SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 29, 1996
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or
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File No. 0-24492
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CITATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-0828225
(STATE OF INCORPORATION) (IRS EMPLOYER I.D. NO.)
2 Office Park Circle, Suite 204
Birmingham, Alabama 35223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(205) 871-5731
(REGISTRANT'S TELEPHONE NUMBER)
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Indicate by check mark whether the registrant has (1) 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
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Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at February 11, 1997
- --------------------------------- --------------------------------
Common Stock, $.01 Par Value 17,726,040
INDEX
Page No.
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements. . . . . . . . . . . . . . . . . . . . . .1
Interim Condensed Consolidated Balance Sheets. . . . . . .2
Interim Condensed Consolidated Statements of Income. . . .3
Interim Condensed Consolidated Statements of Cash Flows. .4
Notes to Interim Condensed Consolidated
Financial Statements . . . . . . . . . . . . . . . . . . .5
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . .9
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . .12
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The financial statements listed below are included on the following pages
of this Report on Form 10-Q:
Interim Condensed Consolidated Balance Sheets at September 29, 1996
and December 29, 1996 (unaudited).
Interim Condensed Consolidated Statements of Income (unaudited) for
the three months ended December 31, 1995 and December 29, 1996.
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended December 31, 1995 and December 29, 1996.
Notes to Interim Condensed Consolidated Financial Statements.
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1
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
September 29,1996 December 29, 1996
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ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,267 $ 2,185
Accounts receivable, net 77,931 82,279
Inventories 39,478 46,792
Deferred income taxes, prepaid expenses and
other assets 15,683 9,322
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Total current assets 135,359 140,578
Property, plant and equipment, net 199,367 267,043
Other assets 48,831 51,552
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$ 383,557 $ 459,173
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 8,328 $ 5,878
Current portion of other long-term debt 2,654 3,123
Accounts payable 33,668 34,381
Accrued expenses 28,205 31,026
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Total current liabilities 72,855 74,408
Long-term debt, net of current portion 140,946 194,524
Deferred income taxes and other deferred liabilities 20,437 37,420
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Total liabilities 234,238 306,352
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Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized, none issued and outstanding -- --
Common stock, $0.01 par value; 30,000,000
shares authorized, 17,715,540 shares issued
and outstanding at September 29, 1996, and
17,721,040 at December 29, 1996 177 177
Additional paid-in capital 107,087 107,115
Retained earnings 42,055 45,529
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Total stockholders' equity 149,319 152,821
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$ 383,557 $ 459,173
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See notes to interim condensed consolidated financial statements.
2
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except share and per share data)
For the Three Months Ended
December 31, 1995 December 29, 1996
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(unaudited) (unaudited)
Net sales $ 91,761 $ 140,486
Costs of sales 75,901 118,360
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Gross profit 15,860 22,126
Selling, general and administrative expenses 9,956 12,805
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Operating income 5,904 9,321
Other (income) expenses:
Interest expense, net 789 3,517
Other, net (99) 109
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690 3,626
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Income before provision for income taxes 5,214 5,695
Provision for income taxes 2,086 2,221
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Net income $ 3,128 $ 3,474
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Earnings per share $ 0.18 $ 0.20
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Weighted average shares outstanding 17,675,540 17,718,491
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See notes to interim condensed consolidated financial statements.
3
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months Ended
December 31, 1995 December 29, 1996
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CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income $ 3,128 $ 3,474
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Adjustments to reconcile net income to net cash flows
from operating activities:
Provision for losses on receivables 48 66
Depreciation and amortization 3,743 7,039
Changes in operating assets and liabilities, net:
Accounts receivable 3,736 7,523
Inventories (889) 986
Prepaid expenses and other assets (972) 5,806
Accounts payable (2,769) (5,047)
Accrued expenses and other liabilities (1,532) (3,341)
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Total adjustments 1,365 13,032
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Net cash provided by operating activities 4,493 16,506
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures, net (7,702) (7,009)
Proceeds from sale of Penn Steel 9,006
Cash paid for acquisition (47,780)
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Net cash used by investing activities (7,702) (45,783)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (2,223)
Repayments of acquired debt (16,340)
Change in long-term debt, note payable and other liabilities (6,600) 47,730
Change in paid in capital -- 28
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Net cash provided by (used in) financing activities (6,600) 29,195
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Net decrease in cash and cash equivalents (9,809) (82)
Cash and cash equivalents, beginning of period 9,812 2,267
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Cash and cash equivalents, end of period $ 3 $ 2,185
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See notes to interim condensed consolidated financial statements.
4
CITATION CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
1. The interim condensed consolidated balance sheet at September 29, 1996, has
been derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles (GAAP).
The interim condensed consolidated financial statements at December 29,
1996 and for the three months ended December 31, 1995 and December 29,
1996 are unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring accruals necessary for a fair
presentation, have been included. These financial statements should be
read in conjunction with the 1996 annual report on SEC Form 10-K.
2. A summary of inventories is as follows:
September 29, December 29,
1996 1996
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Raw materials $ 8,872 $ 11,395
Supplies and containers 9,817 10,114
Castings 20,789 25,283
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$ 39,478 $ 46,792
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3. Balances of major classes of property, plant and equipment and accumulated
depreciation are as follows:
September 29, December 29,
1996 1996
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Land and improvements $ 7,166 $ 10,244
Buildings 37,316 46,898
Plant and equipment 195,370 236,019
Office equipment 9,230 10,897
Transportation equipment 8,788 9,823
Construction in progress 8,403 25,376
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266,273 339,257
Less accumulated depreciation (66,906) (72,214)
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$ 199,367 $ 267,043
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5
4. The Company's other assets consist of the following:
September 29, December 29,
1996 1996
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Goodwill $ 45,704 $ 45,441
Consulting and non-competition
agreements 1,893 1,779
Other 1,234 4,332
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$ 48,831 $ 51,552
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5. Long term debt consists of the following:
September 29, December 29,
1996 1996
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Note payable $ 133,055 $ 182,000
Industrial development bonds 1,085 1,035
Other financing arrangements 9,460 14,612
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$ 143,600 $ 197,647
Less current portion of
long-term debt 2,654 3,123
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$ 140,946 $ 194,524
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6. The following unaudited pro forma summary for the three months ended
December 31, 1995 combines the results of operations of the Company
with the acquisition of Texas Steel Company ("Texas Steel"), Hi-Tech
Corporation ("Hi-Tech"), Southern Aluminum Castings Company ("Southern
Aluminum"), Bohn Aluminum Corporation ("Bohn"), Interstate Forging
Industries, Inc. ("Interstate"), the sale of Pennsylvania Steel Foundry
& Machine Company ("Penn Steel"), and the idling of the steel division
operations at Texas Foundries as if the acquisitions, sale and idling
had occurred at the beginning of the 1996 fiscal year. For the three
months ended December 29, 1996, the pro forma summary presents the
results of operations of the Company as if the acquisition of Interstate
and the sale of Penn Steel had occurred at the beginning of the 1997
fiscal year. Certain adjustments, including additional depreciation
expense, interest expense on the acquisition debt, amortization of
intangible assets and income tax effects, have been made to reflect the
impact of the purchase transactions. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions, sale and
idling been made at the beginning of either fiscal years 1996 or 1997,
or of results which may occur in the future.
6
Pro forma interim condensed consolidated statements of income are as
follows:
For the Three Months Ended
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December 31, December 29,
1995 1996
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Sales $ 133,065 $ 149,633
Operating income 9,449 10,297
Income before provision for income taxes 6,144 6,219
Pro forma net income 3,686 3,794
Pro forma earnings per common share 0.21 0.21
Pro forma earnings per share for the three months ending December 31, 1995
and December 29, 1996 is calculated by dividing pro forma net income by the
weighted average shares outstanding of 17,675,540 and 17,718,491,
respectively.
7. On October 31, 1996, the Company completed the sale of Penn Steel. The
sales price was based on the book value of Penn Steel at October 31, 1996
less $600. The Company recorded a one-time pre-tax loss of $1,807 in the
consolidated statement of income for the year ended September 29, 1996
based on its estimate of the October 31, 1996 book value of Penn Steel.
The actual book value for purposes of this calculation is subject to
negotiation by both parties to the agreement. The agreement states that if
the parties do not agree on the book value of Penn Steel, the disagreement
will be resolved through negotiation between the chief executive officers
of the purchaser and the Company.
8. Effective October 29, 1996 the Company completed the purchase of the stock
of Interstate Forging Industries, Inc. ("Interstate") of Milwaukee,
Wisconsin and Navasota, Texas for $47.8 million plus the assumption of
approximately $22.7 million of Interstate's debt. In addition, the
agreement includes contingent payments equal to five (5) times the amount
by which the average annual net earnings of Interstate before interest,
income taxes and franchise taxes during the three year period from January
1, 1996 through December 31, 1998 exceeds $10,000, computed in accordance
with GAAP on a pre-merger basis. This acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase
price has been allocated to the assets and liabilities of Interstate based
on their estimated fair values at the date of acquisition. Operating
results of Interstate since October 29, 1996 are included in the Company's
condensed consolidated financial statements. Interstate, which produces
custom closed die forgings of carbon, alloy, and stainless steel, has
approximately 500 employees and had annual sales for the
7
years ended December 31, 1995 and 1996 of approximately $83.4 million and
$103.7 million, respectively. The estimated fair values of assets acquired
and liabilities assumed are as follows:
Accounts receivable $ 15,161
Inventories 12,946
Property, plant and equipment 72,559
Other assets 3,014
Accounts payable and accrued expenses (18,819)
Deferred income taxes (14,424)
Long-term debt (22,657)
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Purchase Price $ 47,780
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8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying interim condensed
consolidated balance sheets and statements of income.
QUARTER ENDED DECEMBER 29, 1996 COMPARED TO THE QUARTER ENDED DECEMBER 31, 1995
SALES. Sales increased 53.1%, or $48.7 million, to $140.5 million for the three
months ended December 29, 1996 from $91.8 million in the comparable prior year
period. The increase was attributable to fiscal year 1996 and 1997
acquisitions, all of which were made subsequent to the 1996 first quarter.
Sales at Texas Steel, Hi-Tech, Southern Aluminum, Bohn Aluminum, and Interstate
(collectively the "Acquisitions") in the fiscal 1997 first quarter were
approximately $57.1 million. Sales from the Acquisitions were partially offset
by lower sales at the Company's existing foundry operations, the sale of Penn
Steel during the first quarter of fiscal 1997 and the idling of the Texas
Foundries steel division ("TF Steel") during the last quarter of fiscal 1996.
For the three months ended December 29, 1996, sales from existing units were
down approximately 1.6%, or $1.3 million as compared to the same quarter last
year. The total sales of Penn Steel and TF Steel that were included in the
first fiscal quarter of 1996 was approximately $7.1 million. Tons shipped
increased 25.5% or 12,400 tons, to 61,000 tons for the three months ended
December 29, 1996 from 48,600 tons in the comparable prior year period.
GROSS PROFIT. Gross profit increased 39.5%, or $6.2 million, to $22.1 million
in the 1997 first quarter from $15.9 million in the comparable 1996 period.
Gross margin decreased to 15.8% in the 1997 first quarter from 17.3% in the 1996
first quarter. The overall decrease was due to the integration of the
Acquisitions. The gross margin for the Acquisitions included in the first
quarter of fiscal 1997 was approximately 12.0%. The gross margin from existing
units decreased to 18.4% in the 1997 first quarter from 18.9% in the comparable
prior year period. Penn Steel and TF Steel had a combined negative gross margin
of (1.6%) in the first fiscal quarter of 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses ("SG&A") increased 28.6%, or $2.8 million, to $12.8
million in the 1997 first quarter from $10.0 million in the 1996 first quarter.
SG&A costs attributable to the Acquisitions were $3.9 million. SG&A costs at
existing Company operations were down approximately $230 thousand. SG&A costs
included in the first fiscal quarter of 1996 related to Penn Steel and TF Steel
were approximately $770 thousand. As a percentage of sales, SG&A expenses
decreased to 9.1% in the 1997 first quarter from 10.9 % in the 1996 first
quarter.
OPERATING INCOME. Operating income increased 57.9%, or $3.4 million, to $9.3
million for the 1997 first quarter from $5.9 million for the comparable 1996
quarter. Operating margin increased to 6.6% in the 1997 first quarter from 6.4%
in the 1996 first quarter.
9
INTEREST EXPENSE. Interest expense increased to $3.5 million in the 1997 first
quarter from $789 thousand in the 1996 first quarter. This increase is
primarily attributable to higher average outstanding debt balances as a result
of completing five acquisitions during the second and third quarters of 1996 and
the first quarter of 1997. The purchase price plus assumed debt of the
acquisitions totalled approximately $142.3 million. Capitalized interest for
the first fiscal quarter of 1996 was approximately $380 thousand. There was no
capitalized interest during the first fiscal quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
On July 1, 1996, the Company executed a new primary credit facility with a
consortium of banks, led by the National Bank of Detroit (NBD), to borrow up to
$230,000 to be used for working capital purposes and to fund future
acquisitions. The facility expires on July 31, 1998 and is collateralized by
substantially all of the assets of the Company as well as the stock of its
subsidiaries. The facility consists of a swing line of credit bearing interest
at prime, and revolving credit borrowings which bear interest at LIBOR plus a
margin based on the Company's leverage ratio, as defined in the credit agreement
as amended, at the time of the borrowing. The facility calls for a commitment
fee payable quarterly, in arrears, of 0.25% based on the daily unused portion.
The total balance outstanding under this credit facility was $133,055 and
$182,000 at September 29, 1996 and December 29, 1996, respectively.
As of September 29, 1996, the Company had $3,055 outstanding under the swing
line of credit at the prime rate of 8.25%. There were no outstanding borrowings
under the swing line of credit at December 29, 1996. The $182,000 outstanding
at December 29,1996 under this facility related to five revolving loans. The
Company had $30,000, $60,000 and $52,000 outstanding under these loans at
interest rates of 7.31%, 7.14% and 7.06% which reprice on January 2, 1997,
February 3, 1997 and May 5, 1997, respectively. The Company has entered into
two $20,000 five-year interest rate swap agreements establishing fixed interest
rates for the remaining $40,000 of debt outstanding under the credit facility.
These agreements are repriced every 90 days and expire in August 2001. The
agreements have fixed interest rates plus a margin of 1.0% to 2.0%, based on the
Company's leverage ratio on the dates the agreements are priced. The Company's
fixed interest rates were 8.34% and 8.16% under these two agreements at December
29, 1996. Subsequent to December 29,1996, these two interest rate swap
agreements were repriced at fixed rates of 8.59% and 8.41%. The Company has
entered into an additional $40,000 swap agreement effective February 3, 1997
with a fixed interest rate of 8.35%. The Company is exposed to credit risk in
the event of nonperformance by the counterparty to the interest rate swap
agreements. The Company mitigates credit risk by dealing with financially sound
U.S. banks. Accordingly, the Company does not anticipate loss for
nonperformance by these counterparties.
The Company's primary sources of working capital are cash flows from operating
activities, equity offerings and borrowings under the above mentioned credit
facility. Primary uses of working capital are the funding of operations,
capital expenditures and acquisitions.
10
ACQUISITIONS
Note 8 of the interim condensed consolidated financial statements included
elsewhere in this report describes recently announced acquisitions.
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PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.2(t) First Amendment to Credit Agreement and Waiver and
Consent dated October 28, 1996 among Citation
Corporation and certain of its subsidiaries, NBD
Bank as Agent Bank and other syndicate banks
Exhibit 27 Financial Data Schedule, submitted to the
Securities and Exchange Commission in electronic
format
(b) Reports on Form 8-K:
On November 12, 1996, the Company filed a report on Form 8-K with
respect to events occurring on October 29, 1996, to report the
acquisition of Interstate Forging Industries, Inc. The following
financial statements and pro forma information were filed as a part
of the report:
Financial Statements of business acquired:
Report of Independent Public Accountants
Balance Sheets at December 31, 1995 and January 1, 1995
Statements of Income and Retained Earnings for the years ended
December 31, 1995, January 1, 1995 and January 2, 1994
Statements of Cash Flow for the years ended December 31, 1995,
January 1, 1995 and January 2, 1994
Notes to the Financial Statements
Pro forma financial information:
Pro Forma Combined Balance Sheet at June 30, 1996
Pro Forma Statements of Income for the twelve months ended
October 1, 1995 and for the nine months ended
June 30, 1996 (unaudited)
Notes to the Pro Forma Combined Financial Statements (unaudited)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: CITATION CORPORATION
February 11, 1997 /s/ T. Morris Hackney
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T. MORRIS HACKNEY
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
February 11, 1997 /s/ Frederick F. Sommer
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FREDERICK F. SOMMER
President and Chief Operating Officer
February 11, 1997 /s/ R. Conner Warren
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R. CONNER WARREN
Executive Vice President of Finance and
Administration and Treasurer
(Principal Financial Officer)
February 11, 1997 /s/ Thomas W. Burleson
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THOMAS W. BURLESON
Vice President-Controller and Assistant Secretary
(Principal Accounting Officer)
13