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 June 27, 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
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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 July 23, 1999
- ---------------------------- ----------------------------
Common Stock, $.01 Par Value 17,877,739
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.................................... 13
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K............................. 20
SIGNATURES............................................................. 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 June 27, 1999.
Interim Condensed Consolidated Statements of Income for the three
months and nine months ended June 28, 1998 and June 27, 1999.
Interim Condensed Consolidated Statements of Cash Flows for the nine
months ended June 28, 1998 and June 27, 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 and per share data)
September 27, June 27,
1998 1999
--------------- --------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 2,322 $ 2,080
Accounts receivable, net 103,152 117,989
Inventories 56,353 58,781
Deferred income taxes, prepaid expenses
and other current assets 21,851 33,719
--------------- --------------
Total current assets 183,678 212,569
Property, plant and equipment, net 307,008 339,872
Intangible assets, net of accumulated amortization 72,973 109,593
Other assets 5,606 16,696
--------------- --------------
$ 569,265 $ 678,730
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 5,304 $ 3,480
Current portion of long-term debt 6,316 3,936
Accounts payable 46,802 54,396
Accrued expenses and other current liabilities 40,634 51,513
--------------- --------------
Total current liabilities 99,056 113,325
Long-term debt, net of current portion 237,525 315,415
Deferred income taxes and other long-term liabilities 46,650 50,086
--------------- --------------
Total liabilities 383,231 478,826
--------------- --------------
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, 17,932,402 and 17,937,402
shares issued, and 17,889,113 and 17,877,739
shares outstanding at September 27, 1998 179 179
and June 27, 1999, respectively
Additional paid-in capital 107,844 107,304
Retained earnings 78,011 92,421
--------------- --------------
Total stockholders' equity 186,034 199,904
--------------- --------------
$ 569,265 $ 678,730
=============== ==============
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 Three Months Ended
------------------------------------ ------------------------------------
June 28, June 27, June 28, June 27,
1998 1999 1998 1999
--------------- --------------- --------------- ---------------
( unaudited ) ( unaudited ) ( unaudited ) ( unaudited )
Net sales $ 196,446 $ 214,715 $ 559,760 $ 613,446
Cost of sales 160,481 181,341 462,707 518,111
--------------- --------------- --------------- ---------------
Gross profit 35,965 33,374 97,053 95,335
Selling, general and
administrative expenses 15,944 18,190 47,938 52,974
--------------- --------------- --------------- ---------------
Operating income 20,021 15,184 49,115 42,361
Interest expense, net 4,115 5,495 11,040 15,752
Loss on sale of division - 1,815 - 1,815
--------------- --------------- --------------- ---------------
Income before provision
for income taxes 15,906 7,874 38,075 24,794
Provision for income taxes 6,203 3,150 14,849 9,918
--------------- --------------- --------------- ---------------
Net income $ 9,703 $ 4,724 $ 23,226 $ 14,876
=============== =============== =============== ===============
Earnings per share-basic (Note 6) $ 0.54 $ 0.26 $ 1.30 $ 0.83
=============== =============== =============== ===============
Weighted average shares
outstanding-basic (Note 6) 17,880,558 17,877,534 17,821,750 17,885,253
=============== =============== =============== ===============
Earnings per share-diluted (Note 6) $ 0.54 $ 0.26 $ 1.29 $ 0.83
=============== =============== =============== ===============
Weighted average shares
outstanding-diluted (Note 6) 18,123,034 17,960,850 18,066,793 17,947,728
=============== =============== =============== ===============
See notes to interim condensed consolidated financial statements.
3
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Nine Months Ended
-----------------------------------------
June 28, June 27,
1998 1999
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income $ 23,226 $ 14,876
---------------- ----------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 812 564
Depreciation 23,217 28,714
Amortization 3,082 4,604
Loss on sale of division - 1,815
Changes in operating assets and liabilities, net:
Accounts receivable (7,468) (2,346)
Inventories (1,659) 3,150
Prepaid expenses and other assets (1,205) 2,070
Accounts payable (6,115) (1,243)
Accrued expenses and other liabilities 26 3,122
---------------- ----------------
Total adjustments 10,690 40,450
---------------- ----------------
Net cash provided by operating activities 33,916 55,326
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (37,378) (31,591)
Investment in joint venture - (8,651)
Cash paid for acquisitions (57,006) (61,780)
---------------- ----------------
Net cash used in investing activities (94,384) (102,022)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 5,993 (3,213)
Repayments of acquired debt (2,621) (12,670)
Distributions to former S-corp shareholders (Note 12) - (466)
Change in credit facility and other financing
arrangements, net 56,719 63,343
Change in paid-in-capital 608 (540)
---------------- ----------------
Net cash provided by financing activities 60,699 46,454
--------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 231 (242)
Cash and cash equivalents, beginning of period 2,645 2,322
---------------- ----------------
Cash and cash equivalents, end of period $ 2,876 $ 2,080
================ ================
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 June 27, 1999 and for the three and
nine months ended June 27, 1999 and June 28, 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, as amended by SFAS No. 137,
Deferral of the effective Date of FAS 133, is effective for fiscal years
beginning after June 15, 2000, 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, June 27,
1998 1999
------------------------------
Raw materials $ 10,210 $ 9,118
Supplies and containers 14,052 16,377
Work in process and finished goods 32,091 33,286
------------------------------
$ 56,353 $ 58,781
==============================
5
3. A summary of major classes of property, plant and equipment and accumulated
depreciation is as follows:
September 27, June 27,
1998 1999
------------------------------------
Land and improvements $ 12,454 $ 14,652
Buildings 59,509 66,786
Plant equipment 319,092 357,135
Office equipment 14,258 18,140
Transportation equipment 12,753 12,853
Construction in progress 9,923 18,086
------------------------------------
427,989 487,652
Less accumulated depreciation (120,981) (147,780
------------------------------------
$ 307,008 $ 339,872
====================================
4. A summary of other assets is as follows:
September 27, June 27,
1998 1999
-----------------------------------
Investment in joint venture $1,441 $10,090
Consulting and non-competition
agreements, net 579 338
Other, net 3,586 6,268
-----------------------------------
$5,606 $16,696
===================================
5. A summary of long-term debt is as follows:
September 27, June 27,
1998 1999
-----------------------------------
Credit facility $232,993 $306,954
Other financing arrangements 10,848 12,397
-----------------------------------
243,841 319,351
Less current portion of long-term debt 6,316 3,936
-----------------------------------
$237,525 $315,415
===================================
6
6. Earnings per share ("EPS")
Quarter Ended June 28, 1998
----------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $9,703 17,880,558 $0.54
-----------
Effect of dilutive common
shares:
Weighted average stock options outstanding 705,561
Less:
Stock options - assumed buyback /(1)/ (463,085)
Stock options - antidilutive /(2)/ --
----------------------------------------------------
EPS - diluted $9,703 18,123,034 $0.54
====================================================
Nine Months Ended June 28, 1998
----------------------------------------------------
Income Shares Per Share
(numerator) (denominator) amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $23,226 17,821,750 $1.30
-----------
Effect of dilutive common
shares:
Weighted average stock options outstanding 708,374
Less:
Stock options - assumed buyback /(1)/ (451,335)
Stock options - antidilutive /(2)/ (11,996)
----------------------------------------------------
EPS - diluted $23,226 18,066,793 $1.29
====================================================
7
Quarter Ended June 27, 1999
----------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $4,724 17,877,534 $0.26
Effect of dilutive common
shares:
Weighted average stock options outstanding 710,023
Less:
Stock options - assumed buyback /(1)/ (224,707)
Stock options - antidilutive /(2)/ (402,000)
----------------------------------------------------
EPS - diluted $4,724 17,960,850 $0.26
====================================================
--------------------------------------------------
Nine Months Ended June 27, 1999
--------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
----------------------------------------------------
EPS - basic:
Income available to
common stockholders $14,876 17,885,253 $0.83
Effect of dilutive common
shares:
Weighted average stock options outstanding 713,100
Less:
Stock options - assumed buyback /(1)/ (148,625)
Stock options - antidilutive /(2)/ (502,000)
----------------------------------------------------
EPS - diluted $14,876 17,947,728 $0.83
====================================================
(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 $20.45 and $12.95 for the three month periods and $19.09
and $11.63 for the nine month periods ended June 28, 1998 and June 27,
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.
7. On June 24, 1999, Citation and RSJ Acquisition Co. entered into a
definitive agreement and plan of merger and recapitalization. RSJ
Acquisition Co. is a corporation formed by Kelso & Company (Kelso), a
private investment firm.
8
Under the merger agreement, RSJ Acquisition Co. will merge with and into
Citation and Citation will be the surviving corporation. Each share of
common stock issued and outstanding will be converted into the right to
receive, at the election of the stockholder, either $18.10 in cash or one
share of common stock of Citation as the surviving corporation, subject to
proration designed to ensure approximately 790,000 Citation shares
(approximately 4.4% of the presently outstanding shares) are retained by
the existing stockholders of Citation. RSJ Acquisition Co., Kelso and
Kelso affiliates will invest approximately $190,000 in equity in connection
with the transaction. Additionally, approximately $465,000 million in
financing will be obtained to fund the purchase of stock and to repay
existing indebtedness.
The agreement has been approved by Citation's board of directors but is
subject to shareholder approval and the availability of financing to
complete the transaction, as well as a number of other conditions.
8. 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
==========
9
9. 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, the name of CT-South was
changed to Citation Marion, Inc. Citation Marion, Inc. was merged into
Citation Castings, Inc. and is now doing business under the name Citation
Marion ("Marion"). 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 Marion based on their estimated
fair values at the date of acquisition. Marion is a producer of ductile
iron thin-walled exhaust 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.
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
=========
10. 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 third quarter
of fiscal 1999, the Company distributed $11,217 to the previous
stockholders of Interstate representing a portion of the Company's
contingent payment for calendar year 1998 as required by the purchase
agreement. During fiscal 1998 and 1997, the Company distributed $7,227 and
$2,542, respectively, in contingent payments under the purchase agreement
for calendar years 1997 and 1996, respectively. These payments have been
included in the calculation of the cash paid for the Interstate acquisition
of $69,649. 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.
10
The estimated fair values 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 18,560
Accounts payable and accrued expenses (18,675)
Deferred income taxes (17,046)
Long-term debt (22,664)
--------
Purchase price $ 69,649
========
11. The following unaudited pro forma summary for the nine months ended June
28, 1998 combines the results of operations of the Company with the fiscal
year 1998 acquisitions of Camden Casting, Dycast, and Citation Precision,
fiscal year 1999 acquisitions of Custom and Marion and the fiscal year 1999
disposition of Oberdorfer Industries Corporation ("Oberdorfer") as if all
had occurred at the beginning of the 1998 fiscal year. For the nine months
ended June 27, 1999, the pro forma summary presents the results of
operations of the Company as if the acquisitions of Custom and Marion and
the disposition of Oberdorfer 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:
Nine Months Ended
--------------------------------------
June 28, June 27,
1998 1999
--------------------------------------
Sales $ 624,774 $ 622,662
Operating income $ 56,668 $ 44,172
Income before provision for income taxes $ 39,950 $ 26,978
Net income $ 24,369 $ 16,187
Weighted average shares outstanding - basic (Note 6) 17,821,750 17,885,253
Earnings per common share - basic $ 1.37 $ 0.90
Weighted average shares outstanding - diluted (Note 6) 18,066,793 17,947,728
Earnings per common share - diluted $ 1.35 $ 0.90
11
12. 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.
13. On June 16, 1999, Citation completed the sale of Oberdorfer and recorded a
pretax loss of $1,815 in the consolidated statement of income for the three
and nine months ended June 27, 1999. Citation received proceeds of $3,453,
which included $1,000 in cash, a note receivable of $953 discounted at an
interest rate of 9% and payable in twenty quarterly installments commencing
on October 1, 2001, and membership interests in the purchaser (a limited
liability company) of $1,500. The note receivable and LLC membership
interests are included in Other Assets at June 27, 1999.
12
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.
In addition, a significant element of uncertainty is occasioned by the Company's
recent announcement of the execution of a definitive merger agreement with RSJ
Acquisition Co. Statements in this Form 10-Q concerning the proposed merger, as
well as virtually all facets of the Company's operations, are subject to the
numerous uncertainties associated with the successful closing of the proposed
transaction with RSJ Acquisition Co., and the risks associated with acquisitions
generally.
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 and other
filings with the Securities and Exchange Commission.
Quarter ended June 27, 1999 compared to the quarter ended June 28, 1998
Sales. Sales increased 9.3%, or $18.3 million, to $214.7 million in the third
quarter of fiscal 1999, from $196.4 million in the comparable quarter of fiscal
1998. The increase includes $30.9 million attributable to the acquisitions of
Custom and Marion during the current year (collectively the "Acquisitions"),
offset by a 6.4% decrease or $12.6 million in reduced revenues from the
Company's existing operations. The Company's Industrial Iron and Industrial
Steel Groups had reduced sales of 24.3% or $24.2 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. This
also includes approximately $1.2 million in reduced sales at the Company's
Mansfield, Ohio facility due to a five week strike that was settled in June
1999. Sales by the Company's existing units in its Automotive Group increased
13.2% or $11.0 million, principally due to new business.
13
Gross Profit. Gross profit decreased $2.6 million or 7.2% to $33.4 million in
the third quarter of fiscal 1999, from $36.0 million in the comparable quarter
of fiscal 1998. The gross profit margin declined to 15.5% in the third quarter
of fiscal 1999 from 18.3% in the comparable quarter of fiscal 1998. The gross
margin for the Acquisitions in the third quarter of fiscal 1999 was 16.1%. The
gross margin for existing units in the third quarter of fiscal 1999 was 15.5%,
down from 18.3% 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 14.0% or $2.3 million to $18.2 million
in the third quarter of fiscal 1999 from $15.9 million in the comparable quarter
of fiscal 1998. SGA costs as a percentage of sales increased to 8.5% in the
third quarter of fiscal 1999 versus 8.1% in the comparable quarter of fiscal
1998. SGA costs attributable to the Acquisitions was $2.5 million for the third
quarter of fiscal 1999. SGA costs at existing units was $15.7 million in the
third quarter of fiscal 1999 versus $15.9 million in the comparable quarter of
fiscal 1998.
Operating Income. Operating income decreased $4.8 million or 24.2% to $15.2
million in the third quarter of fiscal 1999 from $20.0 million in the comparable
quarter of fiscal 1998. The overall operating margin decreased to 7.1% in the
third quarter as compared to 10.2% in the third quarter of the previous year.
The operating margin attributable to Acquisitions was 8.0% for the quarter while
the margin for the existing units in the same period was 6.9%.
Interest Expense. Interest expense for the third quarter of fiscal 1999
increased to $5.5 million from $4.1 million in the comparable quarter of fiscal
1998, an increase of $1.4 million. The increase reflects primarily the cost of
financing the Acquisitions.
Loss on Sale. The loss on sale relates to the sale of Oberdorfer which is
described in Note 13 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q.
Nine months ended June 27, 1999 compared to the nine months ended June 28, 1998
Sales. Sales increased 9.6%, or $53.6 million, to $613.4 million for the first
nine months of fiscal 1999 from $559.8 million in the comparable prior year
period. The increase includes $91.5 million attributable to the incremental
sales of Custom, Marion, Citation Precision, Dycast, and Camden (collectively
the "Acquisitions"), offset by a 6.8% decrease or $37.8 million in reduced
revenues from the Company's existing operations. The Company's Industrial Iron
and Industrial Steel Groups had reduced sales of 20.1% or $60.1 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. This also includes approximately $1.2 million in reduced sales at
the Company's Mansfield, Ohio facility due to a five week strike that was
settled in June 1999. Sales by the Company's existing units in its Automotive
Group increased 9.9% or $23.3 million, principally due to new business.
Gross Profit. Gross profit decreased $1.8 million or 1.8% to $95.3 million for
the first nine months of fiscal 1999, from $97.1 million in the comparable prior
year period. The gross profit margin declined to 15.5% for the first nine
months of fiscal 1999 from 17.3% in the comparable prior year period. The gross
margin for the Acquisitions included in the first nine months of fiscal 1999 was
16.8%. The gross margin for existing units decreased to 15.3% in the first nine
months of fiscal 1999 down from 17.3% in the comparable prior year period.
14
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 10.5% or $5.1 million to $53.0 million
in the first nine months of fiscal 1999 from $47.9 million in the comparable
prior year period. SGA costs as a percentage of sales held constant at 8.6% in
the first nine months of fiscal 1999 from the comparable prior year period. SGA
costs attributable to the Acquisitions was $8.0 million in the first nine months
of fiscal 1999. SGA costs at existing units was $44.9 million in the first nine
months of fiscal 1999 versus $47.9 million in the comparable prior year period.
Operating Income. Operating income decreased 13.8%, or $6.7 million, to $42.4
million during the first nine months of fiscal 1999 from $49.1 million in the
comparable prior year period. The overall operating margin decreased to 6.9% in
the first nine months of fiscal 1999 from 8.8% in the comparable prior year
period. The operating margin attributable to Acquisitions was 8.0% for the
first nine 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 nine months of fiscal 1999
increased to $15.8 million from $11.0 million in the comparable prior year
period, an increase of $4.8 million. The increase primarily reflects the cost
of financing the Acquisitions.
Loss on Sale. The loss on sale relates to the sale of Oberdorfer which is
described in Note 13 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q.
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 $300.0 million revolving credit
facility with a consortium of banks, led by the First National Bank of Chicago
("First Chicago") to be used for working capital purposes and to fund future
acquisitions. On November 3, 1998, the Company's credit facility was increased
from $300.0 million to $400.0 million. The facility consists of a swing line of
credit up to $15.0 million bearing interest at prime and revolving credit
borrowings which bear interest at LIBOR plus .625% to LIBOR plus 2.00% 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 June 27, 1999, the Company was able to borrow at LIBOR plus 1% and
LIBOR plus 1.75%, 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 June 27, 1999, the
Company's unused commitment fee rate was .25% and .375%, respectively. The
facility is collateralized by the stock of the Company's subsidiaries and
expires on October 15, 2001. At September 27, 1998 and June 27, 1999, the total
outstanding balance under this credit facility was $233.0 million and $307.0
million, respectively.
15
As of September 27, 1998, the Company had $3.0 million outstanding under the
swing line of credit at the prime rate of 8.5%. The remaining $230.0 million
outstanding under the credit facility at September 27, 1998 related to four
revolving loans. The Company had one loan at $150.0 million at an interest rate
of 6.60%. The remaining $80.0 million outstanding under the credit facility at
September 27, 1998 consists of one $40.0 million and two $20.0 million 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 $20.0 million swap agreements and 7.85% on the $40.0 million swap
agreement at September 27, 1998.
As of June 27, 1999, the Company had $7.0 million outstanding under the swing
line of credit. Of the $300.0 million outstanding under the credit facility at
June 27, 1999, $220.0 million related to seven revolving loans as follows:
Loan Amount
(in millions) Interest Rate Maturity Date
------------- -------------- -------------
125.0 6.79% August 9, 1999
50.0 6.84% August 16, 1999
25.0 6.75% July 26, 1999
5.0 6.67% June 28, 1999
5.0 6.71% July 12, 1999
5.0 6.71% July 19, 1999
5.0 6.79% August 2, 1999
The remaining $80.0 million outstanding under the credit facility at June 27,
1999 consists of one $40.0 million and two $20.0 million 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 8.84% and 8.66% on the two $20.0
million swap agreements and 8.60% on the $40.0 million swap agreement at June
27, 1999. These are scheduled to reprice on August 2, 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. As of June 27, 1999, the Company was either in compliance
with or had obtained waivers for all restrictive covenants.
16
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates which may
adversely affect its consolidated 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.
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 8 and 9 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q describe the recent acquisitions of Custom
and Marion.
Dispositions
Note 13 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recent disposition of Oberdorfer
Industries.
Year 2000 (Y2K) Readiness Disclosure
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 90% complete
to date, is expected to be completed by the fall of 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.
17
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. 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 90% 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 the fall of 1999.
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. 100% of the PC&I Y2K items have been inventoried and identified.
Furthermore, approximately 90% of those systems are deemed to be Y2K compliant.
The Company expects substantially all of its PC&I equipment to be compliant by
the fall of 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
fall of 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 the
fall of 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.
18
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.
___________________________________
19
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 June 27, 1999. However, in a report
on Form 8-K filed July 1, 1999, the Company
reported the execution on June 24, 1999 of a
definitive merger agreement with RSJ Acquisition
Co.
20
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
July 23, 1999 /s/ Frederick F. Sommer
---------------------------------------
FREDERICK F. SOMMER
President and Chief Executive Officer
July 23, 1999 /s/ Thomas W. Burleson
---------------------------------------
THOMAS W. BURLESON
Vice President-Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
21