UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 28, 1997
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or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File No. 0-24492
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CITATION CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 63-0828225
(State of Incorporation) (IRS Employer I.D. No.)
2 Office Park Circle, Suite 204
Birmingham, Alabama 35223
(Address of principal executive offices)
(205) 871-5731
(Registrant's telephone number)
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Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at February 9, 1998
---------------------------- -------------------------------
Common Stock, $.01 Par Value 17,782,600
INDEX
Page No.
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements............................................. 1
Interim Condensed Consolidated Balance Sheets................ 2
Interim Condensed Consolidated Statements of Income.......... 3
Interim Condensed Consolidated Statements of Cash Flows...... 4
Notes to Interim Condensed Consolidated Financial Statements. 5
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K................................. 11
Exhibits:
Exhibit 27 - Financial data schedule, submitted to the
Securities and Exchange Commission in
electronic format
SIGNATURES................................................................ 12
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 28, 1997
and December 28, 1997.
Interim Condensed Consolidated Statements of Income for the three
months ended December 29, 1996 and December 28, 1997.
Interim Condensed Consolidated Statements of Cash Flows for the three
months ended December 29, 1996 and December 28, 1997.
Notes to Interim Condensed Consolidated Financial Statements.
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1
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
SEPTEMBER 28, 1997 DECEMBER 28, 1997
------------------ ------------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,645 $ 1,340
Accounts receivable, net 93,542 95,588
Inventories 48,953 50,749
Deferred income taxes, prepaid expenses and
other assets 15,363 17,723
-------- --------
Total current assets 160,503 165,400
Property, plant and equipment, net 282,991 289,638
Other assets 49,802 48,930
-------- --------
$493,296 $503,968
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 4,211 $ 7,679
Current portion of long-term debt 2,994 2,840
Accounts payable 43,256 41,219
Accrued expenses 43,496 45,625
-------- --------
Total current liabilities 93,957 97,363
Long-term debt, net of current portion 181,239 180,719
Deferred income taxes and other deferred liabilities 45,461 48,000
-------- --------
Total liabilities 320,657 326,082
-------- --------
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 17,782,600
shares issued and outstanding at September 28,
1997 and December 28, 1997, respectively 177 178
Additional paid-in capital 107,243 107,370
Retained earnings 65,219 70,338
-------- --------
Total stockholders' equity 172,639 177,886
-------- --------
$493,296 $503,968
======== ========
See notes to interim condensed consolidated financial statements.
2
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Data)
Three Months Ended
DECEMBER 29, 1996 DECEMBER 28, 1997
------------------ ------------------
(unaudited) (unaudited)
Net sales $ 140,486 $ 170,223
Costs of sales 118,360 143,225
----------- -----------
Gross profit 22,126 26,998
Selling, general and administrative expenses 12,805 15,538
----------- -----------
Operating income 9,321 11,460
Other (income) expenses:
Interest expense, net 3,517 3,225
Other, net 109 (157)
----------- -----------
3,626 3,068
----------- -----------
Income before provision for income taxes 5,695 8,392
Provision for income taxes 2,221 3,273
----------- -----------
Net income $ 3,474 $ 5,119
=========== ===========
Earnings per share - basic (Note 6) $ 0.20 $ 0.29
=========== ===========
Weighted average shares
outstanding - basic (Note 6) 17,718,491 17,781,325
=========== ===========
Earnings per share - diluted (Note 6) $ 0.19 $ 0.28
=========== ===========
Weighted average shares
outstanding - diluted (Note 6) 17,835,835 18,013,716
=========== ===========
See notes to interim condensed consolidated financial statements.
3
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months Ended
DECEMBER 29, DECEMBER 28,
1996 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
Net income $ 3,474 $ 5,119
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 66 94
Depreciation 6,290 7,343
Amortization 749 875
Changes in operating assets and liabilities, net:
Accounts receivable 7,523 227
Inventories 986 (1,061)
Prepaid expenses and other assets 5,806 (1,318)
Accounts payable (5,047) (2,970)
Accrued expenses and other liabilities (3,341) 923
-------- --------
Total adjustments 13,032 4,113
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Net cash provided by operating activities 16,506 9,232
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (7,009) (11,459)
Proceeds from sale of Penn Steel 9,006 --
Cash paid for acquisition (47,780) --
-------- --------
Net cash used by investing activities (45,783) (11,459)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (2,223) 3,468
Repayments of acquired debt (16,340) --
Change in credit facility and other financing
arrangements, net 47,730 (2,674)
Change in paid in capital 28 128
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Net cash provided by financing activities 29,195 922
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NET DECREASE IN CASH AND CASH EQUIVALENTS
FOR THE PERIOD (82) (1,305)
Cash and cash equivalents, beginning of period 2,267 2,645
-------- --------
Cash and cash equivalents, end of period $ 2,185 $ 1,340
======== ========
See notes to interim condensed consolidated financial statements.
4
CITATION CORPORATION
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, 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 December 28, 1997 and for
the three months ended December 28, 1997 and December 29, 1996 are
unaudited; however, in the opinion of management, all adjustments,
consisting only of normal recurring accruals necessary for a fair
presentation, have been included. These financial statements should be
read in conjunction with the 1997 annual report on SEC Form 10-K.
2. A summary of inventories is as follows:
September 28, December 28,
1997 1997
------------- ------------
Raw materials $10,981 $ 9,416
Supplies and containers 12,478 13,007
Finished goods 25,494 28,326
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$48,953 $50,749
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3. Balances of major classes of assets and accumulated depreciation are as
follows:
September 28, December 28,
1997 1997
-------------- ------------
Land and improvements $ 11,096 $ 11,292
Buildings 50,217 51,371
Plant equipment 267,607 277,348
Office equipment 11,797 12,683
Transportation equipment 10,527 10,617
Construction in progress 23,149 24,870
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374,393 388,181
Less accumulated depreciation (91,402) (98,543)
-------- --------
$282,991 $289,638
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5
4. The Company's other assets consist of the following:
September 28, December 28,
1997 1997
------------- ------------
Goodwill $46,161 $45,507
Consulting and non-competition
agreements 1,178 1,031
Other 2,463 2,392
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$49,802 $48,930
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5. Long term debt consists of the following:
September 28, December 28,
1997 1997
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Credit facility $170,393 $170,486
Industrial development bonds 900 832
Other financing arrangements 12,940 12,241
-------- --------
184,233 183,559
Less current portion of long-term debt 2,994 2,840
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$181,239 $180,719
======== ========
6. Earnings per share ("EPS")
Quarter Ended December 29, 1996
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
EPS - BASIC:
Income available to
common stockholders $3,474 17,718,491 $0.20
EFFECT OF DILUTIVE COMMON
SHARES:
Weighted Average Stock Options
Outstanding 662,549
LESS:
Stock Options - Assumed Buyback (1) (286,205)
Stock Options - Antidilutive (2) (259,000)
------ ---------- -----
EPS - DILUTED $3,474 17,835,835 $0.19
====== ========== =====
6
Quarter Ended December 28, 1997
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
EPS - BASIC:
Income available to
common stockholders $5,119 17,781,325 $0.29
EFFECT OF DILUTIVE COMMON
SHARES:
Weighted Average Stock Options
Outstanding 638,025
LESS:
Stock Options - Assumed Buyback (1) (405,634)
Stock Options - Antidilutive (2) --
------ ---------- -----
EPS - DILUTED $5,119 18,013,716 $0.28
====== ========== =====
(1) The number of stock options assumed to be 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
$11.28 and $18.06 for the three month periods ending December 29, 1996 and
December 28, 1997, 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. Effective December 1, 1997 the Company completed the purchase of the 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 $ 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)
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Purchase Price $ 2,000
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7
8. The following unaudited pro forma summary for the three months ended
December 29, 1996 combines the results of operations of the Company with
the acquisitions of Interstate Forging Industries, Inc. ("Interstate") and
Camden as if the acquisitions had occurred at the beginning of the 1997
fiscal year. For the three months ended December 28, 1997, the pro forma
summary presents the results of operations of the Company as if the
acquisition of Camden 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:
Three Months Ended
--------------------------
December 29, December 28,
1996 1997
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Sales $ 155,791 $ 173,938
Operating income $ 10,326 $ 10,843
Income before provision for income taxes $ 6,191 $ 7,751
Pro forma net income $ 3,776 $ 4,728
Weighted average shares outstanding - basic (note 6) 17,718,491 17,781,325
Pro forma earnings per common share - basic $ 0.21 $ 0.27
Weighted average shares outstanding - diluted (note 6) 17,835,835 18,013,716
Pro forma earnings per common share - diluted $ 0.21 $ 0.26
9. Subsequent to December 28, 1997, the Company acquired the stock of Dycast,
Inc. ("Dycast"), an aluminum die casting and machining company in Lake
Zurich, Illinois for a purchase price of approximately $20,940 plus the
assumption of approximately $2,620 of debt. The acquisition will be
accounted for using the purchase method of accounting. Dycast represents
the Company's first acquisition in aluminum die casting technology and
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.
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8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial condition and
earnings during the periods included in the accompanying interim condensed
consolidated balance sheets and statements of income.
Forward Looking Statements. The statements in this Form 10-Q that are not
historical fact are forward looking statements. Such statements are subject to
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 Securities and
Exchange Commission.
QUARTER ENDED DECEMBER 28, 1997 COMPARED TO THE QUARTER ENDED DECEMBER 29, 1996
Sales. Sales increased 21.2%, or $29.7 million, to $170.2 million for the three
months ended December 28, 1997 from $140.5 million in the comparable prior year
period. The increase consists of $13.1 million from the acquisitions of
Interstate and Camden (collectively the "Acquisitions") and an 11.8% increase or
$16.6 million from the Company's existing operations. Tons shipped for the
Company's foundry operations increased 18.0% or 11,000 tons, to 72,000 tons for
the three months ended December 28, 1997 from 61,000 tons in the comparable
prior year period.
Gross Profit. Gross profit increased 22.0%, or $4.9 million, to $27.0 million
in the 1998 first quarter from $22.1 million in the comparable 1997 period. The
overall gross margin increased slightly to 15.9% in the 1998 first quarter from
15.8% in the comparable 1997 period. The gross margin for Acquisitions in the
first quarter of fiscal 1998 was approximately 15.6%. The gross margin from
existing units increased slightly to 15.9% in the 1998 first quarter from 15.8%
in the comparable prior year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 21.3%, or $2.7 million, to $15.5
million in the 1998 first quarter from $12.8 million in the comparable 1997
period. SGA costs attributable to the Acquisitions was $1.1 million. SGA costs
at existing Company operations increased approximately 13.0%, or $1.6 million.
As a percentage of sales, overall SGA expenses remained flat at approximately
9.1% for both the first quarter of 1998 and 1997.
Operating Income. Operating income increased 23.0%, or $2.1 million, to $11.4
million for the 1998 first quarter from $9.3 million for the comparable 1997
quarter. The overall operating
9
margin increased slightly to 6.7% in the 1998 first quarter from 6.6% in the
comparable 1997 period. The operating margin for the Acquisitions for the 1998
first quarter was approximately 7.4%. The operating margin of existing Company
operations increased slightly to 6.7% in the 1998 first quarter from 6.6% in the
comparable 1997 period.
Interest Expense. Interest expense decreased to $3.2 million in the 1998 first
quarter from $3.5 million in the comparable 1997 period. This decrease is
primarily attributable to the reduction of interest rates by approximately 0.5%
in July 1997 when the Company's credit facility was amended. (See additional
discussion under "Liquidity and Capital Resources"). The overall interest rate
reduction was partially offset by higher average outstanding debt balances
relating to the acquisition of Interstate during the first quarter of fiscal
1997. The purchase price plus assumed debt of Interstate totalled approximately
$73.8 million. Capitalized interest for the 1998 first quarter was
approximately $275 thousand. There was no capitalized interest during the 1997
first quarter.
LIQUIDITY AND CAPITAL RESOURCES
On July 24, 1997, the Company's 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 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). At September 28, 1997 and December 28, 1997, the Company
was able to borrow at LIBOR plus 1%. The 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 December
28, 1997, the Company's unused commitment fee rate was .25%. The 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 December 28, 1997, the total outstanding balance under this credit facility
was $170,393 and $170,486, respectively and $129,607 and $129,514, respectively,
was available for borrowing.
At September 28, 1997 and December 28, 1997, the Company had $5,393 and $5,486,
respectively, outstanding under the swing line of credit of the above credit
facility at the prime rate of 8.5%. At September 28, 1997 and December 28, 1997
the remaining $165,000 outstanding under this facility related to five revolving
loans. The Company had $8,000 and $77,000 outstanding under these loans at
interest rates of 6.65% and 6.85% which reprice on October 27, 1997 and January
27, 1998, respectively. On October 27, 1997 the $8,000 was repriced at an
interest rate of 6.69% and was due to reprice again on December 29, 1997. The
remaining $80,000 outstanding under this facility at September 28, 1997 and
December 28, 1997 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 September 28, 1997. 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 only with financially
10
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.
ACQUISITIONS
Notes 7 and 9 of the interim condensed consolidated financial statements
included elsewhere in this report describe the recent acquisitions of Camden and
Dycast.
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 December
28, 1997.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: CITATION CORPORATION
February 9, 1998 /s/ T. Morris Hackney
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T. MORRIS HACKNEY
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
February 9, 1998 /s/ Frederick F. Sommer
------------------------------------------------
FREDERICK F. SOMMER
President and Chief Operating Officer
February 9, 1998 /s/ R. Conner Warren
------------------------------------------------
R. CONNER WARREN
Executive Vice President of Finance and
Administration and Treasurer
(Principal Financial Officer)
February 9, 1998 /s/ Thomas W. Burleson
------------------------------------------------
THOMAS W. BURLESON
Vice President-Controller and Assistant Secretary
(Principal Accounting Officer)
12