UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 28, 1999
--------------
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
-------
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 10, 1999
- ---------------------------- ---------------------------
Common Stock, $.01 Par Value 17,896,113
INDEX
Page No.
--------
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......................... 12
PART II: OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders......... 18
ITEM 6: Exhibits and Reports on Form 8-K............................ 19
SIGNATURES............................................................ 20
EXHIBITS.............................................................. 21
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 (unaudited):
Interim Condensed Consolidated Balance Sheets at September 27, 1998
and March 28, 1999.
Interim Condensed Consolidated Statements of Income for the three
months and six months ended March 29, 1998 and March 28, 1999.
Interim Condensed Consolidated Statements of Cash Flows for the six
months ended March 29, 1998 and March 28, 1999.
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 27, MARCH 28,
1998 1999
------------------- -------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,322 $ 1,749
Accounts receivable, net 103,152 123,886
Inventories 56,353 62,174
Deferred income taxes, prepaid expenses
and other current assets 21,851 35,894
------------------- -------------------
Total current assets 183,678 223,703
Property, plant and equipment, net 307,008 342,883
Other assets 78,579 110,119
------------------- -------------------
$ 569,265 $ 676,705
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 5,304 $ 5,613
Current portion of long-term debt 6,316 8,364
Accounts payable 46,802 51,952
Accrued expenses and other current liabilities 40,634 49,366
------------------- -------------------
Total current liabilities 99,056 115,295
Long-term debt, net of current portion 237,525 315,304
Deferred income taxes and other long-term liabilities 46,650 50,891
------------------- -------------------
Total liabilities 383,231 481,490
------------------- -------------------
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, 17,889,113 shares issued
and outstanding at September 27, 1998 and
March 28, 1999 179 179
Additional paid-in capital 107,844 107,339
Retained earnings 78,011 87,697
------------------- -------------------
Total stockholders' equity 186,034 195,215
------------------- -------------------
$ 569,265 $ 676,705
=================== ===================
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 29, MARCH 28, MARCH 29, MARCH 28,
1998 1999 1998 1999
------------- ---------------- -------------- --------------
( unaudited ) ( unaudited ) ( unaudited ) ( unaudited )
Net sales $ 193,091 $ 213,383 $ 363,314 $ 398,243
Cost of sales 159,001 178,090 302,226 336,282
------------- ---------------- -------------- --------------
Gross profit 34,090 35,293 61,088 61,961
Selling, general and
administrative expenses 16,613 18,749 31,994 34,784
------------- ---------------- -------------- --------------
Operating income 17,477 16,544 29,094 27,177
Interest expense, net 3,700 5,614 6,925 10,257
------------- ---------------- -------------- --------------
Income before provision
for income taxes 13,777 10,930 22,169 16,920
Provision for income taxes 5,373 4,372 8,646 6,768
------------- ---------------- -------------- --------------
Net income $ 8,404 $ 6,558 $ 13,523 $ 10,152
============= ================ ============== ==============
Earnings per share-Basic (Note 6) $ 0.47 $ 0.37 $ 0.76 $ 0.57
============= ================ ============== ==============
Weighted average shares
Outstanding-Basic (Note 6) 17,803,366 17,889,113 17,792,346 17,889,113
============= ================ ============== ==============
Earnings per share-Diluted (Note 6) $ 0.47 $ 0.37 $ 0.75 $ 0.57
============= ================ ============== ==============
Weighted average shares
outstanding-Diluted (Note 6) 18,051,353 17,945,092 18,031,138 17,942,775
============= ================ ============== ==============
See notes to interim condensed consolidated financial statements.
3
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
FOR THE SIX MONTHS ENDED
----------------------------------------
MARCH 29, MARCH 28,
1998 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income $ 13,523 $ 10,152
------------------ ------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 177 156
Depreciation 15,420 18,742
Amortization 2,136 2,799
Changes in operating assets and liabilities, net:
Accounts receivable (6,644) (6,209)
Inventories (1,325) 1,372
Prepaid expenses and other assets (2,739) 49
Accounts payable (3,606) (4,529)
Accrued expenses and other liabilities 2,970 1,987
------------------ ------------------
Total adjustments 6,389 14,367
------------------ ------------------
Net cash provided by operating activities 19,912 24,519
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (25,702) (22,222)
Investment in joint venture - (4,767)
Cash paid for acquisitions (30,179) (50,563)
------------------ ------------------
Net cash used in investing activities (55,881) (77,552)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 4,741 (1,036)
Repayments of acquired debt (2,621) (12,670)
Distributions to former S-corp shareholders (Note 10) - (466)
Change in credit facility and other financing
arrangements, net 33,034 67,135
Change in paid-in-capital 448 (503)
------------------ ------------------
Net cash provided by financing activities 35,602 52,460
------------------ ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (367) (573)
Cash and cash equivalents, beginning of period 2,645 2,322
------------------ ------------------
Cash and cash equivalents, end of period $ 2,278 $ 1,749
================== ==================
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 condensed consolidated balance sheet of Citation Corporation (the
"Company") at September 27, 1998 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 March 28, 1999 and for the three and six months
ended March 28, 1999 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. Certain
minor reclassifications have been made in the previous year's financial
statements in order to conform them to current year classifications. These
financial statements should be read in conjunction with the Company's 1998
annual report on SEC Form 10-K.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 Company intends to provide
the appropriate disclosures required by these statements in its fiscal year
1999 annual report.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires all derivatives
to be recognized at fair value as either assets or liabilities on the
balance sheet. Any gain or loss resulting from changes in such fair value
is required to be recognized in earnings to the extent the derivatives are
not effective as hedges. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, and is effective for interim periods in the
initial year of adoption. The Company has not yet determined the effect, if
any, of the adoption of SFAS No. 133 on its results of operations,
financial position or liquidity.
2. A summary of inventories is as follows:
September 27, March 28,
1998 1999
---------------------------
Raw materials $10,210 $ 9,689
Supplies and containers 14,052 15,709
Work in process and finished goods 32,091 36,776
---------------------------
$56,353 $62,174
===========================
5
3. A summary of major classes of property, plant and equipment and accumulated
depreciation is as follows:
September 27, March 28,
1998 1999
----------------------------
Land and improvements $ 12,454 $ 14,539
Buildings 59,509 67,534
Plant equipment 319,092 351,224
Office equipment 14,258 17,763
Transportation equipment 12,753 12,718
Construction in progress 9,923 18,465
----------------------------
427,989 482,243
Less accumulated depreciation (120,981) (139,360)
----------------------------
$ 307,008 $ 342,883
============================
4. A summary of other assets is as follows:
September 27, March 28,
1998 1999
----------------------------
Goodwill, net $ 72,973 $ 99,884
Investment in joint venture 1,441 6,208
Consulting and non-competition
agreements, net 579 419
Other, net 3,586 3,608
----------------------------
$ 78,579 $ 110,119
============================
5. A summary of long-term debt is as follows:
September 27, March 28,
1998 1999
----------------------------
Credit facility $ 232,993 $ 305,000
Other financing arrangements 10,848 18,668
----------------------------
243,841 323,668
Less current portion of long-term debt 6,316 8,364
----------------------------
$ 237,525 $ 315,304
============================
6
6. Earnings per share ("EPS")
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 /(2)/ --
------------------------------------------------
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 /(1)/ (465,993)
Stock options - antidilutive /(2)/ --
------------------------------------------------
EPS - diluted $ 13,523 18,031,138 $ 0.75
================================================
7
Quarter Ended March 28, 1999
----------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $ 6,558 17,889,113 $ 0.37
--------
Effect of dilutive common
shares:
Weighted average stock options outstanding
714,638
Less:
Stock options - assumed buyback /(1)/ (156,659)
Stock options - antidilutive /(2)/ (502,000)
----------------------------------------------------
EPS - diluted $ 6,558 17,945,092 $ 0.37
====================================================
Six Months Ended March 28, 1999
--------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $ 10,152 17,889,113 $ 0.57
--------
Effect of dilutive common
shares:
Weighted average stock options
outstanding 714,638
Less:
Stock options - assumed buyback /(1)/ (158,976)
Stock options - antidilutive /(2)/ (502,000)
------------------------------------------------------
EPS - diluted $ 10,152 17,942,775 $ 0.57
======================================================
(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 $18.90
and $11.11 for the three month periods and $18.48 and $10.95 for the six month
periods ended March 29, 1998 and March 28, 1999, respectively.
(2) 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.
8
7. Effective November 17, 1998, the Company completed the purchase of the
outstanding stock of Custom Products Corporation ("Custom") of Milwaukee,
Wisconsin, for approximately $35,719 in cash. In addition, the agreement
provides for contingent payments equal to five times the amount by which
the average annual net earnings of Custom before all interest, income
taxes, and franchise taxes during the three year period from October 1,
1998 through September 29, 2001 exceeds $9,500. Earnings shall be computed
in accordance with generally accepted accounting principles on a pre-
acquisition basis, and the aggregate amount of contingent payments shall
not exceed $16,500. 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 Custom based on their estimated
fair values at the date of acquisition. Custom is a machiner of cast and
forged metal products, primarily for the diesel engine, construction
equipment, farm implement and automotive markets. Custom's revenues for its
1998 fiscal year were approximately $75,000. Custom has approximately 650
employees.
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 11,127
Inventories 3,800
Other current assets 6,233
Property, plant and equipment 27,942
Intangible assets and other 30,302
Deferred income tax asset 800
Accounts payable and accrued expenses (17,839)
Deferred income taxes (1,743)
Long-term debt (24,903)
----------
Purchase Price $ 35,719
==========
8. Effective December 28, 1998, the Company acquired all of the stock of CT-
South, Inc. of Marion, Alabama, for a purchase price of approximately
$14,844 in cash. Following the acquisition, CT-South was merged into
Citation Castings, Inc., and is now doing business under the name Citation
Marion ("Marion"). 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 Marion based on their estimated
fair values at the date of acquisition. Marion is a producer of ductile
iron thin-walled manifolds primarily for the passenger car and light truck
markets, and it had revenues for its most recent fiscal year of
approximately $30,000. Marion has approximately 400 employees.
9
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 3,724
Inventories 3,501
Other current assets 18
Property, plant and equipment 4,326
Deferred income tax asset 10,523
Accounts payable and accrued expenses (3,527)
Deferred income taxes (3,500)
Long-term debt (221)
---------
Purchase Price $ 14,844
=========
9. The following unaudited pro forma summary for the six months ended March
29, 1998 combines the results of operations of the Company with the fiscal
year 1998 acquisitions of Camden Casting, Dycast, and Citation Precision
and fiscal year 1999 acquisitions of Custom and Marion as if all of the
acquisitions had occurred at the beginning of the 1998 fiscal year. For the
six months ended March 28, 1999, the pro forma summary presents the results
of operations of the Company as if the acquisitions of Custom and Marion
had occurred at the beginning of the 1999 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 1998 or
1999, or of results which may occur in the future.
Pro forma interim condensed consolidated statements of income are as
follows:
Six Months Ended
------------------------------------
March 29, March 28,
1998 1999
------------------------------------
Sales $ 437,601 $ 416,372
Operating income $ 31,722 $ 26,933
Income before provision for income taxes $ 20,057 $ 15,452
Pro forma net income $ 12,235 $ 9,271
Weighted average shares outstanding - basic (Note 6) 17,792,346 17,889,113
Pro forma earnings per common share - basic $ 0.69 $ 0.52
Weighted average shares outstanding - diluted (Note 6) 18,031,138 17,942,775
Pro forma earnings per common share - diluted $ 0.68 $ 0.52
10
10. On October 23, 1998, the Company made distributions aggregating $466 to
Citation's former S corporation stockholders as a consequence of an
Internal Revenue Service audit of the 1993 and 1994 tax years (prior to the
Company's 1994 initial public offering), which resulted in an increase to
the Company's taxable income for those years. This distribution was made in
accordance with the terms of the 1994 Tax Indemnification Agreement between
the Company and its former S corporation stockholders, by which the Company
and the former S corporation stockholders agreed to indemnify each other
for subsequent determinations of income tax liability or increased
earnings, respectively, attributable to fiscal periods prior to termination
of the S corporation status.
11
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 financial statements.
Forward Looking Statements. The statements in this Form 10-Q that are not
historical fact are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Those statements appear in a
number of places in this report and include statements regarding the intent,
belief or expectations of the Company and its management with respect to, among
other things: (i) the Company's operating performance; (ii) the Company's
expectations concerning sales growth and earnings per share growth; (iii) the
intent, belief or expectations of the Company and its directors and officers
with respect to anticipated acquisitions and acquisition strategies; (iv) trends
in the industries served by the Company; and (v) trends that may affect the
Company's financial condition or results of operations. Such statements are
subject to numerous risks and uncertainties which could cause actual results to
differ materially from anticipated results. The following are some of such
factors, risks and uncertainties: (i) competitive product and pricing pressures;
(ii) fluctuations in the cost and availability of raw materials; (iii) general
economic and business conditions, as well as conditions affecting the industries
served by the Company; (iv) the ability to generate sufficient cash flows to
support acquisition strategies, capital expansion plans and general operating
activities; (v) recent management changes; and (vi) the Company's ability to
penetrate new markets. Readers are cautioned not to place undue reliance on
these forward looking statements which speak only as of the date hereof. 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 Securities and Exchange
Commission.
QUARTER ENDED MARCH 28, 1999 COMPARED TO THE QUARTER ENDED MARCH 29, 1998
Sales. Sales increased 10.5%, or $20.3 million, to $213.4 million in the second
quarter of fiscal 1999, from $193.1 million in the comparable quarter of fiscal
1998. The increase includes $36.3 million attributable to the acquisitions of
Custom and Marion during the current year, and Citation Precision, which was
acquired in April 1998 (collectively the "Acquisitions"), offset by a 8.3%
decrease or $16.0 million in reduced revenues from the Company's existing
operations. The Company's Industrial Iron and Industrial Steel Groups had
reduced sales of 21.1% or $21.6 million from existing units due to a reduction
in orders, principally from customers in the construction equipment, mining
equipment, farm implement, and/or oil tool industries. Sales by the Company's
existing units in its Automotive Group increased 7.8% or $6.5 million,
principally due to new business.
12
Gross Profit. Gross profit increased $1.2 million or 3.5% to $35.3 million in
the second quarter of fiscal 1999, from $34.1 million in the comparable quarter
of fiscal 1998. The gross profit margin declined to 16.5% in the second quarter
of fiscal 1999 from 17.7% in the comparable quarter of fiscal 1998. The gross
margin for the Acquisitions in the second quarter of fiscal 1999 was 20.0%. The
gross margin for existing units in the second quarter of fiscal 1999 was 15.8%,
down from 17.7% in the comparable quarter of fiscal 1998 principally due to
reduced sales in the Company's Industrial Iron and Industrial Steel Groups.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 12.9% or $2.1 million to $18.7 million
in the second quarter of fiscal 1999 from $16.6 million in the comparable
quarter of fiscal 1998. SGA costs as a percentage of sales increased to 8.8% in
the second quarter of fiscal 1999 versus 8.6% in the comparable quarter of
fiscal 1998. SGA costs attributable to the Acquisitions was $3.2 million for the
second quarter of fiscal 1999. SGA costs at existing units was $15.5 million in
the second quarter of fiscal 1999 versus $16.6 million in the comparable quarter
of fiscal 1998.
Operating Income. Operating income decreased $1.0 million or 5.3% to $16.5
million in the second quarter of fiscal 1999 from $17.5 million in the
comparable quarter of fiscal 1998. The overall operating margin decreased to
7.8% in the second quarter as compared to 9.1% in the second quarter of the
previous year. The operating margin attributable to Acquisitions was 11.2% for
the quarter while the margin for the existing units in the same period was 7.0%.
Interest Expense. Interest expense for the second quarter of fiscal 1999
increased to $5.6 million from $3.7 million in the comparable quarter of fiscal
1998, an increase of $1.9 million. The increase reflects primarily the cost of
financing the Acquisitions.
SIX MONTHS ENDED MARCH 28, 1999 COMPARED TO THE SIX MONTHS ENDED MARCH 29, 1998
Sales. Sales increased 9.6%, or $34.9 million, to $398.2 million for the first
six months of fiscal 1999 from $363.3 million in the comparable prior year
period. The increase includes $59.8 million attributable to the incremental
sales of Custom, Marion, Citation Precision, Dycast, and Camden (collectively
the "Acquisitions"), offset by an 6.8% decrease or $24.8 million in reduced
revenues from the Company's existing operations. The Company's Industrial Iron
and Industrial Steel Groups had reduced sales of 18% or $35.9 million from
existing units due to a reduction in orders, principally from customers in the
construction equipment, mining equipment, farm implement, and/or oil tool
industries. Sales by the Company's existing units in its Automotive Group
increased 7.5% or $11.3 million, principally due to new business.
Gross Profit. Gross profit increased $0.9 million or 1.4% to $62.0 million for
first the six months of fiscal 1999, from $61.1 million in the comparable prior
year period. The gross profit margin declined to 15.6% for the first six months
of fiscal 1999 from 16.8% in the comparable prior year period. The gross margin
for the Acquisitions included in the first six months of fiscal 1999 was 16.8%.
The gross margin for existing units decreased to 15.4% in the first six months
of fiscal 1999 down from 16.8% in the comparable prior year period.
13
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 8.7% or $2.8 million to $34.8 million
in the first six months of fiscal 1999 from $32.0 million in the comparable
prior year period. SGA costs as a percentage of sales decreased to 8.7% in the
first six months of fiscal 1999 versus 8.8% in the comparable prior year period.
SGA costs attributable to the Acquisitions was $5.5 million in the first six
months of fiscal 1999. SGA costs at existing units was $29.2 million in the
first six months of fiscal 1999 versus $32.0 million in the comparable prior
year period.
Operating Income. Operating income decreased 6.6%, or $1.9 million, to $27.2
million during the first six months of fiscal 1999 from $29.1 million in the
comparable prior year period. The overall operating margin decreased to 6.8% in
the first six months of fiscal 1999 from 8.0% in the comparable prior year
period. The operating margin attributable to Acquisitions was 7.5% for the first
six months of fiscal 1999 while the margin for the existing units in the same
period was 6.7%.
Interest Expense. Interest expense for the first six months of fiscal 1999
increased to $10.3 million from $6.9 million in the comparable prior year
period, an increase of $3.4 million. The increase primarily reflects the cost of
financing the Acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund capital expenditures
for existing facilities and to fund new business acquisitions. Historically, the
Company has used cash generated by operations, borrowings under its revolving
credit facility (discussed below) and proceeds from public equity offerings to
fund its capital requirements. Additionally, the Company requires capital to
finance accounts receivable and inventory.
As of September 27, 1998, the Company had a $300,000 revolving credit facility
with a consortium of banks, led by the First National Bank of Chicago-NBD
("First Chicago-NBD") to be used for working capital purposes and to fund future
acquisitions. On November 3, 1998, the Company's credit facility was increased
from $300,000 to $400,000. The facility consists of a swing line of credit up to
$15,000 bearing interest at prime and revolving credit borrowings which bear
interest at LIBOR plus .625% to LIBOR plus 1.50% based upon the Company's ratio
of debt to its cash flow, measured by earnings before interest and taxes plus
depreciation and amortization (EBITDA). At September 27, 1998 and March 28,
1999, the Company was able to borrow at LIBOR plus 1% and LIBOR plus 1.25%,
respectively. The facility calls for an unused commitment fee payable quarterly,
in arrears, at a rate of .20% to .50% based upon the Company's ratio of debt to
EBITDA. At September 27, 1998 and March 28, 1999, the Company's unused
commitment fee rate was .25%. The facility is collateralized by the stock of the
Company's subsidiaries and expires on October 15, 2001. At September 27, 1998
and March 28, 1999, the total outstanding balance under this credit facility was
$232,993 and $305,000, respectively.
14
As of September 27, 1998, the Company had $2,993 outstanding under the swing
line of credit at the prime rate of 8.5%. The remaining $230,000 outstanding
under the credit facility at September 27, 1998 related to four revolving loans.
The Company had one loan at $150,000 at an interest rate of 6.60%, which was
repriced on October 14, 1998, November 12, 1998, and December 10, 1998 at
interest rates of 6.42%, 6.30% and 6.13%, respectively. This loan will reprice
again on June 10, 1999. The remaining $80,000 outstanding under the credit
facility at September 27, 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 have fixed interest rates plus a margin of .625% to 1.50%,
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
September 27, 1998.
As of March 28, 1999, the Company had no amounts outstanding under the swing
line of credit. The $305,000 outstanding under the credit facility at March 28,
1999 related to five revolving loans. The Company had $150,000, $50,000,
$20,000, and $5,000 outstanding under these loans at interest rates of 6.38%,
6.30%, 6.22% and 6.22%, respectively, which reprice on June 10, 1999, June 15,
1999, April 26, 1999, and March 29, 1999, respectively. The remaining $80,000
outstanding under the credit facility at March 28, 1999 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 have fixed interest rates plus a
margin of .625% to 1.50%, based on the Company's leverage ratio on the date the
agreements are repriced. The Company's fixed interest rates, including margins,
were 8.34% and 8.16% on the two $20,000 swap agreements and 8.10% on the $40,000
swap agreement at March 28, 1999. 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 only 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 and a specified fixed
charge coverage ratio; place a minimum level of stockholders' equity; place
limitations on capital expenditures, and place limitations on dividends and
other borrowings. The credit facility also has a covenant prohibiting a change
in control in excess of 30% of the Company's outstanding stock other than by the
Company's current largest shareholder, Mr. Hackney.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which may
adversely affect its financial position, results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through its regular operating and financing activities and,
when deemed appropriate, through the use of derivative financial instruments.
The Company does not use financial instruments for trading or other speculative
purposes and is not party to any leverage financial instruments.
The Company is exposed to interest rate risk primarily through its borrowing
activities. The majority of the Company's borrowings are under variable rate
instruments. However, the Company uses interest rate swaps to help manage its
exposure to interest rate movements and reduce borrowing costs.
15
Refer to the Liquidity and Capital Resources section in Management's Discussion
and Analysis of Financial Condition and Results of Operations for further
information.
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 1 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recently issued accounting standards.
ACQUISITIONS
Notes 7 and 8 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q describe the recent acquisitions of Custom
and Marion.
CONFORMANCE OF AUTOMATED SYSTEMS TO YEAR 2000
General. As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. The
Company continues to address the "Year 2000" issue through a company-wide Y2K
Project (the "Project").
The Project involves reviewing current software as well as embedded systems in
certain manufacturing equipment and surveying each of the Company's divisional
operations to assess the impact of the Y2K issue. The Project is being
coordinated by a twenty-five member team. This team includes five personnel from
corporate headquarters, including the overall coordinator, and a coordinator at
each division. The Project, which is approximately 80% complete to date, is
expected to be completed by mid-year 1999. The Company has developed a
contingency plan that involves manual processing, system backups, increased
inventory from critical suppliers and the selection of alternative suppliers of
critical materials.
Project. The Company's Project is divided into five major sections:
infrastructure, applications software, manufacturing software, process control
and instrumentation ("PC&I") and third party suppliers/customers. The Company
has designated a Y2K team leader at each of its locations to help direct the
phases of the project. These phases, which are common to the five major
sections, are as follows: (1) inventorying Y2K items; (2) assessing compliance
to Y2K for the items identified; (3) developing a strategy for remediation of
non-compliant items; (4) implementation of the remediation strategy; and (5)
independent validation from external resources as to the Company's compliance.
The infrastructure and applications software sections consist of an analysis of
hardware and systems software. The applications software includes both the
conversion of applications that are not Y2K compliant and, where available from
the supplier, the replacement of such software. At calendar year end 1998, the
inventory, assessment, implementation and validation for the infrastructure,
applications software and manufacturing software are approximately 95% complete.
With respect to the manufacturing software, approximately 80% of the Company's
divisions are compliant, with approximately 60% using B&L Information Systems,
which is Y2K compliant, and another 20% using other manufacturing software that
is also Y2K compliant. The remaining 20% non-compliant manufacturing software
has been inventoried and identified. The Company expects these three sections of
the Project to be complete by mid-year 1999.
16
The PC&I section includes the hardware, software and associated embedded
computer chips that are used in the operation of all facilities operated by the
Company. Approximately 95% of the PC&I Y2K items have been inventoried and
identified. Furthermore, approximately 65% of those systems are deemed to be Y2K
compliant. The Company expects substantially all of its PC&I equipment to be
compliant by mid-year 1999.
The third party suppliers/customers section of the Project involves sending a
Y2K compliance questionnaire to all key suppliers as well as dealing with any
independent review of the Company's compliance by certain of its customers. The
Company obtains evidence from its key suppliers documenting their compliance
with the Y2K issue and will continue to monitor vendors that are non-compliant
for contingency planning purposes. The Company's contingency plan addresses non-
compliance of key suppliers by having alternative suppliers as well as
increasing critical inventory prior to the year 2000. This section of the
project is approximately 90% complete and full implementation is expected by
mid-year 1999.
Once the strategy of all sections has been implemented, the Company will have
independent validation of its Y2K compliance. Major customers will continue to
review various divisions' systems along with external resources hired by the
Company. The Company anticipates this external review will be completed by mid-
year 1999. The costs associated with the Project have been and will continue to
be expensed as incurred. The Company does not separately track these internal
costs incurred for the Y2K Project; these costs however, to date, consist
principally of the related payroll costs of its information systems group.
Risks. The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K issue, resulting in part from the uncertainty of
the Y2K readiness of third-party suppliers and customers, the Company is unable
to determine at this time whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
condition. The Y2K Project is expected to significantly reduce the Company's
level of uncertainty about the Y2K issue and, in particular, about the Y2K
compliance and readiness of external parties. The Company believes that, with
the implementation and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced. The Company
does not believe it has any material exposure to contingencies related to the
Y2K issue for products it has sold.
_________________________
17
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 16, 1999. 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,
and the number of votes cast, are as follows:
(i) Election of directors:
Votes Votes
Name For Withheld/Abstaining
------------------ ---------- -------------------
George N. Booth 15,926,656 11,368
A. Derrill Crowe 15,924,006 14,018
William W. Featheringill 15,926,656 11,368
T. Morris Hackney 15,925,456 12,568
Frank B. Kelso, II 15,923,331 14,693
Van L. Richey 15,824,856 113,168
Frederick F. Sommer 15,923,926 14,098
R. Conner Warren 15,925,426 12,598
(ii) Amendment to Employee Stock Purchase Plan authorizing purchase
of an additional 500,000 shares.
Votes Votes Votes
For Against Abstaining
---------- ------- ----------
15,337,668 557,177 38,579
(iii) Ratification of independent auditors:
Votes Votes Votes
For Against Abstaining
---------- ------- ----------
15,916,883 4,491 12,050
18
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.2(aa) - Third Amendment to Second Amended and
Restated Credit Agreement, dated as of March
31, 1999 - Page 21
Exhibit 27 - Financial Data Schedule, 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 28, 1999
19
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 10, 1999 /s/ Frederick F. Sommer
--------------------------------------------------
FREDERICK F. SOMMER
President and Chief Executive Officer
May 10, 1999 /s/ Thomas W. Burleson
--------------------------------------------------
THOMAS W. BURLESON
Vice President-Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
20