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 March 29, 1998
---------------
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________
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)
- --------------------------------------------------------------------------------
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
-------- ________
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1998
- ----------------------------- ----------------------------
Common Stock, $.01 Par Value 17,885,113
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.................... 11
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders........ 16
ITEM 6: Exhibits and Reports on Form 8-K........................... 16
SIGNATURES....................................................... 17
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 28, 1997
and March 29, 1998 (unaudited).
Interim Condensed Consolidated Statements of Income (unaudited) for
the three months and six months ended March 30, 1997 and March 29,
1998.
Interim Condensed Consolidated Statements of Cash Flows (unaudited)
for the six months ended March 30, 1997 and March 29, 1998.
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 28, 1997 MARCH 29, 1998
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,645 $ 2,278
Accounts receivable, net 93,542 105,652
Inventories 48,953 52,005
Deferred income taxes, prepaid expenses and
other assets 15,363 19,282
-------- --------
Total current assets 160,503 179,217
Property, plant and equipment, net 282,991 308,106
Other assets 49,802 66,265
-------- --------
$493,296 $553,588
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 4,211 $ 8,952
Current portion of long-term debt 2,994 2,609
Accounts payable 43,256 43,220
Accrued expenses 43,496 49,736
-------- --------
Total current liabilities 93,957 104,517
Long-term debt, net of current portion 181,239 214,658
Deferred income taxes and other deferred liabilities 45,461 47,803
-------- --------
Total liabilities 320,657 366,978
-------- --------
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, 17,759,600 and 17,864,613
shares issued and outstanding at September 28,
1997 and March 29,1998, respectively 177 178
Additional paid-in capital 107,243 107,690
Retained earnings 65,219 78,742
-------- --------
Total stockholders' equity 172,639 186,610
-------- --------
$493,296 $553,588
======== ========
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 For the Six Months Ended
March 30, March 29, March 30, March 29,
1997 1998 1997 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ 170,435 $ 193,091 $ 310,921 $ 363,314
Costs of sales 140,853 159,001 259,213 302,226
----------- ----------- ----------- -----------
Gross profit 29,582 34,090 51,708 61,088
Selling, general and administrative
expenses 15,290 16,687 28,095 32,225
----------- ----------- ----------- -----------
Operating income 14,292 17,403 23,613 28,863
Other (income) expenses:
Interest expense, net 3,836 3,700 7,353 6,925
Other, net (18) (74) 91 (231)
----------- ----------- ----------- -----------
3,818 3,626 7,444 6,694
----------- ----------- ----------- -----------
Income before provision for income
taxes 10,474 13,777 16,169 22,169
Provision for income taxes 4,085 5,373 6,306 8,646
----------- ----------- ----------- -----------
Net income $ 6,389 $ 8,404 $ 9,863 $ 13,523
=========== =========== =========== ===========
Earnings per share - basic (note 6) $ 0.36 $ 0.47 $ 0.56 $ 0.76
=========== =========== =========== ===========
Weighted average shares outstanding-
basic (note 6) 17,724,996 17,803,366 17,721,743 17,792,346
=========== =========== =========== ===========
Earnings per share - diluted (note 6) $ 0.36 $ 0.47 $ 0.55 $ 0.75
=========== =========== =========== ===========
Weighted average shares outstanding-
diluted (note 6) 17,891,022 18,051,353 17,862,231 18,031,138
=========== =========== =========== ===========
See notes to interim condensed consolidated financial statements.
3
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Six Months Ended
MARCH 30, MARCH 29,
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income $ 9,863 $ 13,523
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 38 177
Depreciation 13,017 15,420
Amortization 1,565 2,136
Changes in operating assets and liabilities, net:
Accounts receivable (4,462) (6,644)
Inventories (342) (1,325)
Prepaid expenses and other assets 6,646 (2,739)
Accounts payable (1,002) (3,606)
Accrued expenses and other liabilities 5,329 2,970
-------- --------
Total adjustments 20,789 6,389
-------- --------
Net cash provided by operating activities 30,652 19,912
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (17,189) (25,702)
Proceeds from sale of Penn Steel 9,006 --
Cash paid for acquisitions (47,780) (30,179)
-------- --------
Net cash used by investing activities (55,963) (55,881)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (4,224) 4,741
Repayments of acquired debt (16,340) (2,621)
Change in credit facility and other financing
arrangements, net 46,957 33,034
Change in paid in capital 72 448
-------- --------
Net cash provided by financing activities 26,465 35,602
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS FOR THE PERIOD 1,154 (367)
Cash and cash equivalents, beginning of period 2,267 2,645
-------- --------
Cash and cash equivalents, end of period $ 3,421 $ 2,278
======== ========
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 of Citation Corporation
(the "Company") at September 28, 1997 has been derived from audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles. The interim
condensed consolidated financial statements at March 29, 1998, and for the
three and six months ended March 30, 1997 and March 29, 1998 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 Company's 1997 annual report on SEC Form 10-K.
Recently Issued Accounting Standards. During the first quarter, the
Company adopted SFAS No. 128, Earnings Per Share, which specifies
computation, presentation, and disclosure requirements for EPS. SFAS No.
128 requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and
denominator of the basic EPS computation to that of the diluted computation
(see Note 6).
The Company also is required to adopt during fiscal 1998, SFAS No. 129,
Disclosure of Information about Capital Structure. It contains no change
in disclosure requirements for public entities that were previously subject
to the requirements of Accounting Principles Board No. 10 and No. 15 and
SFAS No. 47. As a result, SFAS No. 129 will not have an impact on the
Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be required. In February
1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits, which revises employers' disclosures
about pension and other postretirement benefit plans. The Company is
required to adopt these statements in fiscal year 1999. The impact of
these pronouncements on the Company is currently being evaluated and is not
expected to be material.
2. A summary of inventories is as follows:
September 28, March 29,
1997 1998
------------- ---------
Raw materials $10,981 $10,469
Supplies and containers 12,478 13,356
Finished goods 25,494 28,180
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$48,953 $52,005
======= =======
5
3. Balances of major classes of assets and accumulated depreciation are as
follows:
September 28, March 29,
1997 1998
------------ ----------
Land and improvements $ 11,096 $ 11,660
Buildings 50,217 55,332
Plant equipment 267,607 293,716
Office equipment 11,797 13,299
Transportation equipment 10,527 12,650
Construction in progress 23,149 27,833
-------- ---------
374,393 414,490
Less accumulated depreciation (91,402) (106,384)
-------- ---------
$282,991 $ 308,106
======== =========
4. The Company's other assets consist of the following:
September 28, March 29,
1997 1998
------------- ---------
Goodwill $46,161 $62,642
Consulting and non-competition
agreements 1,178 865
Other 2,463 2,758
------- -------
$49,802 $66,265
======= =======
5. Long-term debt consists of the following:
September 28, March 29,
1997 1998
------------- ---------
Credit facility $170,393 $205,000
Industrial development bonds 900 796
Other financing arrangements 12,940 11,471
-------- --------
184,233 217,267
Less current portion of long-term debt 2,994 2,609
-------- --------
$181,239 $214,658
======== ========
6
6. Earnings per share ("EPS")
Quarter Ended March 30, 1997
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $6,389 17,724,996 $0.36
Effect of dilutive common
shares:
Weighted average stock options
outstanding 657,890
Less:
Stock options - assumed buyback (1) (331,018)
Stock options - antidilutive (3) (160,846)
----------- ------------- --------
EPS - diluted $6,389 17,891,022 $0.36
====== ========== =====
Six Months Ended March 30, 1997
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $9,863 17,721,743 $0.56
Effect of dilutive common
shares:
Weighted average stock options
outstanding 660,220
Less:
Stock options - assumed buyback (2) (359,809)
Stock options - antidilutive (3) (159,923)
------ ---------- -----
EPS - Diluted $9,863 17,862,231 $0.55
====== ========== =====
7
Quarter Ended March 29, 1998
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $8,404 17,803,366 $0.47
Effect of dilutive common
shares:
Weighted average stock options
outstanding 771,150
Less:
Stock options - assumed buyback (1) (523,163)
Stock options - antidilutive (3) --
------ ---------- -----
EPS - diluted $8,404 18,051,353 $0.47
====== ========== =====
Six Months Ended March 29, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $13,523 17,792,346 $0.76
Effect of dilutive common
shares:
Weighted average stock options
outstanding 704,785
Less:
Stock options - assumed buyback (2) (465,993)
Stock options - antidilutive (3) --
----------
EPS - diluted $13,523 18,031,138 $0.75
======= ========== =====
(1) The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the
period, as if exercised, by the average common market share price during
the period. The average common market share prices used in the above
calculations were $13.24 and $18.90 for the three month periods ended March
30, 1997 and March 29, 1998, respectively.
8
(2) The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the
period, as if exercised, by the average common market share price during
the period. The average common market share prices used in the above
calculations were $12.25 and $18.48 for the six month periods ended March
30, 1997 and March 29, 1998, respectively.
(3) Stock options to purchase shares of common stock at prices greater than
the average market price of the common shares during that period are
considered antidilutive.
7. Effective December 1, 1997 the Company completed the purchase of the
outstanding stock of Camden Casting Center, Inc. ("Camden") for $2,000 that
was paid on January 20, 1998. This acquisition has been accounted for using
the purchase method of accounting and, accordingly, the purchase price has
been allocated to the assets and liabilities of Camden based on their
estimated fair values at the date of acquisition. Operating results of
Camden since December 1, 1997 are included in the Company's condensed
consolidated financial statements. Coincident with the purchase of Camden,
the Company entered into a requirements supply contract for the sale of
castings to LucasVarity. Camden produces high volume ductile iron braking
parts. Its annual sales for the year ended December 31, 1997 were
approximately $25,350. Over 90% of Camden's sales are to LucasVarity.
Camden has approximately 240 employees.
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 2,367
Inventories 735
Property, plant and equipment 2,531
Deferred income tax asset 1,045
Accounts payable and accrued expenses (3,973)
Deferred income taxes (705)
-------
Purchase Price $ 2,000
=======
8. Effective January 8, 1998, the Company completed the purchase of the
outstanding stock of Dycast, Inc. ("Dycast"), an aluminum die casting and
machining company in Lake Zurich, Illinois for a purchase price of
approximately $20,952 plus the assumption of approximately $2,621 of debt.
The acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the
assets and liabilities of Dycast based on their estimated fair values at
the date of acquisition. Dycast, which represents the Company's first
acquisition in aluminum die casting technology, produces aluminum die
castings for automotive, appliance, and small engine applications. Dycast
operates 22 die casting machines and is in the process of installing a
squeeze casting machine. Annual sales for 1997 were approximately $26,000.
Dycast has approximately 210 employees.
9
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 3,276
Inventories 992
Other current assets 489
Property, plant and equipment 12,302
Intangible assets and other 10,718
Accounts payable and accrued expenses (4,204)
Long-term debt (2,621)
-------
Purchase Price $20,952
=======
9. In conjunction with the Company's acquisition of Interstate Forging
Industries, Inc. ("Interstate") during October 1996, the purchase agreement
requires the Company to make additional contingent payments equal to five
times the amount by which the average annual net earnings of Interstate
before all 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 generally accepted accounting principles on a
pre-merger basis. Any additional payments made, as the contingencies are
resolved, will be accounted for as additional costs of acquired assets and
amortized over the remaining life of the assets. During the second quarter
of fiscal 1998, the Company distributed $7,227 to the previous stockholders
of Interstate representing the Company's contingent payment for calendar
year 1997 as required by the purchase agreement. During fiscal year 1997,
the Company distributed $2,542 in contingent payments under the purchase
agreement for the calendar year 1996. These payments have been included in
the calculation of the cash paid for the Interstate acquisition of $58,316.
The 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.
The estimated fair value of assets acquired and liabilities assumed are
summarized as follows:
Accounts receivable, net $ 15,161
Inventories 12,946
Other current assets 3,014
Property, plant and equipment 78,353
Intangible assets and other 7,227
Accounts payable and accrued expenses (18,675)
Deferred income taxes (17,046)
Long-term debt (22,664)
--------
Purchase Price $ 58,316
========
10. The following unaudited pro forma summary for the six months ended March
30, 1997 combines the results of operations of the Company with the
acquisitions of Interstate, Camden and Dycast as if the acquisitions had
occurred at the beginning of the 1997 fiscal year. For the six months
ended March 29, 1998, the pro forma summary presents the results of
10
operations of the Company as if the acquisitions of Camden and Dycast had
occurred at the beginning of the 1998 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 been made at the beginning of either fiscal years 1997 or
1998, or of results which may occur in the future.
Pro forma interim condensed consolidated statements of income are as
follows:
Six Months Ended
------------------------
March 30, March 29,
1997 1998
----------- ---------
Sales $ 344,771 $ 374,708
Operating income $ 26,179 $ 28,900
Income before provision for income taxes $ 17,210 $ 21,684
Pro forma net income $ 10,498 $ 13,227
Weighted average shares outstanding - basic (note 6) 17,721,743 17,792,346
Pro forma earnings per common share - basic $ .59 $ .74
Weighted average shares outstanding - diluted (note 6) 17,862,231 18,031,138
Pro forma earnings per common share - diluted $ .59 $ .73
11. Subsequent to March 29, 1998, Citation Precision, Inc. ("Citation
Precision"), a newly formed subsidiary of the Company, acquired the net
assets of Amcast Precision Products, Inc. of Rancho Cucamonga, California
from Amcast Industrial Corporation for a purchase price of approximately
$25,500. The acquisition will be accounted for using the purchase method
of accounting. Citation Precision produces aluminum and stainless steel
investment castings supplying the Aircraft and Aerospace industry. The
castings are utilized in aircraft engines and the structural airframe.
Amcast Precision Products, Inc. had annual sales in fiscal 1997 of
approximately $19,000. Citation Precision has approximately 220 employees.
- --------------------------------------------------------------------------------
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.
Forward Looking Statements. The statements in this Form 10-Q that are not
historical fact are forward looking statements. Such statements are subject to
11
certain risks and uncertainties which could cause actual results to differ
materially from those projected, including, among others, competition for
customers, labor force and production facilities, the effects of changes in the
economy such as inflation and unemployment rates, weather conditions and
seasonal effects, the uncertainties of new products and programs, and changes in
management. Readers are cautioned not to place undue reliance on these forward
looking statements which speak only as of the date hereof and reflect only
management's belief and expectations based upon presently available information.
Readers are also urged to carefully review and consider the various disclosures
made by the Company which attempt to advise interested parties of the factors
which affect the Company's business, including the disclosures made in other
periodic reports on Forms 10-K, 10-Q and 8-K filed with the United States
Securities and Exchange Commission.
QUARTER ENDED MARCH 29, 1998 COMPARED TO THE QUARTER ENDED MARCH 30, 1997
Sales. Sales increased 13.3%, or $22.7 million, to $193.1 million for the three
months ended March 29, 1998 from $170.4 million in the comparable prior year
period. The increase consists of $13.4 million from the acquisitions of Camden
and Dycast (collectively the "Acquisitions") and a 5.5% increase or $9.3 million
from the Company's existing operations. Management believes these same store
increases were primarily attributable to the general strength of the underlying
economy and its impact on the Company's customers.
Gross Profit. Gross profit increased 15.2%, or $4.5 million, to $34.1 million
in the 1998 second quarter from $29.6 million in the comparable 1997 period.
The overall gross margin increased slightly to 17.7% in the 1998 second quarter
from 17.4% in the comparable 1997 period. The gross margin for Acquisitions in
the second quarter of fiscal 1998 was approximately 15.8%. The gross margin for
existing units increased to 17.8% in the 1998 second quarter from 17.4% in the
comparable prior year period, primarily due to the absorption of fixed costs
over a larger volume of sales and increased efficiencies at a number of our
operating units.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 9.1%, or $1.4 million, to $16.7
million in the 1998 second quarter from $15.3 million in the comparable 1997
period. SGA costs attributable to the Acquisitions were $1.1 million. SGA
costs at existing Company operations remained flat as compared to the comparable
prior year period. As a percentage of sales, overall SGA expenses decreased to
8.6% in the 1998 second quarter from 9.0% in the comparable prior year period,
primarily due to increased sales volume and continued cost control.
Operating Income. Operating income increased 21.8%, or $3.1 million, to $17.4
million for the 1998 second quarter from $14.3 million for the comparable 1997
quarter. The overall operating margin increased to 9.0% in the 1998 second
quarter from 8.4% in the comparable 1997 period. The operating margin for the
Acquisitions for the 1998 second quarter was approximately 7.4%. The operating
margin of existing Company operations increased to 9.1% in the 1998 second
quarter from 8.4% in the comparable 1997 period.
Interest Expense. Interest expense decreased slightly to $3.7 million in the
1998 second quarter from $3.8 million in the comparable 1997 period. This
decrease is primarily attributable to the reduction of interest rates by
approximately 0.5% when the Company's credit facility was amended in July 1997.
12
(See additional discussion under "Liquidity and Capital Resources.") However,
the overall interest rate reduction was offset by higher average outstanding
debt balances relating to the acquisitions of Camden and Dycast during the first
and second quarters of fiscal 1998 and also the contingent payment related to
the Interstate acquisition. The purchase price plus assumed debt of the above
related items totaled approximately $32.8 million. Capitalized interest for the
second fiscal quarters of 1998 and 1997 was approximately $310 thousand and $26
thousand, respectively.
SIX MONTHS ENDED MARCH 29, 1998 COMPARED TO THE SIX MONTHS ENDED MARCH 30, 1997
Sales. Sales increased 16.9%, or $52.4 million, to $363.3 million for the six
months ended March 29, 1998 from $310.9 million in the comparable prior year
period. The increase was evenly split between fiscal year 1997 and 1998
acquisitions and same store sales. The incremental sales at Interstate, Camden
and Dycast (collectively the "Acquisitions") in the first six months of fiscal
1998 were approximately $26.5 million. Sales from the Company's existing
operations in the first six months of 1998 were up approximately 8.3%, or $25.9
million. Management believes these same store increases were primarily
attributable to the general strength of the underlying economy and its impact on
the Company's customers.
Gross Profit. Gross profit increased 18.1%, or $9.4 million, to $61.1 million
for the six months ended March 29, 1998 from $51.7 million in the comparable
1997 period. The overall gross margin increased slightly to 16.8% for the first
six months of fiscal 1998 from 16.6% in the comparable 1997 period. The
incremental gross margin for the Acquisitions included in the first six months
of fiscal 1998 was approximately $4.2 million and 15.7% of the incremental sales
of $26.5 million. The gross margin from existing units increased slightly to
16.9% during the first six months of fiscal 1998 from 16.6% in the comparable
prior year period, primarily due to the absorption of fixed costs over a larger
volume of sales and increased efficiencies at a number of our operating units.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 14.7%, or $4.1 million, to $32.2
million for the six months ended March 29, 1998 from $28.1 million in the
comparable 1997 period. The incremental SGA costs attributable to the
Acquisitions were $2.2 million. SGA costs at existing Company operations
increased approximately 6.9%, or $1.9 million. As a percentage of sales,
overall SGA expenses decreased to 8.9% in the first six months of fiscal 1998
from 9.0% in the comparable 1997 period, primarily due to increased sales volume
and continued cost control.
Operating Income. Operating income increased 22.2%, or $5.3 million, to $28.9
million for the six months ended March 29, 1998 from $23.6 million for the
comparable 1997 period. The overall operating margin increased to 7.9% for the
first six months of fiscal 1998 from 7.6% in the comparable 1997 period. The
operating margin for the Acquisitions included in the first six months of fiscal
1998 was approximately 7.4%. The operating margin of existing Company
operations increased to 8.0% for the first six months of fiscal 1998 from 7.6%
in the comparable 1997 period.
Interest Expense. Interest expense decreased slightly to $6.9 million for the
first six months of fiscal 1998 from $7.4 million in the comparable 1997 period.
This decrease is primarily attributable to the reduction of interest rates by
approximately 0.5% when the Company's credit facility was amended in July 1997.
(See additional discussion under "Liquidity and Capital Resources.") However,
13
the overall interest rate reduction was offset by higher average outstanding
debt balances relating to the acquisition of Interstate during the first quarter
of fiscal 1997 and the contingent payment during the second quarter of 1998 and
the acquisitions of camden and dycast during the first and second quarters of
fiscal 1998. The purchase price plus assumed debt of the Acquisitions totaled
approximately $106.6 million. Capitalized interest for the six months ended
March 29, 1998 and March 30, 1997 was approximately $520 thousand and $26
thousand, respectively.
LIQUIDITY AND CAPITAL RESOURCES
On July 24, 1997, the Company's credit facility (the "Credit Facility") was
increased from $230,000 to $300,000, to be used for working capital purposes and
to fund future acquisitions. Several new banks were added to the lending group.
Under the amended Credit Facility, the Company can borrow at interest rates from
LIBOR plus .5% to LIBOR plus 1.375% based upon the Company's ratio of debt to
its cash flow, measured by earnings before interest and taxes plus depreciation
and amortization (EBITDA). The Credit Facility may also consist of borrowings
up to $15,000 under a swing line of credit bearing interest at prime. At
September 28, 1997 and March 29, 1998, the Company was able to borrow at LIBOR
plus 1%. The Credit Facility calls for an unused commitment fee payable
quarterly, in arrears, at a rate of .18% to .30% based upon the Company's ratio
of debt to EBITDA. At September 28, 1997 and March 29, 1998, the Company's
unused commitment fee rate was .25%. The Credit Facility is collateralized by
substantially all of the assets of the Company as well as the stock of its
subsidiaries and expires on July 24, 2000. At September 28, 1997 and March 29,
1998, the total outstanding balance under this Credit Facility was $170,393 and
$205,000, respectively and $129,607 and $95,000, respectively, was available for
borrowing.
At September 28, 1997 the Company had $5,393 outstanding under the swing line of
credit at the prime rate of 8.5%. There were no borrowings outstanding under
the swing line of credit at March 29, 1998. At March 29, 1998 the $205,000
outstanding under this facility related to seven revolving loans. The Company
had $15,000, $15,000, $80,000 and $15,000 outstanding under these loans at
interest rates of 6.64%, 6.69%, 6.63% and 6.63% which reprice on March 30, 1998,
April 6, 1998, July 27, 1998 and September 17, 1998, respectively. On March 30,
1998 the $15,000 was repriced at an interest rate of 6.69% and on April 6, 1998
the $15,000 was repriced at an interest rate of 6.68%. The remaining $80,000
outstanding under this facility at March 29, 1998 consists of one $40,000 and
two $20,000 five-year interest rate swap agreements that were entered into
during fiscal year 1996. These agreements are repriced every 90 days and expire
between August 2001 and February 2002. The agreements have fixed interest rates
plus a margin of .5% to 1.375%, based on the Company's leverage ratio on the
date the agreements are repriced. The Company's fixed interest rates, including
margins, were 7.91% and 8.09% on the two $20,000 swap agreements and 7.85% on
the $40,000 swap agreement at March 29, 1998. The Company is exposed to credit
risk in the event of nonperformance by the counterparty to the interest rate
swap agreements. The Company believes it mitigates credit risk by dealing only
with financially sound banks. Accordingly, the Company does not anticipate loss
for nonperformance by these counterparties.
The Company's Credit Facility contains certain restrictive covenants that
require the maintenance of a funded debt to EBITDA ratio; a specified fixed
charge coverage ratio; places a maximum debt to total capital leverage ratio;
places limitations on capital expenditures, and places limitations on dividends
and other borrowings.
The Company's primary sources of working capital are cash flows from operating
activities and borrowings under the above mentioned credit facility. Primary
uses of working capital are the funding of operations, capital expenditures and
acquisitions.
14
Recently Issued Accounting Standards
Note 1 of the interim condensed consolidated financial statements included
elsewhere in this report describes the recently issued accounting standards.
ACQUISITIONS
Notes 7, 8 and 11 of the interim condensed consolidated financial statements
included elsewhere in this report describe the recent acquisitions of Camden,
Dycast and Amcast Precision Products, Inc.
CONFORMANCE OF COMPUTER SYSTEMS TO YEAR 2000
Citation is in the process of reviewing current software and has surveyed its
divisional operations to assess the impact of the year 2000 issue. Most of the
standard software in use at its corporate office and divisions and the computer
software for interface among its divisions and corporate office is year 2000
complaint. At three divisions, older or locally developed software systems are
in use that are not fully in conformance with year 2000 effects. Programs to
bring remaining software in compliance are anticipated to be completed by the
end of fiscal year 1998. Citation management believes that its own compliance
programs will not result in material costs to the Company.
The Company is in the preliminary stages of assessing the impact of the year
2000 issue on its major suppliers and customers to determine the extent to which
the Company is vulnerable to those third parties' failure to remediate their own
year 2000 issue. Based on information presently available, the Company does not
anticipate any material impact on its financial condition or results of
operations from the effect of the year 2000 issue on the Company's internal
systems, or those of its major suppliers and customers. However, there can be
no guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible, with the Company's systems, would not have
a material adverse impact on the Company. The Company does not believe it has
any material exposure to contingencies related to the year 2000 issue for
products it has sold.
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15
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Registrant's regular Annual Meeting of Shareholders was held
on February 17, 1998. Proxies for the annual meeting were
solicited pursuant to Regulation 14 under the Act.
(b) There was no solicitation in opposition to management's nominees
for directors as listed in the proxy statement, and all such
nominees were elected.
(c) At the annual meeting, the matters considered and voted upon
(other than procedural matters and ratification of auditors) and
the number of votes cast are as follows:
(i) Election of directors:
Name For Against
- ----------------------------------------- ---------------------- -------
T. Morris Hackney 16,527,834 87,840
Frederick F. Sommer 16,520,527 95,147
R. Conner Warren 16,522,427 93,247
Hugh G. Weeks 16,525,934 89,740
A. Derrill Crowe 16,562,934 52,740
Franklyn Esenberg 16,557,727 57,947
William W. Featheringill 16,561,234 54,440
Frank B. Kelso, II 16,563,134 52,540
Van L. Richey 16,527,834 87,840
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule for current period and
restated Financial Data Schedules for other
periods, submitted to the Securities and Exchange
Commission in electronic format
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended
March 29, 1998.
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16
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
May 12, 1998 /s/ T. Morris Hackney
--------------------------------------------------
T. MORRIS HACKNEY
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
May 12, 1998 /s/ Frederick F. Sommer
--------------------------------------------------
FREDERICK F. SOMMER
President and Chief Operating Officer
May 12, 1998 /s/ Thomas W. Burleson
--------------------------------------------------
THOMAS W. BURLESON
Vice President-Finance and Chief Financial Officer
(Principal Financial Officer)
17