9	%			22.0	%			1.1	%
Operating Income
Metals		$	95.0			$	75.3			$	19.7				26.2	%
% of Metals Sales			8.9	%			8.8	%			0.1	%
Plastics			7.3				5.6				1.7				30.4	%
% of Plastics Sales			6.3	%			5.2	%			1.1	%
Other			(9.8	)			(9.7	)			0.1				1.0	%
Total Operating Income		$	92.5			$	71.2			$	21.3				29.9	%
% of Total Sales			7.9	%			7.4	%			0.5	%

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

Net Sales:

Consolidated 2006 net sales for the Company of $1,177.6 million increased $218.6 million, or 22.8%, versus 2005. The acquisition of Transtar contributed $77.9 million of the total sales increase. Material price increases accounted for 8.0% of the growth with volume and product mix accounting for the balance of the year-over-year sales growth.

     Metals segment sales during 2006 of $1,062.6 million were 24.8% or $211.3 million higher than 2005. Material price increases accounted for 8.8% of the growth with volume and production mix accounting for the balance of the year-over-year sales growth. The aerospace, oil and gas, mining and heavy equipment sectors were especially robust.

     Plastics segment sales during 2006 of $115.0 million were 6.8% or $7.3 million higher than 2005. Volume increased approximately 3.9% during 2006, while material price increases contributed to the balance of the year-over-year sales growth.

Consolidated 2006 cost of materials (exclusive of depreciation) increased $162.0 million, or 23.9%, to $839.2 million. The acquisition of Transtar contributed $55.4 million.

Other Operating Expenses and Operating Income:

On a consolidated basis, other operating costs and expenses increased $35.3 million, or 16.8%, over 2005 due to the inclusion of $19.4 million of Transtar’s other operating expenses and in support of higher overall customer demand. However, other operating expense declined as a percent of sales from 22.0% in 2005 to 20.9% in 2006 as the Company was able to leverage its expenses over higher sales.

     2006 operating income of $92.5 million was $21.3 million, or 29.9%, ahead of last year. Solid underlying demand strengthened the Company’s operating income. The Company’s 2006 operating profit margin (defined as operating income divided by net sales) increased to 7.9% from 7.4% in 2005.

Other Income and Expense, Income Taxes and Net Income:

Interest expense of $8.3 million in 2006 increased $1.0 million versus 2005 on increased borrowings necessitated by the acquisition of Transtar. (See “Liquidity and Capital Resources” discussion below).

     Income tax expense increased to $33.3 million from $23.2 million in 2005. The effective tax rate was 39.6% in 2006 and 40.1% in 2005.

     Equity in earnings of the Company’s joint venture, Kreher Steel, was $4.3 million in 2006, the same as 2005.

     Consolidated net income applicable to common stock of $54.2 million, or $2.89 earnings per diluted share in 2006 compared favorably to $37.9 million, or $2.11 earnings per diluted share in 2005.

2005 Results Compared to 2004

Consolidated results by business segment are summarized in the following table for years 2005 and 2004.

Operating Results by Segment (dollars in millions)

		Year Ended December 31,
		2005				2004				Fav/(Unfav)				% Change
Net Sales
Metals		$	851.3			$	671.2			$	180.1				26.8	%
Plastics			107.7				89.8				17.9				19.9
Total Net Sales		$	959.0			$	761.0			$	198.0				26.0
Cost of Materials
Metals		$	603.9			$	482.7			$	(121.2	)			(25.1	)%
% of Metals Sales			70.9	%			71.9	%			1.0	%
Plastics			73.3				60.7				(12.6	)			(20.8	)
% of Plastics Sales			68.1	%			67.6	%			(0.5	)%
Total Cost of Materials		$	677.2			$	543.4			$	(133.8	)			(24.6	)%
% of Total Sales			70.6	%			71.4	%			0.8	%
Other Operating Costs and Expenses
Metals		$	172.0			$	155.4			$	(16.6	)			10.7	%
Plastics			28.9				23.6				(5.3	)			22.5
Other			9.7				7.1				(2.6	)			36.6
Total Other Operating Costs & Expenses		$	210.6			$	186.1			$	(24.5	)			13.2	%
% of Total Sales			22.0	%			24.5	%			2.5	%
Operating Income
Metals		$	75.3			$	33.1			$	42.2				127.5	%
% of Metals Sales			8.8	%			4.9	%			3.9	%
Plastics			5.6				5.5				0.1				1.8	%
% of Plastics Sales			5.2	%			6.1	%			(0.9	)%
Other			(9.7	)			(7.1	)			(2.6	)			36.6	%
Total Operating Income		$	71.2			$	31.5			$	39.7				126.0	%
% of Total Sales			7.4	%			4.1	%			3.3	%

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

Net Sales:

Consolidated 2005 net sales for the Company of $959.0 million were up $198.0 million, or 26.0%, versus 2004. Volume increased 6% and material price increases accounted for the balance of the year-over-year sales growth.

     Metals segment 2005 sales of $851.3 million were 26.8%, or $180.1 million, ahead of 2004. Volume increased 6% during 2005 and the balance of the sales growth was due to higher pricing. The aerospace, oil and gas, mining and construction equipment, and truck and railroad equipment sectors were especially robust.

     Plastics segment 2005 sales of $107.7 million were $17.9 million, or 19.9%, higher than 2004. Volume increased approximately 2% during 2005 while material price increases contributed the balance of year-over-year sales growth. The business experienced some softness in its retail point-of-purchase display and shelving markets during the third-quarter of 2005, affecting its year-over-year growth comparisons. The business rebounded back to historical levels by year-end 2005.

Consolidated 2005 cost of materials (exclusive of depreciation) increased $133.8 million or 24.6% versus 2004.

Other Operating Expenses and Operating Income:

On a consolidated basis, 2005 other operating expenses increased $24.5 million, or 13.2%, versus 2004 in support of higher overall customer demand. However, other operating expense declined as a percent of sales from 24.5% in 2004 to 22.0% in 2005, as the Company was able to leverage its sales growth.

     The Company’s “Other” operating segment includes expenses related to executive, financial and legal services that benefit both operating segments. The $2.6 million increase in expense as compared to the prior year is primarily attributable to long-term management incentive programs that were initiated in 2005.

     Total 2005 operating income of $71.2 million was $39.7 million, or 126.0%, ahead of 2004. Solid underlying demand coupled with a lower, previously restructured cost base, strengthened the Company’s operating profits. The Company’s 2005 operating profit margin increased to 7.4% from 4.1% in 2004.

Other Income and Expense, Income Taxes and Net Income:

Interest expense of $7.3 million in 2005 declined $1.6 million versus the prior year on lower overall borrowings and reduced interest rates, stemming from the Company’s debt refinancing in the second half of 2005. As part of the refinancing of its long-term notes in the fourth quarter of 2005, the Company recorded a $4.9 million pre-tax charge related to the early termination of its former note agreements.

     Income tax expense increased to $23.2 million in 2005 from $11.3 million in 2004 due to higher taxable income.

     Equity in earnings of the Company’s joint venture, Kreher Steel, was $4.3 million in 2005, as compared to $5.2 million in 2004. During 2004, Kreher’s product lines experienced escalating material costs as compared to declining material costs in 2005.

     Consolidated net income applicable to common stock of $37.9 million, or $2.11 earnings per diluted share in 2005 compared favorably to $14.5 million, or $0.82 per diluted share, in 2004.

Liquidity and Capital Resources

The Company’s primary sources of liquidity include cash generated from earnings and its use of available borrowing capacity to fund working capital needs and growth initiatives.

     Net cash from operating activities in 2006 was $29.8 million, driven by strong earnings; however, increased inventory levels to support the growth of the business along with higher payments for income taxes reduced net cash from operating activities when compared to the $57.9 million in cash generated in 2005.

     In 2006 the Company continued its concerted efforts to manage its investment in inventory. The following chart depicts the improvements in inventory turns, as measured by average days’ sales in inventory (“DSI”) since 2004.

		2006				2005				2004
Average DSI			116.7				119.3				120.3

     As a result of the acquisition of Transtar, accounts receivable increased $35.2 million, inventories increased $60.6 million, accounts payable increased $20.5 million and long-term deferred tax liabilities increased $28.7 million.

     In September 2006, the Company entered into a $210 million amended senior credit facility with its lending syndicate. This facility replaced the Company’s $82.0 million revolving credit facility entered into in July, 2005. The amended senior credit facility provides for (i) a $170 million revolving loan (the “U.S. Revolver”) to be drawn on by the Company from time to time, (ii) a $30 million term loan (the “U.S. Term Loan” and with the U.S. Revolver, the “U.S. Facility”) and (iii) a Cdn. $11.1 million revolving loan (approximately $9.9 million in U.S. dollars) (the “Canadian Facility”) to be drawn on by the Company’s Canadian subsidiary from time to time (collectively the “Amended Senior Credit Facility”). The revolving loans and term loans mature in 2011.

     The Company used the proceeds from the $30 million U.S. Term Loan and $117 million of the amount available under the U.S. Revolver along with approximately $30 million of cash on hand to finance the acquisition of Transtar. The year-over-year reduction in cash balances is primarily attributable to the use of cash on hand to fund a portion of the acquisition price.

     Available revolving credit capacity is primarily used to fund working capital needs. As of December 31, 2006, the Company had outstanding borrowings of $108.0 million under its U.S. Revolver and had availability of $54.7 million. There were no outstanding borrowings under the Canadian Facility.

     As of December 31, 2006, the Company remained in compliance with the covenants of its credit agreements, which require it to maintain certain funded debt-to-capital and working capital-to-debt ratios, and a minimum book value of equity, as defined in the Company’s credit agreements. A summary of covenant compliance is shown below.

						Actual
		Required				12/31/06
Debt-to-Capital Ratio (a)			< 0.55				0.43
Working Capital-to-Debt Ratio			> 1.00				1.43
Book Value of Equity (a)		$171.2 million				$237.2 million

     As of December 31, 2006, the Company had $12.0 million in outstanding trade acceptances with varying maturity dates ranging up to 120 days. The weighted average interest rate was 6.88%. A trade acceptance is a form of debt instrument having a definite maturity and obligation to pay and which has been accepted by an acknowledgement by the company upon whom it is drawn. As of December 31, 2006, the Company had $111.3 million of short-term debt which includes the $108 million revolver and excludes the $12.0 million in trade acceptances. See Note 9 to the consolidated financial statements for more information.

     In 2006, the Company reinstituted a dividend on its common stock. When combined with the dividend paid on the Company’s preferred stock, the Company paid $5.0 million in dividends in 2006 versus $1.0 million, on the preferred stock only, in 2005.

     Management believes the Company 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, fund future dividend payments and meet its debt obligations.

Capital Expenditures

Capital expenditures for 2006 were $12.9 million as compared to $8.7 million in 2005. During 2006, the expenditures included spending associated with the Company’s new Birmingham, Alabama facility ($3.3 million) and the Company’s ongoing business system replacement initiative ($2.3 million), along with typical equipment replacement and upgrades.

Contractual Obligations and Other Commitments:

At December 31, 2006, the Company’s contractual obligations, including estimated payments by period, were as follows: (dollars in thousands)

						Less				One to								More
						Than One				Three				Three to				Than Five
Payments Due In		Total				Year				Years				Five Years				Years
Long-Term Debt Obligations		$	101,383			$	12,055			$	28,802			$	25,305			$	35,221
Interest Payments on Debt Obligations (a)			30,708				6,818				10,915				6,851				6,124
Capital Lease Obligations			1,502				779				666				56				1
Operating Lease Obligations			67,795				15,006				25,071				16,311				11,407
Purchase Obligations (b)			226,415				218,018				8,397				—				—
Other (c)			6,319				6,319				—				—				—
Total		$	434,122			$	258,995			$	73,851			$	48,523			$	52,753

     The above table does not include $16.3 million of other non-current liabilities recorded on the Consolidated Balance Sheets, as summarized in Notes 4 and 5 to the consolidated financial statements. These non-current liabilities consist of liabilities related to the Company’s non-funded supplemental pension plan and postretirement benefit plans for which payment periods cannot be determined. Non-current liabilities also include the deferred gain on the sale of assets, which are principally the sale-leaseback transactions disclosed in Note 4 to the consolidated financial statements. The cash outflows associated with these transactions are included in the operating lease obligations above.

     The Company has a number of long-term contracts to purchase certain quantities of material with certain suppliers. In each case of such a long-term obligation, the Company has an irrevocable purchase agreement from its customer for the same amount of material over the same time period.

Pension Funding

The Company’s funding policy on its defined benefit pension plan is to satisfy the minimum funding requirements of Employee Retirement Income Security Act (“ERISA”). Future funding requirements are dependent upon various factors outside the Company’s control including, but not limited to, fund asset performance and changes in regulatory or accounting requirements. Based upon factors known and considered as of December 31, 2006, the Company does not anticipate any cash contributions to be made to the pension plans in 2007.

Off-Balance Sheet Arrangements

With the exception of letters of credit and sales-leaseback financing on certain equipment used in the operation of the business, it is not the Company’s general practice to use off-balance sheet arrangements, such as third-party special-purpose entities or guarantees to third parties.

     Obligations of the Company associated with its leased equipment are disclosed under the “Contractual Obligations and Other Commitments” section above.

     See Note 12 to the consolidated financial statements for more details on the Company’s outstanding letters of credit.

Critical Accounting Policies

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include amounts that are based on management’s estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. The following is a description of the Company’s accounting policies that management believes are the most important to understanding the Company’s financial results:

Inventory –Over ninety percent of the Company’s inventories are valued using the LIFO method. Under this method, the current value of materials sold is recorded as Cost of Materials 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 replacement 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 industries. 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 the Company’s 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. Note 5 to the consolidated financial statements disclose the assumptions used by management.

Goodwill and Other Intangible Assets Impairment – SFAS No. 142, “Goodwill and Other Intangible Assets”, establishes accounting and reporting standards for goodwill and other intangible assets. Under these standards, goodwill is not amortized, but rather is subject to an annual impairment test. The carrying value of the Company’s goodwill is evaluated annually during the first quarter of each fiscal year or when certain triggering events 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 deemed impaired. The equity valuation is based on historical data and management estimates of future cash flow. Since the estimates are forward looking, actual results could differ materially from those used in the valuation process.

The Company’s recorded intangible assets were substantially acquired as part of the Transtar acquisition and consist primarily of customer relationships. The initial values of the intangible assets were based on a discounted cash flow valuation using assumptions made by management as to future revenues from select customers, the level and pace of attrition in such revenues over time and assumed operating income amounts generated from such revenues. These intangible assets are amortized over their useful lives as estimated by management, which are generally 11 years for customer relationships. Furthermore, when certain conditions or certain triggering events occur, a separate test of impairment, similar to the impairment test for goodwill is performed and if the intangible asset is deemed impaired, such asset will be written down to its fair value.

Stock-Based Compensation — The Company offers stock-based compensation to executive and other key employees, as well as its directors. Stock-based compensation expense is recorded over the vesting period based on the grant date fair value of the stock award. For stock option grants, the Company determines the grant date fair value of the award utilizing a Black-Scholes valuation model based on assumptions of the risk-free interest rate, expected term of the option, volatility and expected dividend yield. See Note 10 to the consolidated financial statements for a discussion of the specific assumptions made by management. Stock-based compensation expense for the Company’s long-term incentive plan is recorded using the fair value based on the grant date market price of the Company’s common stock. In recording stock-based compensation expense for the long-term incentive plan, management also must estimate the probable number of shares which will ultimately vest. The actual number of shares that will vest may differ from management’s estimate.

Recent Accounting Pronouncements:

A description of recent other accounting pronouncements is included in Note 1 to the consolidated financial statements under the caption ”Significant Accounting Policies”.

ITEM 7a — Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to interest rate, commodity price, and foreign exchange rate risks that arise in the normal course of business.

     Interest Rate Risk — The Company finances its operations with fixed and variable rate borrowings. Market risk arises from changes in variable interest rates. Under its U.S. Revolver and Canadian Facility, the Company’s interest rate on borrowings is subject to changes in the LIBOR and Prime interest rate fluctuations. Based on the Company’s variable rate debt instruments at December 31, 2006, if interest rates were to increase hypothetically by 25 basis points, 2006 interest expense would have increased by approximately $0.2 million in 2006.

     Commodity Price Risk — The Company’s raw material costs are comprised primarily of 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 materials than in its selling prices.

     Foreign Exchange Rate Exposure — The Company conducts operations in foreign countries, including Canada, Mexico, France and the United Kingdom. However, changes in the value of the U.S. dollar as compared to foreign currencies would not have a material impact on the Company’s reported earnings.

ITEM 8 — Financial Statements and Supplementary Data

Consolidated Statements of Operations

		Year Ended December 31,
(Dollars in thousands, except per share data)		2006				2005				2004
Net sales		$	1,177,600			$	958,978			$	760,997
Costs and expenses:
Cost of materials (exclusive of depreciation)			839,234				677,186				543,426
Warehouse, processing and delivery expense			123,204				108,427				95,229
Sales, general, and administrative expense			109,407				92,848				82,142
Depreciation and amortization expense			13,290				9,340				8,751
Operating income			92,465				71,177				31,449
Interest expense, net (Note 9)			(8,302	)			(7,348	)			(8,968	)
Discount on sale of accounts receivable (Note 9)			—				(1,127	)			(969	)
Loss on extinguishment of debt (Note 9)			—				(4,904	)			—-
Income before income taxes and equity earnings of joint venture			84,163				57,798				21,512
Income taxes (Note 7)			(33,330	)			(23,191	)			(11,294	)
Net income before equity in earnings of joint venture			50,833				34,607				10,218
Equity in earnings of joint venture (Note 6)			4,286				4,302				5,199
Net income			55,119				38,909				15,417
Preferred stock dividends			(963	)			(961	)			(957	)
Net income applicable to common stock		$	54,156			$	37,948			$	14,460
Basic earnings per share		$	2.95			$	2.37			$	0.92
Diluted earnings per share		$	2.89			$	2.11			$	0.82

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

Consolidated Balance Sheets

		December 31,
(Dollars in thousands, except share and par value data)		2006				2005
Assets
Current assets
Cash and cash equivalents (Note 1)		$	9,526			$	37,392
Accounts receivable, less allowances of $3,112 in 2006 and $1,763 in 2005			160,999				107,064
Inventories (principally on last-in, first-out basis) (latest cost higher by $128,404 in 2006 and $104,036 in 2005) (Note 1)			202,394				119,306
Other current assets			18,743				6,351
Total current assets			391,662				270,113
Investment in joint venture (Note 6)			13,577				10,850
Goodwill (Note 8)			101,783				32,222
Intangible assets (Note 8)			66,169				70
Prepaid pension cost (Note 5)			5,681				41,946
Other assets			5,850				4,112
Property, plant and equipment, at cost (Note 1)
Land			5,221				4,772
Building			49,017				45,890
Machinery and equipment			141,090				127,048
			195,328				177,710
Less – accumulated depreciation			(124,930	)			(113,288	)
			70,398				64,422
Total assets		$	655,120			$	423,735
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable		$	117,561			$	103,246
Accrued payroll and employee benefits (Note 5)			15,168				12,241
Accrued liabilities			14,984				9,294
Income taxes payable			931				5,834
Deferred income taxes-current (Note 7)			16,339				1,218
Current portion of long-term debt (Note 9)			12,834				6,233
Short-term debt (Note 9)			123,261				—
Total current liabilities			301,078				138,066
Long-term debt, less current portion (Note 9)			90,051				73,827
Deferred income taxes (Note 7)			31,782				21,903
Deferred gain on sale of assets (Note 4)			5,666				5,967
Pension and postretirement benefit obligations (Note 5)			10,636				8,467
Commitments and contingencies (Notes 4 and 12)			—				—
Stockholders’ equity (Notes 10 and 11)
Preferred stock, $0.01 par value - 10,000,000 shares authorized; 12,000 shares issued and outstanding			11,239				11,239
Common stock, $0.01 par value - 30,000,000 shares authorized; 17,085,091 and 16,605,714 shares issued and outstanding in 2006 and 2005, respectively			170				166
Additional paid-in capital			69,775				60,916
Retained earnings			160,625				110,530
Accumulated other comprehensive income (loss) (Note 13)			(18,504	)			2,370
Deferred unearned compensation			(1,392	)			—
Treasury stock, at cost – 362,114 shares in 2006 and 546,065 shares in 2005			(6,006	)			(9,716	)
Total stockholders’ equity			215,907				175,505
Total liabilities and stockholders’ equity		$	655,120			$	423,735

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

Consolidated Statements of Cash Flows

		Year Ended December 31,
(Dollars in thousands)		2006				2005				2004
Cash flows from operating activities:
Net income		$	55,119			$	38,909			$	15,417
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			13,290				9,340				8,751
Amortization of deferred gain			(760	)			(498	)			(839	)
Loss on sale of facilities/equipment			94				73				701
Equity in earnings from joint venture			(4,286	)			(4,302	)			(5,199	)
Deferred tax provision			4,537				(2,046	)			7,072
Share-based compensation expense			4,485				4,174				1,460
Increase in minority interest			—				—				188
Excess tax benefits from stock-based payment arrangements			(1,186	)			(793	)			—
Increase (decrease) from changes in:
Accounts receivable			(19,678	)			(26,217	)			(24,126	)
Inventories			(22,521	)			16,742				(15,668	)
Other current assets			(2,570	)			2,186				(350	)
Other assets			722				(398	)			(133	)
Prepaid pension			1,920				316				(187	)
Accounts payable			7,882				9,702				24,351
Accrued payroll and employee benefits			(1,350	)			2,319				4,363
Income tax payable			(10,090	)			7,594				(1,377	)
Accrued liabilities			2,044				506				(1,053	)
Postretirement benefit obligations and other liabilities			2,165				271				249
Net cash from operating activities			29,817				57,878				13,621
Cash flows from investing activities:
Investments and acquisitions, net of cash acquired			(175,583	)			(236	)			(1,744	)
Dividends from joint ventures			1,623				1,915				2,228
Proceeds from sale of facilities/equipment			124				33				—
Capital expenditures			(12,935	)			(8,685	)			(5,318	)
Collection of note receivable			—				2,465				—
Net cash from investing activities			(186,771	)			(4,508	)			(4,834	)
Cash flows from financing activities:
Short-term debt			110,919				—				—
Proceeds from issuance of long-term debt			30,000				75,000				—
Repayment of long-term debt			(7,832	)			(96,271	)			(7,452	)
Payment of debt issuance fees			(3,156	)			—				—
Preferred stock dividends paid			(963	)			(961	)			(957	)
Common stock dividends paid			(4,061	)			—				—
Exercise of stock options			2,840				2,227				—
Excess tax benefits from stock-based payment arrangements			1,186				793				—
Net cash from financing activities			128,933				(19,212	)			(8,409	)
Effect of exchange rate changes on cash and cash equivalents			155				128				273
Net (decrease) increase in cash and cash equivalents			(27,866	)			34,286				651
Cash and cash equivalents — beginning of year			37,392				3,106				2,455
Cash and cash equivalents — end of year		$	9,526			$	37,392			$	3,106

See Note 1 to the consolidated financial statements for supplemental cash flow disclosures.

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

Consolidated Statement of Stockholders’ Equity

																																		Accumulated
																						Additional								Unearned				Other
		Common				Treasury				Preferred				Common				Treasury				Paid-in				Retained				Deferred				Comprehensive
(Dollars and shares in thousands)		Shares				Shares				Stock				Stock				Stock				Capital				Earnings				Compensation				Income				Total
Balance at January 1, 2004			15,788				(57	)		$	11,239			$	159			$	(245	)		$	43,367			$	58,122			$	(30	)		$	1,042			$	113,654
Comprehensive Income:
Net income																											15,417												15,417
Foreign currency translation																																			1,009				1,009
Minimum pension liability, net of tax benefit of $278																																			(435	)			(435	)
Total comprehensive income																																							15,991
Preferred stock dividend																											(957	)											(957	)
Exercise of stock options and other			18				(5	)															1,685								28								1,713
Balance at December 31, 2004			15,806				(62	)		$	11,239			$	159				($245	)		$	45,052			$	72,582				($2	)		$	1,616			$	130,401
Comprehensive Income:
Net income																											38,909												38,909
Foreign currency translation																																			1,151				1,151
Minimum pension liability, net of tax benefit of $254																																			(397	)			(397	)
Total comprehensive income																																							39,663
Preferred stock dividend																											(961	)											(961	)
Long-term incentive plan																							2,143																2,143
Exercise of stock options and other			800				(484	)							7				(9,471	)			13,721								2								4,259
Balance at December 31, 2005			16,606				(546	)		$	11,239			$	166				($9,716	)		$	60,916			$	110,530			$	0			$	2,370			$	175,505
Comprehensive Income:
Net income																											55,119												55,119
Foreign currency translation																																			66				66
Minimum pension liability, net of tax expense of $206																																			322				322
Total comprehensive income																																							55,507
Adjustment to initially apply SFAS No. 158, net of tax benefit of $13,611																																			(21,262	)			(21,262	)
Preferred stock dividend																											(963	)											(963	)
Common stock dividend																											(4,061	)											(4,061	)
Long-term incentive plan																							3,209																3,209
Exercise of stock options and other			479				184								4				3,710				5,650								(1,392	)							7,972
Balance at December 31, 2006			17,085				(362	)		$	11,239			$	170				($6,006	)		$	69,775			$	160,625				($1,392	)			($18,504	)		$	215,907

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

A. M. Castle & Co.
Notes to Consolidated Financial Statements
December 31, 2006

(1) Significant Accounting Policies

Nature of operations—A.M. Castle & Co. and subsidiaries (the “Company”) distribute specialty metals and plastics to customers globally from operations in North America, France and the United Kingdom. The Company provides a broad range of product inventories as well as value-added processing services to a wide array of customers, principally within the producer durable equipment sector of the economy.

Basis of presentation—The consolidated financial statements include the accounts of A. M. Castle & Co. and its subsidiaries over which the Company exhibits a controlling interest. The equity method of accounting is used for the Company’s 50% owned joint venture, Kreher Steel Company, LLC. All inter-company accounts and transactions have been eliminated.

Use of estimates—The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The principal areas of estimation reflected in the consolidated financial statements are sales returns and allowances, inventory, goodwill and intangible assets, income taxes, contingencies and litigation, and defined benefit retirement plans.

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. Revenue derived from consigned inventories at customer locations for 2006 was $19.6 million (or 1.7% of sales) compared to $11.9 million in 2005 (or 1.2% of 2005 sales) and $9.5 million or 1.2% of sales in 2004. Inventory on consignment at customers as of December 31, 2006 was $4.4 million, or 2.2% of consolidated net inventory and $1.5 million or 1.2% as of December 31, 2005 as reported on the Company’s consolidated balance sheets. Provisions for discounts and rebates to customers, and returns are recorded in the same period the related sales are recorded.

Cost of materials—Cost of materials consists of the costs the Company pays for metals, plastics and related inbound freight charges. It excludes depreciation and amortization which are included in Other operating expenses. The Company accounts for inventory on a last-in, first-out (“LIFO”) basis and LIFO adjustments are recorded to cost of materials. LIFO adjustments are calculated as of December 31 of each year. Interim estimates of the year-end charge or credit are determined based on inflationary or deflationary purchase cost trends and estimated year-end inventory levels. Interim LIFO estimates may require significant year-end adjustments. See Note 14 to the consolidated financial statements for further details of such adjustments.

Other operating expenses—Other operating expenses primarily consist of (1) warehousing, processing and delivery expenses, which include occupancy costs, compensation and employee benefits for warehouse personnel, processing, shipping and handling costs; (2) selling expenses, which include compensation and employee benefits for sales personnel, (3) general and administrative expenses, which include compensation for executive officers and general management, expenses for professional services primarily attributable to accounting and legal advisory services, data communication and computer hardware and maintenance; and (4) depreciation and amortization expenses, which include depreciation for all owned property and equipment and amortization of various long-lived intangible assets.

Cash and cash equivalents—Short-term investments that have an original maturity, at the time of purchase, of 90 days or less are considered cash and cash equivalents.

Statement of cash flows—The Company had non-cash financing activities for the years ended December 31, 2006, 2005 and 2004, which included the receipt of shares of the Company’s common stock tendered in lieu of cash by employees exercising stock options. The tendered shares had a value of less than $0.1 million in 2006 (1,620 shares), $9.4 million in 2005 (509,218 shares) and $0.1 million in 2004 (5,657 shares), and were recorded as treasury stock. In 2006, the Company also contributed shares of treasury stock to its profit sharing plan totaling $2.7 million and assumed debt as part of the acquisition discussed in Note 2.

Supplemental Disclosures of Consolidated Cash Flow Information—

		Year Ended December 31,
(Dollars in thousands)		2006				2005				2004
Cash paid during the year for—
Interest		$	9,041			$	8,365			$	8,910
Income taxes		$	38,871			$	16,860			$	6,331

Inventories— Over ninety percent of the Company’s inventories are stated at the lower of LIFO cost or market. The Company values its LIFO increments using the costs of its latest purchases during the years reported. In 2005 certain inventory quantity reductions caused a liquidation of LIFO inventory values. The liquidation increased pre-tax income by $2.8 million in 2005.

Insurance plans—The Company is self-insured for a portion of its worker’s compensation and automobile insurance liabilities. 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.

Property, plant and equipment—Property, plant and equipment are stated at cost and include assets held under capital leases. Major renewals and betterments are capitalized, while maintenance and repairs that do not substantially improve or extend the useful lives of the respective assets are expensed currently. When items are disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income. The Company provides for depreciation of plant and equipment sufficient to amortize the cost of properties over their estimated useful lives (buildings and building improvements — 12 to 40 years; machinery and equipment – 5 to 20 years). For assets classified as machinery and equipment, lives used for calculating depreciation expense are from 10 to 20 years for manufacturing equipment, 10 years for furniture and fixtures, and 5 years for vehicles and office equipment. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining term of the lease. Depreciation is recorded using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Depreciation expense for 2006, 2005 and 2004 was $11.1 million, $9.3 million and $8.8 million, respectively.

Long-lived assets—The Company’s long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Goodwill and intangible assets—Goodwill is not amortized, but rather is subject to an annual impairment test, which can be more frequent when certain triggering events occur. The Company performs an annual impairment test on goodwill during the first quarter of each fiscal year. Intangible assets are amortized over their useful lives as estimated by management, which are generally 11 years for customer relationships and 3 years for non-compete agreements. When conditions or certain triggering events occur, a separate test of impairment, similar to the impairment test for goodwill is performed and if the intangible asset is deemed impaired, such intangible asset is written down to its fair value.

Income taxes—The Company accounts for income taxes using the asset and liability method. Deferred income taxes reflect the net tax effect, using enacted tax rates of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The Company records valuation allowances against its deferred tax assets when it is more likely than not that the amounts will not be realized. Income tax expense includes provisions for amounts that are currently payable, and changes in deferred tax assets and liabilities.

Foreign currency translation—For all non-U.S. operations, the functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using year-end exchange rates, and income and expenses are translated using the average exchange rates for the reporting period. In accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation”, translation adjustments are deferred in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Gains or losses resulting from foreign currency transactions were not material in 2006, 2005 or 2004.

Earnings per share—The Company’s preferred stock participates in dividends paid on the Company’s common stock on an “if converted” basis. In accordance with Emerging Issues Task Force Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share”, basic earnings per share is computed by applying the two-class method to compute earnings per share. The two-class method is an earnings allocation method under which earnings per share is calculated for each class of common stock and participating security considering both dividends declared and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock plus common stock equivalents. Common stock equivalents consist of stock options, restricted stock awards and convertible preferred stock shares, which 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 diluted earnings per share calculations for 2006, 2005 and 2004:

(dollars and shares in thousands,
except per share data)		2006				2005				2004
Numerator:
Net income		$	55,119			$	38,909			$	15,417
Preferred stock dividends paid			(963	)			(961	)			(957	)
Undistributed earnings		$	54,156			$	37,948			$	14,460
Undistributed earnings attributable to:
Common stockholders		$	49,831			$	37,948			$	14,460
Preferred stockholders, as if converted			4,325				—				—
Total undistributed earnings		$	54,156			$	37,948			$	14,460
Denominator:
Denominator for basic earnings per share:
Weighted average common shares outstanding			16,907				16,033				15,795
Effect of dilutive securities:
Outstanding employee and directors’ common stock options and restricted stock			360				593				1,253
Convertible preferred stock			1,794				1,794				1,794
Denominator for diluted earnings per share			19,061				18,420				18,842
Basic earnings per share		$	2.95			$	2.37			$	0.92
Diluted earnings per share		$	2.89			$	2.11			$	0.82
Outstanding employees and directors common stock options and restricted and convertible preferred stock shares having no dilutive effect			20				53				956

Concentrations—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, Mexico, France and the United Kingdom. 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 customer accounting for more than 3% of total 2006 net sales. Approximately 90% of the Company’s business is conducted in the United States with the remainder of the sales generated by the Company’s operations in Canada, Mexico, France and the United Kingdom.

Share-based compensation—The Company records share-based compensation expense ratably over the award vesting period based on the grant date fair value of share-based compensation awards.

New Accounting Standard Adopted — In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”, which was an amendment of SFAS No. 87, 88, 106 and 132(R). Among other items, SFAS No. 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financial statements, requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. The Company adopted SFAS No. 158 effective December 31, 2006 and the incremental effect of applying it on individual line items on our consolidated balance sheet as of December 31, 2006 is as follows (dollars in thousands):

		Before								After
		Application of								Application of
		SFAS No. 158				Adjustments				SFAS No. 158
Prepaid pension costs		$	38,126			$	(32,445	)		$	5,681
Total assets			687,565				(32,445	)			655,120
Pension and postretirement benefit obligations			8,208				2,428				10,636
Deferred income taxes, current and non-current			61,732				(13,611	)			48,121
Accumulated other comprehensive loss			2,758				(21,262	)			(18,504	)
Total stockholders’ equity			237,169				(21,262	)			215,907
Total liabilities and stockholders’ equity			687,565				(32,445	)			655,120