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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES ACT OF 1934
For the fiscal year ended September 28, 1997 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT
Common Stock, $.01 par value
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(Title of Class)
Indicate whether the registrant has 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, and has been subject to such filing requirements for the past 90
days.
Yes X No ________
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the registrant's voting Common Stock held by non-
affiliates of the registrant was approximately $162,767,163 as of December 15,
1997 based on the NASDAQ National Market System closing price on that date.
As of December 15, 1997 there were 17,782,600 shares of the registrant's Common
Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference into
Part III of this Form 10-K.
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TABLE OF CONTENTS
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Item No. Page No.
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PART I
1. Business.................................................... 3
2. Properties.................................................. 18
3. Legal Proceedings........................................... 18
4. Submission of Matters to a Vote of Security Holders......... 19
Executive Officers.......................................... 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
6. Selected Financial Data..................................... 21
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 23
8. Financial Statements........................................ 31
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 60
PART III
10. Directors and Executive Officers of the
Registrant.................................................. *
11. Executive Compensation...................................... *
12. Security Ownership of Certain Beneficial
Owners and Management....................................... *
13. Certain Relationships and Related Transactions.............. *
PART IV
14. Exhibits, Financial Statement schedules, and
Reports on Form 8-K......................................... 61
SIGNATURES............................................................ 63
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* Portions of the Proxy Statement for the Registrant's Annual Meeting of
Shareholders to be held on February 17, 1998 are incorporated by reference in
Part III of this Form 10-K.
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CITATION CORPORATION
PART I
ITEM 1: BUSINESS
Citation Corporation is a manufacturer of cast, forged and machined
components for the capital and durable goods industries. At its 20 operations
in nine states, its approximately 6,000 employees produce aluminum, iron and
steel castings, steel forgings and machined and assembled components for
automobiles, light, medium and heavy trucks, off-highway construction equipment,
agricultural equipment, pumps, compressors and industrial valves, machine tools,
aircraft and other durable goods. The Company's stock is traded on the Nasdaq
National Market under the symbol "CAST."
BUSINESS CONDITIONS
Within its markets, Citation identifies the following trends;
Outsourcing. Many of Citation's current and potential customers are large
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original equipment manufacturers (OEM's) including Caterpillar Inc., Ford Motor,
General Motors, Freightliner and other large multi-national corporations.
In the past, many large OEM's were integrated manufacturers with large
component manufacturing capability in-house. Today, many of these same
companies see their component operations as liabilities that are less cost
effective than independent suppliers and require significant capital and
management attention to maintain. This applies to captive foundries and forge
shops that the OEM's have operated and, in some cases, continue to operate
today.
Leading Edge Reports, a market research firm which prepared the 1996 market
study, "Foundry Products and Markets," has estimated that the captive share of
foundry shipments has dropped from approximately 29 percent in 1987 to less than
18 percent by 1996. During the same period, however, the independent share has
risen from approximately 71 percent to slightly more than 82 percent.
Citation believes that outsourcing is beneficial to its customers because
the Company provides a broad range of components and services to its customers
and is growing through acquiring other companies and adding internal capacity.
Further, Citation is one of the largest suppliers of its type and is, therefore,
capable of handling the requirements of major corporations wishing to outsource
castings or forgings.
Supplier Consolidation. Many OEM's, including those in markets served by
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Citation, are working to consolidate their supplier base. Supplier
consolidation is attractive to these companies because it is more efficient to
deal with a smaller, but better equipped group of suppliers.
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Consolidation also allows them to practice a partnership process with vendors.
In a partnership process, vendors are invited to participate in the product
development stage, which helps the customer reduce new product development
costs. For the vendor, it offers the attractiveness of better understanding the
customer goals and the ability to design long term agreements acceptable to both
parties. Supplier consolidation thus reduces costs to the customers and
improves the efficiency of the purchasing process.
Citation supports customers who wish to consolidate suppliers by providing
engineering and design services through its Automotive Sales and Engineering
Division located in Southfield, Michigan and through its individual forge and
foundry locations. Citation offers other value-added services as appropriate.
As a large, diverse, and financially healthy corporation, Citation believes
supplier consolidation is a positive trend.
Foundry/Forge Shop Closings. Both foundry and forge industries, while
----------------------------
collectively very large in total U.S. shipments (approximately $22.8 billion in
1996), are composed of a multitude of very fragmented companies, many of which
are regional businesses with focus on a single market and/or product. While
there are a number of larger companies in the industry, a relatively small
number have revenues exceeding $100 million and most are smaller than $50
million.
Further, the foundry/forge industry is consolidating, with a few larger
corporations such as Citation growing through acquisition. According to Leading
Edge, approximately 1,000 foundries closed down in the 10-year period from 1987
to 1997. This included both very large captive facilities which were not cost
effective and small foundries that could not keep up with capital demands and
government regulations. In most cases, the companies went out of business and
the capacity was lost.
There are far fewer U.S. forge shops than foundries, approximately 500 in
1997 according to Leading Edge, and there have been relatively few closings in
the past decade. More typically, weaker forge shops were closed in the decades
of the 60's and 70's due to competition from ductile iron. However, forges,
like foundries, tend to be relatively small companies with revenues under $50
million. Only a relatively few large forging companies exist.
This environment of smaller, fragmented companies is considered a plus for
Citation because there are opportunities to make acquisitions and few
competitors in the industry which can follow the same strategy.
Material shift to lighter weight. Led by a quest for lighter vehicles to
---------------------------------
improve gas mileage, as well as other applications, weight reduction has
important implications to metal component suppliers.
In industries such as automotive, this has resulted in substantial growth
in lighter weight materials such as aluminum. In the past two decades, a number
of gray iron and steel components on cars were converted to aluminum. This
includes parts such as engine cylinder heads, intake
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manifolds, brake master cylinders, wheels and other parts. In addition, engine
blocks for a number of passenger cars are now cast in aluminum, instead of gray
iron.
As a result, aluminum, which constituted approximately 191 pounds per
vehicle in 1991, is projected by Drucker Research to reach 350 pounds per
vehicle by 2001, an average annual growth rate of more than six percent.
However, beyond changing to lighter weight materials, there are other
implications. Processes such as austempered ductile iron allow a smaller,
lighter, but higher strength part to substitute for a larger part. Further,
smaller, higher-revving gasoline engines may require higher strength forged
steel crankshafts instead of cast crankshafts.
Citation Corporation is a leading producer of aluminum castings and forged
steel, as well as steel and iron castings, and is, thus, able to take advantage
of shifting material trends better than companies with single product
capability.
BUSINESS STRATEGY
Citation's strategy encompasses four elements.
First, the Company is a growth company with a growth objective of
approximately 15 percent a year. The Company's financial objectives are built
on the premise of growth, thus assuming higher leverage than industry norms.
Because cash is utilized for both internal and external growth, the Company does
not currently pay its shareholders a dividend.
Citation operates in a highly fragmented industry where very few metal
component producers exceed $100 million in annual revenues and the average
company employs less than 100 employees. Within this industry, very few are
pursuing a consolidation strategy.
Citation's plans are to grow at five percent a year (approximately twice
GDP growth) through internal growth and 10 percent a year through acquisition.
Such growth is measured as an average over time.
Second, rather than focusing solely on the product produced, Citation grows
based upon its markets and customers' needs. The question Citation seeks to
answer is, "What are the customer's wants and needs that fit within Citation's
core competence?"
Thus, Citation's strategy is to provide products and technologies that
solve customer needs. A Citation sales proposal might show specifications,
function and costs of aluminum, iron, or steel castings, or steel forgings.
Third, Citation tends to view diverse metal shaping technologies and
different metallurgy as complementary rather than competitive. Therefore, it is
strongly desirable to offer steel forgings and ductile iron castings, depending
upon the application.
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Fourth, Citation considers a broad market presence appropriate. The
Company sees itself as a supplier to durable goods and capital goods markets,
rather than linking itself to the cycles of any single market. The Company
maintains, however, a significant presence in the automotive and heavy truck
markets and will continue to do so because these markets are two of the largest
consumers of castings and forgings.
ACQUISITIONS
In fiscal 1997, Citation made its largest acquisition to date when the
Company acquired Interstate Forging Industries, Inc. of Milwaukee, Wisconsin and
Navasota, Texas.
Interstate currently has sales capacity of approximately $140 million that
will increase to approximately $155 million when it completes construction and
installation of a 7,000 ton forging press at its Navasota plant. This is
scheduled for completion at the end of fiscal 1998.
Interstate, which is operated as a separate group, produces custom closed
die forgings of carbon, alloy and stainless steel for construction equipment,
aircraft, off-road-equipment, material handling, and truck and trailer
industries. Interstate is one of Caterpillar Inc.'s largest suppliers of steel
forgings and is a Certified Caterpillar Supplier.
The purchase price was approximately $70 million, including the assumption
of debt. Shareholders of Interstate are also eligible for a contingent payment
based upon Interstate exceeding certain established earnings targets during the
period from January 1, 1996 to December 31, 1998.
Interstate has a total of 626 employees at its two locations. The
Milwaukee plant, which is also its corporate headquarters, produces forgings up
to 50 pounds. The Navasota location produces large forgings up to 2,500 pounds.
Navasota currently possesses the largest mechanical forging press in North
America, its 14,000-ton behemoth, "Big Bear."
Since Citation completed its initial public offering of stock in August
1994, the Company has completed 12 acquisitions and one divestiture, more than
tripling the revenues. While most of these acquisitions are currently
performing at or above the Company average return, the future strategy is to
consider fewer, but larger acquisitions. The goal of acquiring only companies
that are expected to be accretive to earnings continues to be part of the
acquisition strategy.
Acquisitions that fit these goals must also fit with Citation's extensive
metal forming experience. Within this range, however, strategic acquisition
opportunities are extremely broad.
These opportunities include companies that add to current Citation
technology within a like or dissimilar material; increase Citation's current
product offering, such as in larger or smaller components than now produced;
offer new or emerging methods of producing similar products; provide different
processes; or give market or geographic (including global) diversification.
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Given the highly fragmented industry in which Citation operates, and the
limited number of true consolidators within those industries, the acquisition
opportunities for Citation are excellent.
INTERNAL EXPANSION
During fiscal 1997, Citation not only made its largest acquisition to date
but also undertook its largest overall capital program, spending approximately
$40 million. This is 1.3 times depreciation and amortization and indicates
Citation's commitment to add capacity, improve its competitive position and
maintain its facilities in an environmentally aware and employee safe manner.
The largest single capacity-adding project involves expansion of Citation's
lost foam facilities at Columbiana, Alabama - Citation Foam Casting Company.
Lost foam is a different form of casting technology that utilizes pattern
replicas of polystyrene coated with ceramic slurry. The coating is dried, the
pattern placed in a metal flask and sand compacted around it. When the
polystyrene pattern is contacted by molten metal, the pattern evaporates. What
remains when the metal cools is a metal replica.
There are a number of advantages of lost foam or "evaporative pattern"
casting. Principally, a part can be designed nearer to the net shape required.
This reduces or eliminates machining, thus lowering the overall cost to the
customer. General Motor's Saturn Division, for example, produces component parts
for its vehicles using both iron and aluminum lost foam manufacturing.
Citation Foam currently has one production line and a large casting
prototype line that was completed in fiscal 1997.
Currently the division is doubling capacity by adding additional melt
capability, a second production line, expanding and upgrading casting finishing
operations, adding a paint line and expanding building and ancillary equipment.
All together, the projects are estimated to cost $12.5 million, spread over
fiscal 96, 97 and 98. Start up is scheduled for the second quarter of fiscal
98.
Approximately 105 additional employees will be hired when the project is
complete, adding to the 140 currently employed. After completion of the
expansion, Citation Foam, which is already the largest independent iron lost
foam producer in the world, will have capacity to produce in excess of $30
million annually in lost foam gray and ductile iron castings.
Another very significant project that will be completed over three years --
fiscal 96, 97 and 98 -- is the addition of a 7,000-ton press at Interstate
Forging's Navasota plant.
This 7,000-ton press will be the second largest at Interstate and will
provide about $15 million in additional capacity when completed at the end of
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fiscal 1998. Capital cost for the project is about $5.0 million, of which
approximately $2.5 million was spent in fiscal 1997.
The project will relieve some of the demand on the 6,000-ton press, which
is currently pressured to meet customer orders. Total Interstate capacity when
the project is complete will be approximately $155 million annually.
A number of other capital projects also offer important productivity gains.
The Oberdorfer Industries facility, one of the oldest aluminum casting
plants in the U.S., is being rebuilt from the inside out. This includes support
equipment such as electrical and compressed air, as well as additional melt
capacity, heat treatment and a no-bake molding line. This project will take four
years to complete at a cost of approximately $12 million, of which about $2.5
million was spent in fiscal 1997. The State of New York is supporting the
rebuild with low cost loans, training grants and other assistance.
When completed in fiscal 2000, Oberdorfer's practical capacity will have
doubled and it will have the capability of producing a more cost effective,
higher quality product.
Also during fiscal 1997, Castwell Products replaced a high-speed molding
line with a newer version. The replacement, at an approximate cost of $1.4
million, adds capacity and is more efficient than the old line.
Alabama Ductile added an automatic pressure pour for one of its three high-
speed molding lines at a cost of $824 thousand. Addition of the unit is
expected to increase efficiency and quality.
Hi-Tech Corporation, the medium volume machining company acquired in fiscal
1996, spent approximately $4.0 million in capital during the year for several
projects. Hi-Tech added two production lines to machine low volume knuckles and
disconnect housings, plus added to its physical plant.
Texas Steel increased its steel casting capacity through the addition of an
air set molding line. The new line has the capability to produce 240 tons per
month of castings weighing in the range of 2,000 to 20,000 pounds. The
expansion also required the addition of a 2,000-pound per minute sand mixer to
prepare sand for molding and a building expansion. Completed during the fiscal
year at a capital cost of approximately $660 thousand, the new molding line adds
about $7 million in annual capacity for Texas Steel.
Iroquois Foundry added warehouse and shipping capacity at the main plant at
a cost of about $500 thousand. Iroquois had been shipping a portion of its
requirements out of old facilities not located on the plant site. This was
costly and inefficient.
During fiscal 1997, Citation allocated approximately $23.4 million in
capital to insure its divisions remain cost efficient and to add additional
product capability.
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In addition, a significant amount of capital is required to stay abreast of
environmental requirements and for employee safety. Citation spent approximately
$1.9 million for environmental projects in fiscal 1997 and an additional $850
thousand for employee safety. All told, staying current is a significant expense
for manufacturing businesses today.
MARKETS AND CUSTOMERS
Citation's programs to broaden its product lines showed significant
progress during fiscal 1997. In fiscal 1995, the Company's output was almost 90
percent gray and ductile iron castings, less than seven percent steel castings
and only three percent aluminum castings. However, in fiscal 1997, Citation
produced 55 percent iron castings, 20 percent aluminum castings, 18 percent
steel forgings and slightly more than seven percent steel castings. Not included
in these breakdowns is the fact that the Company now also offers medium volume
machining through its Hi-Tech Corporation subsidiary.
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CITATION SHIPMENTS BY METAL TYPE
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Ductile Gray Alloy
Iron Iron Iron Steel Aluminum Steel
Castings Castings Castings Castings Castings Forgings
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1997 40% 14% 1% 7% 20% 18%
1995 74% 16% - 7% 3% -
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The largest single impact on product diversification in 1997 was the
acquisition of Interstate Forging Industries. That acquisition made Citation one
of the few large metals component companies able to offer both castings and
forgings.
In addition, successful new product launches at Citation's Southern
Aluminum and a strong order book at Bohn Aluminum, both acquired in fiscal 1996,
increased Citation's presence in the aluminum castings industry.
Ford Motor Company remained Citation's largest customer for the second year
in a row. Due to product launches of engine components produced by Southern
Aluminum for Ford, Ford's percentage of Citation revenues increased from
slightly less than six percent in fiscal 1996 to 10.5 percent in fiscal 1997.
Citation's second largest customer, Caterpillar, Inc., doubled as a
percentage of Citation business. A large part was due to the acquisition in
October 1996 of Interstate Forging. Interstate is one of Caterpillar's largest
suppliers of steel forgings.
In addition, Caterpillar is Texas Steel's largest customer. Overall,
Caterpillar is a significant customer to four Citation divisions - Interstate,
Texas Steel, Iroquois Foundry and Berlin Foundry. These divisions were all
acquired since Citation's August 1994 IPO.
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In fact, Caterpillar may best represent how Citation's market inward
strategy is designed to work. Citation considers ways to meet the needs of
substantial multi-national original equipment manufacturers such as Caterpillar
and has grown by filling those needs through different technology and metallurgy
within the Citation repertoire.
In the case of Caterpillar, this represents steel castings, steel forgings,
large gray iron castings and small to medium-sized ductile iron castings.
New to Citation's top ten customer list in 1997 were Uni Boring Co., Inc.
and Hydro Aluminum Adrian, Inc. Uni Boring is a machiner of aluminum parts
supplied by Southern Aluminum Castings for Ford. Hydro Aluminum is an aluminum
forge company supplying the automotive industry. Bohn Aluminum supplies Hydro
with special alloy permanent mold castings for automotive air conditioners.
CITATION'S TOP 10 CUSTOMERS
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1997 1996 1995
CUSTOMER PERCENT PERCENT PERCENT
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Ford Motor Co. 10.5% 5.8% 1.0%
Caterpillar, Inc. 8.7 4.3 0.7
Dana Corporation 5.6 5.2 7.8
Digitron Tool Co. 2.9 4.5 1.0
Simpson Industries 2.4 2.0 1.9
Uni Boring Co., Inc. 2.3 1.6 -
Kelsey-Hayes Company 2.1 1.8 1.8
Chrysler Corporation 2.0 2.1 1.7
Hydro Aluminum Adrian, Inc. 1.7 1.2 -
Hendrickson Suspension 1.7 2.0 4.3
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TOTAL 39.9% 30.5% 20.2%
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Reflecting changes in Citation's product offering and customers, Citation's
major markets also showed changes. Despite these changes, Citation's markets
continue to reflect the Company's strategy to maintain Motor Vehicles as
approximately half of its revenues and Capital Goods as the other half.
The percentage increase in the Automotive/Light Truck market from fiscal
1996 to fiscal 1997 reflects larger Citation shipments to Ford. The increase is
due to the successful launch of new Ford products at Southern Aluminum.
On the other hand, the percentage decrease in the Medium/Heavy Truck
markets reflects the decline of heavy truck orders since the 1995 banner year.
While Citation shipments to this segment actually grew from fiscal 1996 to
fiscal 1997, growth was less than that of most other markets served by the
Company.
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The significant increases to the Construction Equipment market reflect
increased shipments to Caterpillar primarily because of the acquisitions of
Texas Steel and Interstate Forging, both of which are major Caterpillar
suppliers, and continued growth in end user demand for Caterpillar products.
CITATION SHIPMENTS BY MARKET
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1997 1996 1995
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Automotive/Light Truck 34.7% 30.2% 30.5%
Medium and Heavy Trucks 15.1 18.5 23.5
Construction Equipment 11.3 6.5 -
Pumps, Valves and Compressors 6.9 10.8 11.1
Oil Field Equipment 6.1 1.6 0.8
Internal Combustion Engines 4.7 5.8 4.3
Agriculture 4.2 3.5 2.6
Aircraft and Aerospace 2.7 2.4 2.5
Railroad Equipment 2.0 3.0 3.7
Electrical Equipment 1.9 2.2 3.9
Mining Equipment 1.5 - -
Waterworks 1.4 1.9 2.8
Machine Tools 0.9 2.5 2.4
Other Uses 6.6 11.1 11.9
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TOTAL 100.0% 100.0% 100.0%
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Pumps, Valves and Compressors declined largely due to the divestiture of
Pennsylvania Steel and the idling of the Texas Foundries Steel Division. Both
actions took place at the end of fiscal 1996.
Oil Field Equipment markets increased due to strong demand for oil and gas
well drilling and accessory equipment and the acquisition of Interstate Forging,
which is a significant supplier to the Oil Field Equipment market.
Citation's market shipments and top ten customers in fiscal 1997 reflect
the success of the acquisition program since Citation's initial public offering
in August 1994 and the drive to diversify the Company's product base. From its
origin as an iron castings foundry company, Citation has developed into a broad
metal components supplier to Capital and Durable Goods Industries.
ORGANIZATIONAL CHANGE
When Citation Corporation held its initial public offering in August 1994,
the Company had sales of $192 million. Today, sales have grown more than three-
fold to $650 million.
In 1994, Citation was a leading producer of iron and steel castings in
Alabama, Texas and North Carolina. Today, Citation is also among the ten largest
independent producers of aluminum castings and the top five independent
producers of closed-die steel forgings. In addition to the three
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southern states where Citation was located in 1994, the company today also
operates in Wisconsin, Illinois, New York, Ohio, Tennessee, and Indiana.
In 1994, the Company had seven manufacturing locations and about 2,100
employees. Today the Company has 17 divisions and about 6,000 employees.
In order to manage a growing corporation in this significantly changing
environment, Citation must constantly change its methods and procedures or risk
chaos. But the goal is not to embrace change for change's sake. Senior
management has to understand which policies and procedures remain useful in
managing Citation's growing number of divisions, yet develop new systems where
improvement is required.
A basic philosophy of managing the divisions is to support maximum autonomy
at each unit. The purpose of creating "stand alone" divisions is to foster an
entrepreneurial spirit throughout the corporation. Yet, given an autonomous
culture, how does Citation truly develop synergy among these independent
divisions?
REORGANIZING CORPORATE DIRECTION
One of the programs required for well-managed growth was the need to
develop a more cooperative culture so that, with the help of a lean central
operations and staff management team, strengths and opportunities developed by
one division could be best utilized by all.
Accomplishing this, however, to a large extent, required reorganizing
operations management.
At the time, T. Morris Hackney was holding positions of Chairman,
President, CEO and COO. Mr. Hackney recognized that the sheer size of what
would be a 17-division organization required increasing focus on the operating
side of the business.
In July 1996, Frederick F. "Rick" Sommer was added to the Citation team as
President and COO. With prior experience as President and CEO of a public,
multi-divisional, $700 million automotive parts supplier, Mr. Sommer had
experienced rapid growth and the changing methods of managing a public company
in turbulent times.
The senior organization then, as now, includes the Chairman and CEO,
responsible for the guiding policies of the Company as well as long term
strategy and mergers and acquisitions. The President and COO is responsible for
the operating and marketing organizations.
The Executive Vice President - Finance and Administration and CFO, is
filled by long time Citation employee, R. Conner Warren. Mr. Warren is
responsible for the fiscal management of the Company's resources and the
direction of the corporate staff.
The manufacturing organization functioned around groups of like businesses,
each led by a Group Vice President. At the end of 1997, there were four groups:
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High Volume Foundry Group
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Alabama Ductile Casting Co., Brewton, Alabama
Citation Foam Casting Co., Columbiana, Alabama
Mansfield Foundry Corporation, Mansfield, Ohio
Texas Foundries, Lufkin, Texas
Hi-Tech Corporation, Albion, Indiana
Camden Casting Center, Camden, Tennessee (acquired December 1, 1997)
Medium Volume Foundry Group
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Southern Ductile Casting Co., Bessemer, Selma and Centreville, Alabama
Foundry Service Company, Biscoe, North Carolina
Mabry Foundry, Beaumont, Texas
Iroquois Foundry, Browntown, Wisconsin
Berlin Foundry Corporation, Berlin, Wisconsin
Special Foundry Group
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Bohn Aluminum Corporation, Butler, Indiana
Southern Aluminum Castings Co., Bay Minette, Alabama
Oberdorfer Industries, Inc., Syracuse, New York
Texas Steel Company, Ft. Worth, Texas
Castwell Products, Skokie, Illinois
Forging Group
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Interstate Forging Industries, Inc., Milwaukee, Wisconsin and Navasota,
Texas
In addition to the corporate organization, the division management team was
changed and realigned with half of the 17 operating divisions receiving new
management during the past 18 months.
DEVELOPING A COOPERATIVE CULTURE
Most of the management tools used to develop a cooperative culture are
basic and straightforward.
The first step was establishment of a measurement system that allows prompt
and accurate measurement of actual results against the expected financial
results.
Citation utilized new software which allows each division to feed results
direct to corporate headquarters more quickly and accurately than sending
results on paper. Reports that compare results are now quickly made available to
divisions so that each can see how it compares with like divisions.
Two formal evaluation programs also review division systems and results.
Conducted at the divisions by senior corporate management, one is called an
Administrative Review, the other, a Performance Review.
The first measures systems, to insure the division is organized properly.
The second measures results. Both focus on benchmarking each
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division against its own systems and budgets as well as comparing it with
results at other divisions. Each program emphasizes continuous improvement.
To further formalize the cooperative culture, at least one corporate wide
meeting for each management discipline is held either at corporate headquarters
or at a division location each year. In fiscal 1997, sessions were held with
corporate and division controllers, sales and sales administration personnel,
technical and quality directors, safety engineers, human resource managers, MIS
personnel, maintenance and industrial engineers, operations managers, purchasing
managers, and others. In all cases, the approach was the same - to share
successes and to assist other divisions with implementation of improvements.
Divisional budget meetings with corporate management give the operating
units the opportunity to make a case for capital needs and to agree upon
financial performance for the coming year and beyond.
Divisional capital expenditures are categorized by project. Projects for
the purpose of increasing division capacity, improving productivity or cost
effectiveness, or to give the division the capability for producing new products
must exceed the corporate cost of capital. The budget process is also linked to
continuous improvement goals.
General Managers' meetings are held twice a year - once at corporate
headquarters and once at a remote site. At these meetings, division managers
share concerns and develop ideas. Key corporate and staff personnel also
participate in team-building activities with the General Managers.
Of course, development is not limited to management levels.
Employee attitude surveys are conducted to help division management
understand employee concerns. Training programs at the division level help
strengthen employee skills to accomplish the goal of advancing our human
resources while creating a safer workforce. Several divisions have basic
education programs to strengthen employee communications and, in some cases,
assist towards a G.E.D. certificate.
Success of these and other programs to develop a cooperative culture is not
always immediately apparent. Often they are an investment in the future of the
organization. However, a number of successes were noted in fiscal 1997. These
include:
- Casting finishing technology developed at Alabama Ductile division is
now utilized at Castwell Products, Foundry Service, Mansfield,
Southern Aluminum, Texas Foundries, and Southern Ductile divisions.
- A number of divisions have completed either ISO and/or QS-9000
certification and several more will complete certification shortly
using assistance from corporate staff and outside consultants.
- Eight divisions are interlinking software and computer systems to
better utilize those hardware systems that have more resources than
required by a single division.
14
<PAGE>
- Standard maintenance items and surplus equipment are now listed in
computer printouts and circulated through all divisions to reduce
duplication and improve utilization.
- Divisions are being refocused to better fit capabilities with
production. Medium and low volume work is being moved from Bohn
Aluminum to Oberdorfer Industries to better match Oberdorfer's
capabilities and to allow Bohn additional capacity for increasing high
volume production. Texas Foundries' medium volume iron work is
similarly being moved to several facilities of the Medium Volume
Foundry Group.
- Alabama Ductile and Southern Aluminum developed visual employee
communications systems now in use at other Citation divisions.
RAW MATERIALS
The primary raw material used by the Company to manufacture iron and steel
castings is steel scrap. To produce aluminum castings the Company purchases
aluminum ingot to specified alloy grades. The ingot is purchased from primary
aluminum producers and in some cases from secondary smelters. Bohn Aluminum and
Southern Aluminum produce part of their requirements by operating smelters that
melt scrap aluminum.
The Company purchases steel scrap from numerous sources, generally regional
scrap brokers, using a combination of spot market purchases and contract
commitments. The Company has no long-term contractual commitments with any scrap
supplier and does not anticipate, nor has it experienced, any difficulty in
obtaining scrap. This is due to the relatively large number of suppliers and the
Company's position as a major scrap purchaser.
The cost of steel scrap is subject to fluctuations, but the Company has
contractual arrangements with most of its customers allowing it to adjust its
casting prices to reflect fluctuations. In periods of rapidly rising steel scrap
prices, these adjustments will lag the current market price for steel scrap
because they are generally based on average market prices for prior periods.
These periods vary by customer but are generally no longer than one quarter.
This adjustment lag may have an adverse effect on the Company's results of
operations during such periods.
The price of aluminum ingot is also subject to fluctuations and in some
cases the Company has contractual arrangements to adjust its prices to reflect
fluctuations. In other cases, changes in aluminum ingot prices must be recovered
through casting price negotiations with the customer. Recovery of cost increases
in both cases may lag the aluminum ingot price increases by a quarter or more.
BACKLOG
See the financial summary on page 22.
15
<PAGE>
COMPETITION
The market for the Company's casting products is highly competitive. There
are an estimated 3,000 foundries and forge shops currently producing ductile
iron, gray iron, steel and aluminum castings and steel forgings in the United
States. The companies within the industry compete on the basis of price,
quality, service and engineering. The industry consolidation that has occurred
over the past two decades has resulted in a significant reduction in the number
of smaller foundry companies and a rise in the share of production held by the
larger foundry companies. Major users of castings and forgings own some of the
foundries and forge shops in this industry. For example, the three largest
automobile manufacturers operate foundries. Some of the Company's competitors
have greater financial resources than the Company, may have lower production
costs than the Company, or both.
EMPLOYEES
As of September 28, 1997, the Company had 5,778 full time employees, of
whom 4,898 were hourly employees and 880 were salaried employees. Unions
represent approximately 2,414 of the Company's hourly manufacturing employees at
11 of its 19 plants under collective bargaining agreements expiring at various
times through October 2002.
The management of each division and corporate staff participate in a
management bonus pool equal to 15% of income before taxes and corporate
administrative charges. Divisional management's bonus compensation is based on
the financial performance of their respective divisions, while corporate
management's bonus compensation is based on overall Company profitability.
Hourly incentive plan programs and participants vary by division.
ENVIRONMENTAL MATTERS
Companies in the foundry and forging industries must comply with numerous
federal, state and local environmental laws and regulations which address the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste, and the release of hazardous substances into the environment.
The Company's operations require compliance with these regulations, as well as
regulations concerning workplace safety and health standards. The Company
believes it is in substantial compliance with these laws and regulations.
The Company has implemented substantial record keeping, management
procedures and practices for the purposes of complying with environmental laws
and regulations. In seeking to comply with these laws and regulations, each
foundry has personnel responsible for environmental issues who work closely with
the Company's corporate director of environmental management. The corporate
director assists in supplying technical advice and guidance in interpreting
regulations, transferring technology, procedures and obtaining permits.
The chief environmental issues for the Company's foundries are air
emissions and solid waste disposal. Air emissions, primarily dust particles,
are handled by dust collection systems. The solid waste generated by these
16
<PAGE>
foundries is generally sand, which is recycled and reused in the foundry or
disposed of as non-hazardous waste in landfills on Company property or in
permitted off-site landfills. The Company has closed certain of the landfills
on its properties without incurring material expenditures and expects to close
other such landfills in the future without incurring material expenditures. The
Company has also begun beneficially reusing the excess sand as fill material and
as a raw material in other products such as cement and asphalt. However, there
can be no assurance that future regulations will not require the Company to
incur additional and potentially material costs related to its past or present
environmental practices. Because its forge shops do not melt metal nor utilize
sand in their operations, environmental issues are much more limited than
foundry operations.
Although the Company's practices have, in certain instances, resulted in
noncompliance with environmental laws and regulations and in non-material fines
related thereto, the Company currently does not anticipate any environmental
related costs that would have a material adverse effect on its operations.
However, it cannot be assured that the Company's activities will not give rise
to actions by governmental agencies or private parties, which could cause the
Company to incur fines, penalties, operational shutdowns, damages, clean-up
costs or other similar expenses. Also, the Company's foundries, capacity
levels, or increases thereof, are dependent upon the Company's ability to
maintain, or obtain increases in such levels in its permits for air emissions.
However, it cannot be assured that the Company will be able to maintain its
current permits, or obtain appropriate increases in capacity levels under such
permits, so as to maintain its current level of operations or increase capacity
as it may desire in the future.
The Company is implementing a source removal and shallow groundwater
remediation project at Castwell Products for purposes of removing excessive
levels of trichloroethylene ("TCE") which were detected at this facility. These
excessive levels of TCE resulted from previous leakage into the groundwater from
a part washing area located on the premises. The need for the remediation was
identified in connection with the Company's acquisition of Castwell Products,
and the Company assumed an accrued liability in the amount of $1.2 million
related to the estimated cost of the remediation. Of this amount, approximately
$600,000 is expected to be paid through fiscal 1998 in connection with soil
removal, groundwater remediation measures and testing expenses. Of that amount,
approximately $365,000 was spent through fiscal 1997. Thereafter, the Company
estimates that it will incur approximately $30,000 annually for an estimated 20
to 30 years for ongoing monitoring and periodic sampling tests. There can be no
assurance, however, that the costs and expenses related to this remediation
project will not be materially greater than currently estimated.
The 1990 amendments to the Clean Air Act may have a major impact on the
compliance costs of many U.S. companies, including foundries. Many of the
regulations that will implement the Clean Air Act amendments have not yet been
promulgated. The MACT Standard affecting iron and steel foundries will not
issue draft regulations until November 1999 and final regulations until November
2000. Until such regulations are issued, it is not possible to estimate the
costs the Company may need to incur to comply with them.
17
<PAGE>
ITEM 2: PROPERTIES
The following table sets forth certain information concerning the
facilities owned and operated by the Company as of September 28, 1997:
<TABLE>
<CAPTION>
CAPACITY/(1)/ FLOOR SPACE
FACILITY LOCATION (TONS PER YEAR) (SQ. FT.)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alabama Ductile Brewton, Alabama 45,000 135,000
Bohn Aluminum Butler, Indiana 15,000 135,000
Berlin Foundry Berlin, Wisconsin 30,000 335,000
Castwell Products Skokie, Illinois 32,000 286,000
Citation Foam Columbiana, Alabama 13,000 130,000
Foundry Service Biscoe, North Carolina 20,000 160,000
Hi-Tech Corporation Albion, Indiana /(2)/ 67,000
Interstate Forging Milwaukee, Wisconsin 16,000 200,000
Navasota, Texas 42,000 500,000
Iroquois Foundry Browntown, Wisconsin 25,000 131,600
Mabry Foundry Beaumont, Texas 12,250 118,000
Mansfield Foundry Mansfield, Ohio 30,000 242,000
Oberdorfer Industries Syracuse, New York 3,500 250,000
Southern Aluminum Bay Minette, Alabama 22,000 255,000
Southern Ductile Bessemer, Alabama 15,000 108,000
Centreville, Alabama 2,400 32,000
Selma, Alabama 5,000 30,000
Texas Foundries Lufkin, Texas 90,000 595,000
Texas Steel Corporation Fort Worth, Texas 23,500 454,000
------- ---------
441,650 4,163,600
</TABLE>
(1) Maximum capacity of each foundry is based on six days of operations
per week with two ten-hour-shifts per day, except for Iroquois, which
is based on one ten-hour-shift per day and Bohn Aluminum, which is
based on five days of operations per week with three eight-hour-shifts
per day.
(2) Hi-Tech Corporation performs machining. Capacity, therefore, is stated
in sales revenue, rather than tons. Estimated capacity of Hi-Tech
Corporation is approximately $15.0 million in sales revenue.
ITEM 3: LEGAL PROCEEDINGS
The Company is party to several pending legal proceedings, all of which are
deemed by management of the Company to be routine litigation incidental to the
business, and none of which is believed likely to have a material adverse effect
on the Company, its financial position or operations.
18
<PAGE>
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year covered by this
report, no matter has been submitted to a vote of security holders through the
solicitation of proxies or otherwise.
EXECUTIVE OFFICERS
The executive officers of the Company as of the end of fiscal 1997 were as
follows:
Name Position
- ---- --------
T. Morris Hackney Chairman of the Board and Chief Executive Officer
Frederick F. Sommer President and Chief Operating Officer
R. Conner Warren Executive Vice President of Finance and Administration,
Treasurer and Chief Financial Officer
Virgil C. Reid Group Vice President - Medium Volume Foundries
Timothy L. Roberts Group Vice President - Special Foundry Group
Thomas W. Burleson Vice President - Controller and Assistant Secretary
T. MORRIS HACKNEY founded the Company in 1974 and has served as its Chief
Executive Officer since that time. Prior to establishing the Company, Mr.
Hackney served as President of Hackney Corporation, a chain-link fence
manufacturer, for nine years.
FREDERICK F. SOMMER joined the Company as its President and Chief Operating
Officer in July 1996. Automotive Industries, Inc. formerly employed Mr. Sommer
as its President and Chief Operating Officer from 1992 until his appointment as
President and Chief Executive Officer in 1994. He remained in this position
after the company was acquired by Lear Corporation in 1995, and also served as a
Senior Vice President of Lear Corporation.
R. CONNER WARREN joined the Company in 1975, shortly after its founding.
Since that time, Mr. Warren has served the Company in various capacities and is
currently its Executive Vice President of Finance and Administration and
Treasurer. Mr. Warren is the Company's senior administrative and financial
officer. Prior to joining the Company, Mr. Warren was an employee of Hackney
Corporation. He is a past president of the American Foundryman's Society and of
the American Cast Metals Association and is currently the U.S. representative to
the International Association of Foundry Technical Associations and a member of
its executive board.
VIRGIL C. REID joined the Company in 1981 and has served as Group Vice
President - Medium Volume Foundries since October 1992. Prior to attaining his
current position, Mr. Reid served as General Manager of Alabama Ductile, and
General Manager, Sales Administrator and Controller of Foundry Service. From
1974 to 1981, Mr. Reid served in various capacities for GTE, including
Divisional Cost Accounting Manager of its Metal Laminates Division.
19
<PAGE>
TIMOTHY L. ROBERTS joined the Company in May 1995 as Group Vice President -
Special Foundry Group. He served as Director of Manufacturing Operations at
Intermet Corporation, an iron castings company, from 1994 to 1995, and
previously served ten years at Wheland Foundry where he advanced to the position
of Director of Operations and General Manager.
THOMAS W. BURLESON joined the Company in 1992 as Corporate Controller and
became Vice President - Controller in August 1994. Prior to joining the
Company, Mr. Burleson was Corporate Controller of Marvin's, a regional building
products chain, from 1990 to 1992, and was an accountant with Coopers & Lybrand
from 1980 to 1990. Mr. Burleson is a certified public accountant.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock first began trading on the NASDAQ National
Market System on August 2, 1994. The stock is quoted in the NASDAQ National
Market System under the symbol CAST. The following table sets forth, for the
fiscal periods indicated, the high and low bid prices reported on the NASDAQ
National Market System.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995
First Quarter $13 $10 1/2
Second Quarter $15 1/8 $12 1/8
Third Quarter $17 5/8 $13 1/8
Fourth Quarter $18 3/8 $15
FISCAL 1996
First Quarter $19 $ 9 1/4
Second Quarter $13 $ 9 3/4
Third Quarter $15 7/8 $11 1/2
Fourth Quarter $14 3/4 $10 3/8
FISCAL 1997
First Quarter $13 1/8 $ 9 1/2
Second Quarter $15 3/8 $ 9 7/8
Third Quarter $18 1/4 $13 1/4
Fourth Quarter $20 $16 1/4
</TABLE>
As of December 11, 1997, there were approximately 3,300 holders of the
Company's Common Stock, including shares held in "street" names by nominees who
are record holders.
The Company has never declared or paid a cash dividend, except for
dividends paid to the Company's former S corporation shareholders. It is the
present policy of the Board of Directors to retain all earnings for the
development of the Company's business. Any payment of dividends in the future
will depend upon the Company's earnings, capital requirements, financial
condition and such other factors as the Board of Directors may deem relevant.
20
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company and
should be read in conjunction with the financial statements and notes related
thereto included elsewhere in this report. The selected financial data as of
and for the five years ended September 28, 1997 have been derived from the
Company's consolidated financial statements, which were audited by Coopers &
Lybrand L.L.P., the Company's independent accountants.
21
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED/(1)/
(Dollars in thousands, except per share amounts)
October 3, October 2, October 1, Sept. 29, Sept. 28,
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $150,318 $191,566 $307,681 $487,753 $648,961
Cost of sales 123,733 151,921 243,493 404,961 538,502
-------- -------- -------- -------- --------
Gross profit 26,585 39,645 64,188 82,792 110,459
Selling, general and administrative
expenses 17,545 19,650 32,697 45,844 58,066
-------- -------- -------- -------- --------
Operating income 9,040 19,995 31,491 36,948 52,393
Interest expense, net 2,513 2,813 3,974 7,866 14,433
Other expenses (income) 382 (24) (581) 1,178 (14)
-------- -------- -------- -------- --------
Income before provision for
income taxes 6,145 17,206 28,098 27,904 37,974
Provision for income taxes/ (2)/ 2,568 6,538 11,019 11,162 14,810
-------- -------- -------- -------- --------
Net income (pro forma
through October 2, 1994)/(2)/ $ 3,577 $ 10,668 $ 17,079 $ 16,742 $ 23,164
======== ======== ======== ======== ========
Pro forma net income per share/(3)/ $0.36 $1.02 $1.27 $0.95 $1.31
======== ======== ======== ======== ========
Weighted average number of shares
outstanding (in thousands)/(3)/ 9,933 10,486 13,438 17,694 17,733
OTHER DATA (UNAUDITED):
Backlog (in dollars) $ 25,535 $ 48,051 $ 78,262 $ 84,596 $156,880
Tons shipped 110,481 131,984 196,616 231,618 268,034
Capital expenditures $ 7,921 $ 17,228 $ 29,844 $ 31,166 $ 40,531
Depreciation and amortization 5,468 7,089 10,638 20,151 30,489
EBITDA/(4)/ 14,508 27,084 42,129 57,099 82,896
Gross margin 17.7% 20.7% 20.9% 17.0% 17.0%
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets $ 34,990 $ 46,713 $ 94,591 $135,359 $160,503
Current liabilities 39,654 31,213 56,015 72,855 93,957
Working capital (4,664) 15,500 38,576 62,504 66,546
Net property, plant and equipment 41,910 63,203 143,425 199,367 282,991
Total assets 82,223 113,449 271,871 383,557 493,296
Short-term debt, including current
portion of long-term debt 18,332 579 6,553 2,654 2,994
Long-term debt, excluding current
portion 24,387 29,703 71,254 140,946 181,239
Stockholders' equity 15,041 43,631 132,476 149,319 172,639
</TABLE>
22
<PAGE>
(1) The Company operates on a 52- or 53-week fiscal year ending on the Sunday
closest to September 30. Fiscal years 1994, 1995, 1996, and 1997 were 52-
week fiscal years and fiscal year 1993 was a 53-week fiscal year.
(2) The Company terminated its status as an S corporation on the completion of
its initial public offering in August 1994 and became subject to corporate
income taxation. Accordingly, pro forma net income through October 2, 1994
reflects federal and state income taxes as if the Company had been a C
corporation based on the statutory tax rates that were in effect during the
periods reported.
(3) The weighted average number of shares outstanding for the year ended
October 2, 1994 gives effect to the number of shares (1,002,500) of Common
Stock that would have been required to be sold (at the initial public
offering price of $8.00 per share) to fund an $8.0 million S Corporation
distribution to the former S corporation stockholders effected at the
closing of the Company's initial public offering in August 1994.
(4) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income plus depreciation and amortization. EBITDA
should not be considered as an alternative measure of net income or cash
provided by operating activities (both as determined in accordance with
generally accepted accounting principles), but it is presented to provide
additional information related to the Company's debt service capability.
EBITDA should not be considered in isolation or as a substitute for other
measures of financial performance or liquidity.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto, included
elsewhere in this annual report.
The Company operates on a 52- or 53-week year, ending on the Sunday closest
to September 30. Fiscal years 1994, 1995, 1996, and 1997 consisted of 52 weeks,
and fiscal 1993 consisted of 53 weeks. The next 53-week year will be the fiscal
year ending October 3, 1999.
RESULTS OF OPERATIONS
The following table sets forth operating results expressed as a percentage
of sales for the periods indicated, and the percentage change in such operating
results between periods.
23
<PAGE>
<TABLE>
<CAPTION>
Percentage of Sales Period-to-Period Percentage
-------------------
Fiscal Year Ended Increase (Decrease)
----------------- -------------------
1996 1997
October 1, September 29, September 28, compared to compared to
1995 1996 1997 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales ------------------- 100.0 100.0 100.0 58.5 33.0
Cost of sales ----------- 79.1 83.0 83.0 66.3 33.0
----- ----- -----
Gross profit ------------ 20.9 17.0 17.0 29.0 33.4
Selling, general and
administrative expenses - 10.6 9.4 9.0 40.2 26.7
----- ----- -----
Operating income -------- 10.3 7.6 8.0 17.3 41.8
Interest expense, net --- 1.3 1.6 2.2 97.9 83.5
Other expense (income) -- (0.1) 0.3 0.0 302.8 (101.2)
----- ----- -----
Income before income
taxes ------------------- 9.1 5.7 5.8 (0.7) 36.1
</TABLE>
FISCAL YEAR ENDED SEPTEMBER 28, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 29,
1996
Sales. Sales increased 33.0%, or $161.2 million, to $649.0 million in 1997
from $487.8 million in 1996. Of this increase, $169.2 million resulted from
sales by the Company's 1996 and 1997 acquisitions. These include the Company's
Interstate Forging Industries operations, acquired during fiscal year 1997, and
the increase resulting from a full year of sales of the Company's Texas Steel,
Hi-Tech, Southern Aluminum, and Bohn Aluminum operations which were acquired
during fiscal year 1996. A decrease of $33.1 million in sales revenue resulted
from the sale of Pennsylvania Steel and the idling of the Texas Foundries Steel
Division, both of which were effective as of September 29, 1996. If the
continuing operations were compared on a "same store" basis, i.e., excluding
both the sales increase resulting from the acquisitions and the decrease
attributable to the sold and idled operations, sales revenue would have
increased approximately $25.1 million or 5.2%. Management believes this increase
was primarily attributable to the general strength of the underlying economy and
its positive impact on the Company's customers, as well as capacity expansions
at selected Company facilities. Tons shipped increased 15.7% for the year ended
September 28, 1997.
Gross Profit. Gross profit increased 33.4% or $27.7 million, to $110.5
million in 1997 from $82.8 million in 1996. Gross margin of 17.0% was
essentially the same in both 1997 and 1996 due to lower average gross margins on
the acquisitions. Excluding the non-continuing operations, $25.6 million of the
increase in gross profit was attributable to the acquisitions, and $4.3 million
of the increase was attributable to the same store operations.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased 26.7%, or $12.2 million, to $58.1
million in 1997 from $45.8 million in 1996. Approximately $13.0 million of this
increase resulted from the addition of the acquisitions. The SG&A expenses
increase in 1997 was offset by a decrease of $3.1 million due to the sale of
Pennsylvania Steel and the idling of the Texas Foundries Steel
24
<PAGE>
Division at the end of 1996. The remaining increase of $2.3 million in 1997
compared to 1996 relates primarily to higher sales commissions and
administrative costs and related staffing resulting from the Company's growth at
its continuing operations. As a percentage of sales, SG&A expenses decreased to
9.0% in 1997 from 9.4% in 1996.
Operating Income. Operating income increased 41.8%, or $15.4 million, to
$52.4 million in 1997 from $36.9 million in 1996. Operating margin increased to
8.1% in 1997 from 7.6% in 1996. The increase in the operating margins and
operating income resulted from operating efficiencies and lower SG&A expenses as
a percentage of sales at the acquisitions. In addition, spreading the SG&A
expenses over a significantly increased sales base without proportional
increases in the SG&A expenses also contributed to improved operating margins.
Operating income attributable to the acquisitions increased by $12.6 million in
1997. Same store operating income increased by $2.0 million in 1997 and the
operations of Pennsylvania Steel and Texas Foundries Steel Division, which were
sold and idled respectively, had a negative impact on 1996 operating income of
$0.9 million.
Interest Expense. Interest expense, net of interest income, increased
83.5%, or $6.5 million, to $14.4 million in 1997 from $7.9 million in 1996.
This increase is primarily attributable to significantly higher average debt
balances related to acquisition activity during fiscal 1996 and 1997. The
Company capitalized $388 thousand of interest costs in 1997 as compared to $453
thousand in 1996.
Bank debt increased from $143.6 million as of September 29, 1996, to $185.2
million as of September 28, 1997. This increase is primarily attributable to
the Interstate Forging acquisition on October 29, 1996. The acquisition of
Interstate increased bank borrowings approximately $73.8 million. On July 24,
1997, the Company closed a new secured revolving credit facility with a maximum
loan commitment of $300 million with a consortium of banks, led by The First
National Bank of Chicago. See further discussion of the Company's current
credit facility under "Liquidity and Capital Resources."
Net Income. Net income increased 38.4%, or $6.4 million, to $23.2 million
in 1997 from net income of $16.7 million in 1996. Net income for 1997 was 3.6%
of sales, as compared to 3.4% of sales in 1996. Net income increased by $3.4
million as a result of the acquisitions. In 1996, Pennsylvania Steel and the
Steel Division of Texas Foundries, prior to their sale and idling, respectively,
combined to lose approximately $1.2 million after tax.
FISCAL YEAR ENDED SEPTEMBER 29, 1996 COMPARED TO FISCAL YEAR ENDED OCTOBER 1,
1995
Sales. Sales increased 58.5%, or $180.1 million to $487.8 million in 1996
from $307.7 million in 1995. Of this increase, approximately $190.2 million
resulted from sales by the Company's 1995 and 1996 acquisitions. These include
the Company's Texas Steel, Hi-Tech, Southern Aluminum and Bohn Aluminum
operations, each
25
<PAGE>
acquired during fiscal year 1996, and the increase resulting from the full-
year's sales of the Company's Oberdorfer, Iroquois, Berlin, Pennsylvania Steel
and Castwell operations which were acquired during fiscal year 1995. There was a
$10.1 million sales decrease for the operations owned prior to 1995 due to
general declines in the economy affecting the demand for the Company's products,
particularly products utilized in the Heavy Truck market which decreased 15-20%
from 1995 to 1996. For fiscal 1996, average selling prices remained
approximately the same as in fiscal 1995 at all operating units. Tons shipped
increased 17.8% for the year ended September 29, 1996.
Gross Profit. Gross profit increased 29.0% or $18.6 million to $82.8
million in 1996 from $64.2 million in 1995. Gross profit margins decreased to
17.0% in 1996 from 20.9% in 1995, due to the lower gross margins from the
majority of the 1995 and 1996 acquisitions, the impact of lower sales volume on
units owned prior to 1995, and the lower operating efficiencies due to a major
expansion of Texas Foundries operations which was delayed and suffered major
equipment downtime. Of the increase in the gross profit, $30.9 million resulted
from the 1995 and 1996 acquisitions. The remaining $12.3 million decrease
resulted from the impact of the economy on units owned prior to 1995 and the
inefficient operations at Texas Foundries.
Selling, General and Administrative Expenses. Selling, general and
administrative (SG&A) expenses increased by 40.2% or $13.1 million to $45.8
million in 1996 from $32.7 million in 1995. Expenses increased by $15.6 million
as the result of SG&A expenses attributable to companies acquired in 1995 and
1996. Expenses from operations owned prior to 1995 declined by approximately
$2.5 million as a result of reductions in sales representative commissions and
spreading corporate administrative costs over a larger sales base. For fiscal
1996, SG&A expenses, as a percentage of sales, declined to 9.4% from 10.6% in
fiscal 1995.
Operating Income. Operating income increased by 17.3% or $5.4 million to
$36.9 million in 1996 from $31.5 million in 1995. Approximately $15.3 million
of the operating income resulted from the Company's 1995 and 1996 acquisitions,
while operating income from the pre-acquisition units declined approximately
$9.9 million in 1996. The decline was primarily attributable to lower revenues
of the units owned prior to 1995, inefficiencies at the Mansfield Foundry
operation, the impact of the delayed "ramp-up" of the Texas Foundries' Iron
Division, and excess losses attributed to maintenance shut-downs of a number of
the units in July and August 1996. The operating margin in 1996 declined to
7.6% from 10.3% in 1995, attributable to the preceding factors and the generally
lower operating margins of the acquired operations.
Interest Expense. Interest expense, net of interest income, increased
97.9% or $3.9 million to $7.9 million in 1996 from $4.0 million in 1995.
Interest expense increased because of higher debt balances to fund acquisitions
and slightly higher average interest rates. Additionally, the Company
capitalized interest on the Texas Foundries expansion project until
26
<PAGE>
it was substantially complete. The Company capitalized interest of $453 thousand
in 1996 as compared to $1.0 million in 1995.
The Company's debt increased from $77.8 million at October 1, 1995 to
$143.6 million at September 29, 1996. The increase was primarily attributable
to the completion of the acquisitions of Texas Steel, Southern Aluminum, Bohn
Aluminum and Hi-Tech Corporation during the current fiscal year. See further
discussion of the Company's current credit facility under "Liquidity and Capital
Resources."
Other Expense (Income). In fiscal year 1996, the Company established a
$1.8 million pre-tax allowance for the anticipated loss on the sale of
Pennsylvania Steel, which occurred subsequent to the fiscal year end.
Pennsylvania Steel was sold for approximately $9.0 million, which was less than
net book value. The Company also had approximately $600 thousand in other
income in both fiscal 1996 and 1995.
Net Income. Net income declined 2.0% or $400 thousand to $16.7 million in
1996 from $17.1 million in 1995. As a percentage of sales, 1996 net income
declined to 3.4% as compared to 5.6% in 1995.
SUPPLEMENTAL QUARTERLY INFORMATION
The following table presents selected unaudited quarterly results for
fiscal years 1996 and 1997. The Company's sales are generally lower in its
first fiscal quarter due to plant closings by major customers for vacations,
holidays, and model changeovers. In addition, the Company's operations usually
take normal one-week shut-downs during July. The units lose production for the
week (or weeks) they are down, and also incur heavier than normal maintenance
expenses during these periods. These events negatively affect gross margins at
operating units in both the first and fourth fiscal quarters.
27
<PAGE>
<TABLE>
<CAPTION>
Fiscal Quarters Ended:
Dec. 31, Mar. 31, Jun. 30, Sept. 29, Dec. 29, Mar. 30, Jun. 29, Sept. 28,
1995 1996 1996 1996 1996 1997 1997 1997
-----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ------------------ $91,761 $120,955 $143,420 $131,617 $140,486 $170,435 $177,858 $160,182
Gross profit ----------- 15,860 22,345 26,253 18,334 22,126 29,582 32,221 26,530
SG&A Expenses ---------- 9,956 11,776 12,326 11,786 12,805 15,290 15,648 14,323
Operating income ------- 5,904 10,569 13,927 6,548 9,321 14,292 16,573 12,207
Income before taxes ---- 5,214 8,826 11,509 2,355 5,695 10,474 12,795 9,010
Net income ------------- 3,128 5,296 6,905 1,413 3,474 6,389 7,805 5,496
Net income per share --- $ 0.18 $ 0.30 $ 0.39 $ 0.08 $ 0.20 $ 0.36 $ 0.44 $ 0.31
As a Percentage of Sales % % % % % % % %
Gross profit ----------- 17.3 18.5 18.3 13.9 15.8 17.4 18.1 16.6
SG&A expenses ---------- 10.8 9.7 8.6 9.0 9.1 9.0 8.8 8.9
Operating income ------- 6.4 8.7 9.7 5.0 6.6 8.4 9.3 7.6
Income before taxes ---- 5.7 7.3 8.0 1.8 4.0 6.2 7.2 5.6
</TABLE>
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, bank financing
and proceeds from public equity offerings to fund its capital requirements.
Additionally, the Company requires capital to finance accounts receivable and
inventory.
Net cash provided by operating activities primarily represents net income
plus non-cash charges for depreciation, amortization and deferred income taxes
and changes in working capital positions. Because of the capital intensive
nature of the business, non-cash charges for depreciation and amortization are
substantial. Net cash provided by operating activities was $22.6 million, $21.8
million, and $68.4 million in 1995, 1996, and 1997 respectively.
Net cash used in investing activities in 1995, 1996, and 1997 was $97.0
million, $67.9 million, and $82.3 million respectively. Substantially all of
the above investment activities were for capital expenditures and acquisitions.
In addition, the Company had non-cash investments of $14.9 million in 1995 and
$320 thousand in 1996 related to acquisitions. There were no such
transactions during 1997. These transactions are described more fully in the
notes to the consolidated financial statements included elsewhere in this annual
report.
In order to meet or exceed customer expectations, the Company historically
has made significant capital investment in its plants and equipment. The Company
has spent $101.5 million during the three fiscal years ended September 28, 1997
for the purpose of improving production efficiency, expanding capacity and
technological capability, reducing costs
28
<PAGE>
and complying with regulatory requirements. The Company believes that on average
it needs to spend amounts at least equal to its annual depreciation charge in
order to maintain its facilities in competitive working order, and in years when
substantial new capacity is added, capital expenditures may significantly exceed
the Company's depreciation charge. The most significant capital project has been
the expansion at Citation Foam. This included the addition of a new foam casting
production line, additional melt capacity and a new casting painting, finishing,
and shipping facility. The project will be substantially complete in the first
quarter of fiscal 1998. As a result of the expansion project, Citation Foam
capacity will be more than doubled.
The Company had net cash provided by financing activities of $83.2 million,
$38.5 million, and $14.2 million for 1995, 1996, and 1997, respectively. The
Company's secondary public offering in 1995 provided $69.5 million of cash. For
1995, 1996, and 1997, net cash of $17.2 million, $30.1 million, and $18.0
million, respectively, was provided from the Company's credit facility, capital
lease obligations, and other financing arrangements. Cash distributions to the
Company's original stockholders (pre IPO) were $3.5 million during 1995.
Dividends paid in fiscal year 1995 represent the final payment of previously
undistributed S Corporation taxable income. The Company has no current plans to
pay dividends, as future earnings of the Company are expected to be retained for
use in the business.
On July 24, 1997, the Company's credit facility was increased from $230
million to $300 million to be used for working capital purposes and to fund
future acquisitions. At September 28, 1997, the total outstanding balance under
the credit facility was $170.3 million and $129.6 million was available for
borrowing. This transaction and the outstanding debt balances at September 29,
1996 and September 28, 1997 are described more fully in note 6 of the
consolidated financial statements included elsewhere in this annual report.
The Company anticipates that its cash flow from operations and amounts
expected to be available for borrowing from lending institutions will be
adequate to fund its capital expenditure and working capital requirements for
the next two years.
CYCLICALITY, SEASONALITY AND INDUSTRY CONCENTRATION
The Company has had and expects to have a significant concentration of its
sales in the automotive/light truck and heavy truck industries. The Company's
sales are generally lower in its first and fourth fiscal quarters due to plant
closings by major customers for vacations, holidays and model changeovers. As a
result, the inherent cyclicality and seasonality of these industries may affect
the Company's future sales and earnings, particularly during periods of slow
economic growth or recession. In addition to the above industries, the Company
also has significant sales to substantially all major industrial sectors of the
economy. Management believes the differing cycles of these sectors will provide
protection against periodic down cycles in any particular industrial sector.
29
<PAGE>
INFLATION
Management believes that the Company's operations have not been materially
adversely affected by inflation because the Company is generally able to pass
through to its customers inflationary cost increases. However, in periods of
rapidly rising steel scrap prices, the Company will lag behind the market on the
amount it can pass through to customers, and its results of operations may be
adversely affected during these periods.
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 2 of the consolidated financial statements included elsewhere in this
report describes recently issued accounting standards.
CONFORMANCE OF COMPUTER SYSTEMS TO YEAR 2000
Citation is in the process of reviewing current software and has surveyed
its divisional operations to assess the impact of the year 2000 issue. The
standard software in use at its corporate office and divisions and the computer
software for interface among its divisions and corporate office is year 2000
compliant. At three divisions, older or locally developed software systems are
in use that are not fully in conformance with year 2000 effects. Programs to
bring remaining software in compliance are anticipated to be completed by the
end of fiscal year 1998. Citation management believes that its own compliance
programs will not result in material costs to the Company.
The Company is in the preliminary stages of assessing the impact of the
year 2000 issue on its major suppliers and customers to determine the extent to
which the Company is vulnerable to those third parties' failure to remediate
their own year 2000 issue. Based on information presently available, the Company
does not anticipate any material impact on its financial condition or results of
operations from the effect of the year 2000 issue on the Company's internal
systems, or those of its major suppliers and customers. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another company,
or a conversion that is incompatible with the Company's systems, would not have
a material adverse impact on the Company. The Company does not believe it has
any material exposure to contingencies related to the year 2000 issue for
products it has sold.
RECENT ACQUISITIONS
The Company completed one acquisition during fiscal 1997, as follows:
Interstate Forging Industries, Inc. Milwaukee, WI October, 1996
Navasota, TX
In addition to the above acquisition completed during the fiscal year, the
Company completed the acquisition of Camden Castings Center, Camden, TN on
December 1, 1997 following the close of the 1997 fiscal year. These
transactions are described more fully in the notes to the consolidated financial
statements included elsewhere in this annual report.
30
<PAGE>
ITEM 8: FINANCIAL STATEMENTS
The following financial statements are contained in this report.
Page
Report of Independent Certified Public Accountants 32
Consolidated Financial Statements for Years Ended October 1, 1995,
September 29, 1996 and September 28, 1997
Consolidated Balance Sheets 33
Consolidated Statements of Income 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
Report of Independent Certified Public Accountants on
Supplementary Information 69
Schedule II - Valuation and Qualifying Accounts 70
31
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
Citation Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheets of Citation
Corporation and subsidiaries (the Company) as of September 28, 1997 and
September 29, 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended September 28, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Citation
Corporation and subsidiaries as of September 28, 1997 and September 29, 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended September 28, 1997, in conformity with
generally accepted accounting principles.
Birmingham, Alabama
November 17, 1997
32
<PAGE>
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 29, 1996 and September 28, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,267 $ 2,645
Accounts receivable - trade, less allowance for doubtful accounts
of $1,421 and $1,367 in 1996 and 1997, respectively 77,931 93,542
Inventories 39,478 48,953
Income tax receivable 3,655
Deferred income taxes 4,411 8,429
Prepaid expenses and other assets 7,617 6,934
------------- -------------
Total current assets 135,359 160,503
Property, plant, and equipment, net of accumulated depreciation 199,367 282,991
Intangible assets, net of accumulated amortization 47,802 47,373
Other assets 1,029 2,429
------------- -------------
Total assets $ 383,557 $ 493,296
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 8,328 $ 4,211
Current portion of other long-term debt 2,654 2,994
Accounts payable 33,668 43,256
Income tax payable 2,745
Accrued wages and benefits 6,122 9,131
Accrued benefit plan contributions 3,051 4,324
Accrued vacation 4,219 4,716
Accrued insurance reserves 4,508 6,592
Accrued interest 2,014 2,430
Other accrued expenses 8,291 13,558
------------- -------------
Total current liabilities 72,855 93,957
Credit facility 133,055 170,393
Other long-term debt, less current portion above 7,891 10,846
Deferred income taxes 15,725 38,921
Other liabilities 4,712 6,540
------------- -------------
Total liabilities 234,238 320,657
Commitments and contingencies (Notes 13, 17, and 19)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares
authorized, none issued and outstanding
Common stock, par value $0.01 per share; 30,000,000 shares
authorized, 17,715,540 and 17,759,600 shares issued and
outstanding in 1996 and 1997, respectively 177 177
Additional paid-in capital 107,087 107,243
Retained earnings 42,055 65,219
------------- -------------
Total stockholders' equity 149,319 172,639
------------- -------------
Total liabilities and stockholders' equity $ 383,557 $ 493,296
============= =============
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------ --------------- -------------
<C> <C> <C>
<S>
Sales $ 307,681 $ 487,753 $ 648,961
Cost of sales 243,493 404,961 538,502
------------ --------------- -------------
Gross profit 64,188 82,792 110,459
Selling, general, and administrative expenses 32,697 45,844 58,066
------------ --------------- -------------
Operating income 31,491 36,948 52,393
Other expenses (income):
Interest expense, net of amounts capitalized of $1,003, $453,
and $388 in 1995, 1996, and 1997, respectively 3,974 7,866 14,433
Other, net (581) 1,178 (14)
------------ --------------- -------------
3,393 9,044 14,419
------------ --------------- -------------
Income before provision for income taxes 28,098 27,904 37,974
Provision for income taxes 11,019 11,162 14,810
------------ --------------- -------------
Net income $ 17,079 $ 16,742 $ 23,164
============ =============== =============
Earnings per average common share $ 1.27 $ 0.95 $ 1.31
============ =============== =============
Weighted average common shares outstanding 13,437,900 17,693,974 17,733,157
============ =============== =============
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
NUMBER ADDITIONAL
OF PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
----------- ------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, October 2, 1994 13,242,500 $ 132 $ 35,265 $ 8,234 $ 43,631
Issuance of common stock
under Incentive Award Plan 41,500 332 332
Issuance of common stock
for the acquisition of:
Berlin Foundry Corporation 61,540 1 999 1,000
Pennsylvania Steel Foundry
and Machine Company, Inc. 80,000 1 1,309 1,310
Issuance of common stock 4,250,000 43 69,133 69,176
Subscriptions under employee
stock purchase plan (52) (52)
Net income 17,079 17,079
----------- ------- ------------ --------- -----------
Balance, October 1, 1995 17,675,540 177 106,986 25,313 132,476
Issuance of common stock
under Incentive Award Plan 40,000 320 320
Subscriptions under employee
stock purchase plan (219) (219)
Net income 16,742 16,742
----------- ------- ------------ --------- -----------
Balance, September 29, 1996 17,715,540 177 107,087 42,055 149,319
Issuance of common stock
under Incentive Award Plan 59,310 499 499
Purchase of common shares
for constructive retirement (15,250) (255) (255)
Subscriptions under employee
stock purchase plan (88) (88)
Net income 23,164 23,164
----------- ------- ------------ --------- -----------
Balance, September 28, 1997 17,759,600 $ 177 $ 107,243 $ 65,219 $ 172,639
=========== ======= ============ ========= ===========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
CITATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended October 1, 1995, September 29, 1996, and September 28, 1997
(In Thousands)
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28,
1995 1996 1997
----------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 17,079 $ 16,742 $ 23,164
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 461 584 64
Provision for loss on sale of Penn Steel 1,807
Depreciation expense 8,944 17,080 26,539
Amortization expense 1,694 3,071 3,950
Deferred income taxes, net 1,866 3,444 3,045
Gain on sale of property, plant, and equipment (200) (38) (116)
Changes in operating assets and liabilities, net:
Accounts receivable - trade (2,823) (7,294) (3,729)
Inventories (572) (3,138) (1,175)
Prepaid expenses and other assets (6,789) (2,135) 1,519
Income tax receivable (489) (3,166) 3,655
Income tax payable (1,236) 3,520
Accounts payable (29) 198 3,828
Accrued expenses and other liabilities 4,698 (5,374) 4,159
----------- ---------- ------------
Net cash provided by operating activities 22,604 21,781 68,423
----------- ---------- ------------
Cash flows from investing activities:
Property, plant, and equipment expenditures (29,844) (31,166) (40,531)
Proceeds from sale of property, plant, and equipment 367 258 371
Cash paid for acquisitions (67,500) (36,130) (51,089)
Proceeds from sale of Penn Steel 9,006
Other nonoperating assets, net (820) (37)
----------- ---------- ------------
Net cash used in investing activities (96,977) (67,858) (82,280)
----------- ---------- ------------
Cash flows from financing activities:
Cash overdraft 8,328 (3,890)
Issuance of capital stock 69,456 101 411
Purchase of Common Stock for constructive retirement (255)
Other financing arrangements, net (1,670) (6,652) (3,029)
Repayment of acquired debt (16,750) (33,662) (16,340)
Credit facility, net change 35,634 70,417 37,338
Distributions to stockholders (3,466)
----------- ---------- ------------
Net cash provided by financing activities 83,204 38,532 14,235
----------- ---------- ------------
Net increase (decrease) in cash and cash equivalents 8,831 (7,545) 378
Cash and cash equivalents, beginning of year 981 9,812 2,267
----------- ---------- ------------
Cash and cash equivalents, end of year $ 9,812 $ 2,267 $ 2,645
=========== ========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,154 $ 8,434 $ 13,932
=========== ========== ============
Income taxes, net of refunds received $ 10,249 $ 10,797 $ 3,431
=========== ========== ============
</TABLE>
See Notes 16, 17, and 18 for additional supplemental disclosures of cash flow
information.
See notes to consolidated financial statements.
36
<PAGE>
CITATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Data)
1. ORGANIZATION AND OPERATIONS
Citation Corporation and subsidiaries (the Company) is a manufacturer of
cast, forged, and machined components for the capital goods and durable goods
industries. At its 16 operating divisions, the Company produces aluminum,
iron and steel castings, steel forgings, and machined and assembled
components for automobiles, light, medium and heavy trucks, off-highway
construction equipment, agricultural equipment, pumps, compressors and
industrial valves, and other durable goods. The Company owns and operates
businesses in Alabama, Illinois, Indiana, New York, North Carolina, Ohio,
Texas, and Wisconsin which function as separate divisions or subsidiaries.
References herein to Alabama Ductile Casting Company (ADCC), Berlin Foundry
Corporation (BFC), Bohn Aluminum Corporation (Bohn), Castwell Products (CP),
Citation Foam Casting Company (CFCC), Foundry Service Company (FSC), Hi-Tech
Corporation (Hi-Tech), Interstate Forging Industries, Inc. (Interstate),
Iroquois Foundry Corporation (IFC), Mabry Foundry (Mabry), Mansfield Foundry
Corporation (MFC), Oberdorfer Industries (Oberdorfer), Pennsylvania Steel
Foundry and Machine Company, Inc. (Penn Steel), Southern Ductile Casting
Company (SDCC), Southern Aluminum Castings Company (SACC), Texas Foundries,
and Texas Steel Company (Texas Steel) refer to operations of these divisions
or subsidiaries. The Company also has a wholly owned subsidiary, Citation
Automotive Sales Corp. (CAS), which operates a sales and engineering office
in Detroit, Michigan.
The consolidated financial statements and notes to consolidated financial
statements include the accounts of Citation Corporation and its divisions and
wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company sells castings and forgings to customers in various industries
and geographic regions of the U.S. To reduce credit risk, the Company
performs ongoing credit evaluations of its customers' financial condition and
does not generally require collateral. Significant volumes of sales to
customers in specific industries during fiscal years 1995, 1996, and 1997
were as follows:
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Automotive/light truck 31% 30% 35%
Heavy truck 24% 19% 15%
---------- ---------- ---------
55% 49% 50%
========== ========== =========
</TABLE>
On September 19, 1995, the Company completed a secondary offering of
4,250,000 shares of common stock at $17.375 per share. The net proceeds after
deducting applicable issuance costs and expenses were $69,176. The net
proceeds were used to reduce amounts outstanding under the Company's note
payable agreement.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR - The Company operates on a fifty-two/fifty-three week fiscal
year which ends on the Sunday nearest to September 30. Fiscal years 1995,
1996, and 1997 each consisted of fifty-two weeks.
REVENUE RECOGNITION - The Company records sales upon shipment of the related
products, net of any discounts.
CASH EQUIVALENTS - The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less at the date of
purchase to be cash equivalents.
CASH OVERDRAFT - In conjunction with the credit facility discussed in Note 6,
the Company entered into a consolidated cash management system with the
administrative agent and lead bank of the credit facility. As a result of
maintaining this consolidated cash management system, the Company maintains a
zero balance at the lead bank resulting in book cash overdrafts. Such
overdrafts are included in current liabilities.
INVENTORIES - Raw materials inventories are stated at the lower of cost
(principally first-in, first-out basis) or market. Supplies and containers
inventories are stated primarily at the lower of cost (principally average
cost) or market. Castings and forgings inventories are stated primarily at
the lower of cost (as determined principally at standard cost or under the
retail method) or market.
PROPERTY, PLANT, AND EQUIPMENT - Property, plant, and equipment are carried
at cost, less accumulated depreciation, and include expenditures that
substantially increase the useful lives of existing assets. Maintenance,
repairs, and minor renovations are charged to expense as incurred. Upon sale,
retirement, or other disposition of these assets, the cost and related
accumulated depreciation are removed from the respective accounts, and any
gain or loss on the disposition is included in income.
The Company provides for depreciation of property, plant, and equipment using
primarily the straight-line method designed to depreciate costs over
estimated useful lives as shown below:
<TABLE>
<CAPTION>
ESTIMATED USEFUL LIFE
---------------------
<S> <C>
Buildings 10 - 50 years
Plant equipment 3 - 20 years
Office equipment 2 - 12 years
Transportation equipment 3 - 7 years
</TABLE>
Property, plant, and equipment acquired under capital lease agreements are
carried at cost less accumulated depreciation. These assets are depreciated
in a manner consistent with the Company's depreciation policy for purchased
assets.
INTANGIBLE ASSETS - Goodwill, the excess of purchase price over the fair
value of net assets acquired in purchase transactions, is being amortized on
a straight-line basis primarily over a 20-year period but with various
amounts ranging from 18 to 40 years. The Company assesses
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
the recoverability and the amortization period of the goodwill by determining
whether the amount can be recovered through undiscounted net income of the
businesses acquired, excluding interest expense and goodwill amortization,
over the remaining amortization period. Amounts paid or accrued for
noncompetition and consulting agreements are amortized using the straight-
line method over the term of the agreements. Bond and other financing
expenses are amortized using the straight-line method, which approximates the
effective interest method, over the term of the related debt issues.
LONG-LIVED ASSETS - The Company recognizes impairment losses on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. There were no such losses recognized during
fiscal years 1995, 1996, or 1997.
ACCOUNTING FOR INCOME TAXES - The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred income taxes are
recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts
at each year end. The amounts recognized are based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred tax assets and liabilities.
RECLASSIFICATIONS - Certain reclassifications have been made in the previous
years' financial statements in order to conform them to the current year
classifications, with no effect on previously reported net income or
stockholders' equity.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings Per Share (SFAS 128). SFAS 128 supersedes existing
generally accepted accounting principles relative to the calculation of
earnings per share, is effective for years ending after December 15, 1997,
and requires restatement of all prior period earnings per share information
upon adoption. Generally, SFAS 128 requires a calculation of basic earnings
per share, which takes into consideration income (loss) available to common
shareholders and the weighted average of common shares outstanding. SFAS 128
also requires the calculation of a diluted earnings per share, which takes
into effect the impact of all additional common shares that would have been
outstanding if all potential common shares relating to options, warrants, and
convertible securities had been issued, as long as their effect is dilutive.
SFAS 128 requires dual
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
presentation of basic and diluted earnings per share on the face of the
statement of income and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation. The Company does
not expect the effect of its adoption of SFAS 128 to be material.
3. INVENTORIES
A summary of inventories is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------------ ------------------
<S> <C> <C>
Raw materials $ 8,872 $ 10,981
Supplies and containers 9,817 12,478
Castings and forgings 20,789 25,494
------------------ ------------------
$ 39,478 $ 48,953
================== ==================
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Balances of major classes of assets and accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------------ ------------------
<S> <C> <C>
Land and improvements $ 7,166 $ 11,096
Buildings 37,316 50,217
Plant equipment 195,370 267,607
Office equipment 9,230 11,797
Transportation equipment 8,788 10,527
Construction in progress 8,403 23,149
------------------ ------------------
266,273 374,393
Less accumulated depreciation (66,906) (91,402)
------------------ ------------------
$ 199,367 $ 282,991
================== ==================
</TABLE>
5. INTANGIBLE ASSETS
The Company's intangible assets, net of accumulated amortization, consist
of the following:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------------ ------------------
<S> <C> <C>
Goodwill $ 45,704 $ 46,161
Consulting and noncompetition agreements 1,893 1,178
Other 205 34
------------------ ------------------
$ 47,802 $ 47,373
================== ==================
</TABLE>
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
The future annual amount of amortization expense related to the Company's
intangible assets as of September 28, 1997 is as follows for fiscal years:
<TABLE>
<S> <C>
1998 $ 3,231
1999 2,953
2000 2,841
2001 2,616
2002 2,616
Thereafter 33,116
----------
$ 47,373
==========
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------- -------------
<S> <C> <C>
Credit facility $ 133,055 $ 170,393
Industrial development bonds 1,085 900
Other financing arrangements 9,460 12,940
------------- -------------
143,600 184,233
Less current portion of other long-term debt 2,654 2,994
------------- -------------
$ 140,946 $ 181,239
============= =============
</TABLE>
From October 2, 1995 to June 30, 1996, the Company's credit facility provided
for borrowings up to a total of $135,000 and was to expire on July 31, 1998.
The credit facility bore interest at a rate ranging from LIBOR plus 1% to
LIBOR plus 2.5%, depending on the Company's leverage ratio, as defined in the
agreement.
Effective July 1, 1996, the Company executed a new primary facility with a
consortium of banks, led by the First National Bank of Chicago - NBD (First
Chicago - NBD), to increase the amount available to borrow up to $230,000 to
be used for working capital purposes and to fund future acquisitions. The
facility consisted of a swing line of credit bearing interest at prime and
revolving credit borrowings which bore interest at LIBOR plus a margin based
on the Company's leverage ratio, as defined in the credit agreement, at the
time of the borrowing and was to expire on July 31, 1998. At September 29,
1996, the total balance outstanding under this credit facility was $133,055
and $96,945 was available for borrowing. As of September 29, 1996, the total
outstanding balance consisted of $3,055 under the swing line of credit at a
prime rate of 8.25%. The remaining $130,000 outstanding under this facility
related to four revolving loans. At September 29, 1996, the Company had
$30,000 and $60,000 outstanding under these loans at interest rates of 7.31 %
and 7.14% which repriced on January 2, 1997 and February 3, 1997,
respectively. The Company entered into two $20,000 five-year interest rate
swaps
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
establishing fixed interest rates for the remaining $40,000 of debt
outstanding under the credit facility at September 29, 1996. These swap
agreements are repriced every 90 days and expire in August 2001. The
Company's fixed interest rates were 8.34% and 8.16% under these two
agreements at September 29, 1996.
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). On September 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. On September 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, the total outstanding
balance under this credit facility was $170,393 and $129,607 was available
for borrowing.
As of September 28, 1997, the Company had $5,393 outstanding under the swing
line of credit at the prime rate of 8.5%. The remaining $165,000 outstanding
under this facility related to five revolving loans. At September 28, 1997,
the Company had $8,000 and $77,000 outstanding under these loans at interest
rates of 6.66% and 6.85% which reprice on October 27, 1997 and January 27,
1998, respectively. The remaining $80,000 outstanding under this facility
consists of one $40,000 five-year interest rate swap agreement, which
commenced in fiscal year 1997, 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 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 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 has industrial development bond issues which are for expanded
production facilities. One of the bonds bears interest at 80% of prime (6.56%
and 6.76% at September 29, 1996 and September 28, 1997, respectively). The
remaining bonds bear interest at fixed rates of 5.75% and 8.25% and mature
through 2003. Amounts due under these bond issues are
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
collateralized by property, plant, and equipment having a net book value of
$7,506 and $7,400 at September 29, 1996 and September 28, 1997, respectively.
Other financing arrangements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
---------------- ----------------
<S> <C> <C>
Notes payable for the purchase of Mabry, guaranteed by the
Company's majority stockholder, requiring quarterly
payments of $18 each, including principal and interest at
8% through April 1998, at which time the rate will be
determined annually based on rates charged by banks to
large corporations until final payment in May 2003 $ 757 $ 669
Notes payable for the purchase of BFC requiring twelve
combined quarterly payments of $167 beginning August 1,
1995, including interest at 8% 1,166 500
Note payable for the purchase of CP requiring a payment of
$3,000 on January 1, 1996 and 22 quarterly payments of
approximately $273 beginning April 1, 1996 5,455 4,364
Note payable for the purchase of Hi-Tech, bearing interest
at 8%, payable on December 30, 1996 320
Bank note bearing interest at 7.63%, payable in quarterly
installments of $200, plus interest, with a final
installment due March 31, 1999 5,400
Note payable to Small Business Administration, bearing
interest at 9.23%, payable in monthly payments of interest
and principal through July 2011 656 630
Note payable to Small Business Administration, bearing
interest at 6.625%, payable in monthly payments of
interest and principal through September 2006, and
collateralized by equipment with no remaining net book
value 238 226
Miscellaneous capital lease obligations for equipment,
requiring monthly payments ranging from $1 to $7,
including principal and interest, at rates ranging from
8.25% to 12.1% and maturing at dates ranging from 1998
through 2002 476 664
Various other notes, requiring monthly payments ranging
from $1 to $50, including principal and interest at rates
ranging from 9.25% to 14.5%, and maturing at dates ranging
from 1998 through 2001 392 487
---------------- ----------------
$ 9,460 $ 12,940
================ ================
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
Aggregate maturities of long-term debt at September 28, 1997 are as follows
for fiscal years:
<TABLE>
<S> <C>
1998 $ 2,994
1999 6,318
2000 171,924
2001 1,787
2002 365
Thereafter 845
---------
$ 184,233
=========
</TABLE>
7. COMMON STOCK PLANS
The Company's Incentive Award Plan (the Award Plan) provides for the grant of
incentive stock options, non-qualified stock options, stock appreciation
rights, and restricted stock or a combination thereof, as determined by the
Compensation Committee of the Board of Directors at the time of grant, to
officers and certain employees. Under the Award Plan, 1,750,000 shares of the
Company's common stock have been reserved for issuance. Options granted under
the plan provide for the purchase of the Company's common stock at not less
than the fair market value on the date the option is granted. In conjunction
with the Company's initial public offering, options for 538,000 shares of
common stock were granted at prices ranging from $8-$8.80 per share. The
options expire on August 2, 1999 and portions of the options granted became
exercisable beginning December 1, 1994 at varying times through fiscal year
1998. Options subsequently granted generally become exercisable over periods
ranging from six months to two years and have terms of five years. In
connection with the acquisition of Interstate as discussed in Note 17, the
Company issued 43,500 restricted shares under the Award Plan during 1997.
On February 23, 1995, the Shareholders approved the Non-Qualified Stock
Option Plan for Non-Employee Directors (Non-Employee Directors Stock Option
Plan) which provides for the grant of stock options to the non-employee
directors of the Company. Under this plan, 100,000 shares of the Company's
common stock have been reserved for issuance. Options granted under the plan
provide for the purchase of the Company's common stock at not less than the
fair market value on the date the option is granted. The options issued under
this plan are exercisable six months after the date of grant and expire five
years after the date of grant. As of September 29, 1996 and September 28,
1997, options for 50,000 shares of the Company's stock have been issued under
this plan and 50,000 shares are available for grant. All of the 50,000
options issued to date were granted at $15.25 per share, became exercisable
in January 1996, and expire in June 2000. None of these options have been
exercised as of September 28, 1997.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
Transactions under both plans are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER RANGE OF AVERAGE
OF OPTIONS EXERCISE PRICES EXERCISE PRICE
------------ --------------- --------------
<S> <C> <C> <C>
Options outstanding, October 2, 1994 538,000 $ 8.00 - $ 8.80 $ 8.07
Granted 159,000 $13.38 - $16.06 $ 15.64
Exercised (41,500) $ 8.00 $ 8.00
Canceled (50,000) $ 8.00 $ 8.00
------------------------------------------------------------
Options outstanding, October 1, 1995 605,500 $ 8.00 - $16.06 $ 10.07
Granted 100,000 $ 12.06 $ 12.06
Exercised (40,000) $ 8.00 $ 8.00
------------------------------------------------------------
Options outstanding, September 29, 1996 665,500 $ 8.00 - $16.06 $ 10.49
Granted 34,000 $14.44 - $14.88 $ 14.57
Exercised (59,310) $ 8.00 - $16.06 $ 8.41
Canceled (20,000) $ 16.06 $ 16.06
------------------------------------------------------------
Options outstanding, September 28, 1997 620,190 $ 8.00-$16.06 $ 11.00
============================================================
</TABLE>
The following table summarizes information about options exercisable and
granted as of the following years:
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28,
1995 1996 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Options exercisable 346,500 495,500 610,190
Weighted-average exercise
price of options exercisable $ 8.21 $ 10.19 $ 10.67
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)
The following table summarizes information about options outstanding at
September 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -------------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
EXERCISE SEPTEMBER 28, CONTRACTUAL SEPTEMBER 28, EXERCISE
PRICE 1997 LIFE 1997 PRICE
------------ ----------------- ------------- ------------------- ------------
<S> <C> <C> <C> <C>
$8.00 280,190 1.8 280,190 $8.00
$8.80 50,000 1.8 50,000 $8.80
$13.38 10,000 1.9 10,000 $13.38
$15.25 50,000 2.8 50,000 $15.25
$16.06 96,000 2.8 96,000 $16.06
$12.06 100,000 3.9 100,000 $12.06
$14.44 24,000 4.5 24,000 $14.44
$14.88 10,000 4.6
----------------- -----------------
620,190 610,190
================= =================
</TABLE>
The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its stock option plans. Accordingly, no
compensation expense has been recognized for its stock option plans. Had
compensation expense for the Company's stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of Statement of Financial Accounting Standards No.
123, the Company's net income and earnings per share would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
--------------- ---------------
<S> <C> <C>
Net income:
As reported $ 16,742 $ 23,164
Pro forma $ 16,301 $ 22,989
Net income per share:
As reported $ 0.95 $ 1.31
Pro forma $ 0.93 $ 1.30
</TABLE>
The pro forma amounts reflected above are not representative of the effects
on reported net income in future years because, in general, the options
granted have different vesting periods and additional awards are made each
year.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)
The Company elected to use the Black-Scholes pricing model to calculate the
fair values of the options awarded, which are included in the pro forma
results above. The following weighted average assumptions were used to derive
the fair values:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
--------------- --------------
<S> <C> <C>
Dividend yield 0% 0%
Expected life (years) 3 3
Expected volatility 44.2% 41.9%
Risk-free interest rate (range) 6.32% 6.27% - 6.56%
</TABLE>
The Company also has an Employee Stock Purchase Plan (Stock Purchase Plan)
that allows eligible employees to purchase, through payroll deductions,
shares of the Company's common stock at specified dates at no less than 85%
of the fair market value of the stock as of the offering date. All active
employees are eligible to participate. Shares of common stock under the Stock
Purchase Plan are to be purchased in the open market or issued from treasury
stock. The maximum number of shares currently available under the Stock
Purchase Plan is 250,000 shares. Subscriptions were outstanding for
approximately 49,000 shares of common stock at $9.55 per share at September
29, 1996 and approximately 75,000 shares of common stock at $13.30 per share
were outstanding at September 28, 1997.
On December 15, 1994, the Board of Directors approved the Stock Plan for Non-
Employee Directors (Directors Stock Plan) to enable its non-employee
directors to have all or part of their directors' fees used to purchase
shares of the Company's common stock. As of September 29, 1996 and September
28, 1997, 5,013 shares have been issued under this plan.
8. PREFERRED STOCK
The Company has 5,000,000 shares of preferred stock authorized for issuance.
The preferences, powers, and rights of the preferred stock are to be
determined by the Company's board of directors. None of these shares are
issued and outstanding.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(in Thousands, Except Share and Per Share Data)
9. INCOME TAXES
The components of the provision for income taxes consist of the following:
<TABLE>
<CAPTION>
OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28,
1995 1996 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Current income tax expense:
Federal $ 7,522 $ 6,192 $ 10,355
State 1,001 1,526 1,410
------------------ ------------------ ------------------
8,523 7,718 11,765
------------------ ------------------ ------------------
Deferred income tax expense (benefit):
Federal 1,824 3,054 2,511
State 672 390 (384)
------------------ ------------------ ------------------
2,496 3,444 2,127
------------------ ------------------ ------------------
Valuation allowance 918
------------------ ------------------ ------------------
Total provision for income taxes $ 11,019 $ 11,162 $ 14,810
================== ================== ==================
</TABLE>
Deferred tax assets and liabilities are composed of the following:
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
------------------ -------------------
<S> <C> <C>
Current:
Allowance for doubtful accounts and returns $ 980 $ 861
Accrued insurance liabilities 1,719 2,417
Other accrued liabilities 1,712 5,151
------------------ -------------------
Net current deferred tax asset $ 4,411 $ 8,429
================== ===================
Long-term:
Basis differences of property, plant, and equipment $ 15,685 $ 36,807
Other, net 40 1,196
Valuation allowance 918
------------------ -------------------
Net long-term deferred tax liability $ 15,725 $ 38,921
================== ===================
</TABLE>
Realization of deferred tax assets associated with certain state net
operationg loss (NOL) carryforwards is dependent upon the related subsidiary
generating sufficient income prior to their expiration. Management believes
that there is a risk that certain of the NOL carryforwards may expire unused,
and, accordingly, has established a valuation allowance against them of $918
as of September 28, 1997.
The Company has NOLs for state income tax reporting purposes of $15,373
available for years beginning after September 28, 1997. These NOLs have
expiration dates through fiscal year 2012.
48
<PAGE>
Total provision for income taxes differs from the amount which would be
provided by applying the statutory federal income tax rate to pretax earnings
as indicated below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
October 1, September 29, September 28,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Provision for income taxes at statutory federal
income tax rate $ 9,837 $ 9,766 $ 13,291
Increase (decrease) resulting from:
Officers' life insurance 27 7 87
Nondeductible meals and entertainment
expenses 107 133 190
State income taxes 1,075 1,245 345
Valuation allowance 918
Other, net (27) 11 (21)
----------------- ----------------- -----------------
Total provision for income taxes $ 11,019 $ 11,162 $ 14,810
----------------- ----------------- -----------------
</TABLE>
10. DEFINED BENEFIT PLANS
BFC's employees are covered by a defined benefit pension plan sponsored by
the union which represents the employees. Minimum contributions are
determined in accordance with provisions of the negotiated labor contract,
but the Company's funding policy is to contribute amounts which are
actuarially determined to provide the plan with sufficient assets to meet
future benefit payment requirements consistent with the funding
requirements of federal laws and regulations.
Bohn maintains a defined benefit pension plan covering employees subject to
a collective bargaining agreement. Benefits under the plan accrued at a
rate of $14.50 per month per year of credited service during 1996 and 1997,
respectively.
Interstate sponsors two defined pension plans covering Milwaukee union
employees. Pursuant to its collective bargaining agreements, Interstate
amended these defined benefit plans in 1991 and 1990 to cease future
benefit accruals and to freeze the current benefit rates.
Oberdorfer maintains a defined benefit pension plan covering employees
subject to a collective bargaining agreement. Benefits under the plan
accrued at a rate of $16 and $19 per month per year of service during 1996
and 1997, respectively.
SDCC has two defined benefit pension plans for employees covered by a
collective bargaining agreement. The plans provide pension benefits equal
to a multiple of years of continuous service before age 65. The Company's
policy is to make annual contributions to the plans based on the maximum
amount allowed as deductible by the Internal Revenue Service.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
The components of net pension costs of the plans are as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS
--------------------------------------------- -----------------------------------------------
YEAR ENDED YEAR ENDED
--------------------------------------------- -----------------------------------------------
OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28, OCTOBER 1, SEPTEMBER 29, SEPTEMBER 28,
1995 1996 1997 1995 1996 1997
------------ --------------- --------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 95 $ 217 $ 168 $ 307 $ 306 $ 167
Interest cost 240 442 457 529 514 434
Return on plan
assets (313) (443) (757) (518) (674) (470)
Net amortization
and deferral 84 (27) 256 115 290 73
------------ --------------- --------------- ------------ --------------- ---------------
Net pension
expense $ 106 $ 189 $ 124 $ 433 $ 436 $ 204
============ =============== =============== ============ =============== ===============
</TABLE>
The measurement dates for the plan assets and obligations for fiscal years
1996 and 1997 are September 30, 1996 and 1997, respectively. The
reconciliation of the funded status of the plans combined is as follows:
<TABLE>
<CAPTION>
ASSETS EXCEED ACCUMULATED BENEFITS
ACCUMULATED BENEFITS EXCEED ASSETS
--------------------------------- ---------------------------------
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
1996 1997 1996 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Present value of accumu-
lated plan benefits:
Vested $ 5,970 $ 6,023 $ 6,406 $ 6,512
Nonvested 574 323 379 399
--------------- --------------- --------------- ---------------
$ 6,544 $ 6,346 $ 6,785 $ 6,911
=============== =============== =============== ===============
Projected benefit
obligation $ 6,544 $ 6,346 $ 7,287 $ 6,911
Fair value of plan assets 6,988 6,788 6,384 5,700
--------------- --------------- --------------- ---------------
Projected benefit
obligation less than (in
excess of) plan assets 444 442 (903) (1,211)
Unrecognized net (gain)
loss 299 242 (145) 1,071
Prior service cost not yet
recognized in net
periodic pension cost 320 286 261 578
Unrecognized net
assets at date of initial
application (210) (88) 705 (38)
Additional minimum liability (78) (811)
--------------- --------------- --------------- ---------------
(Accrued) prepaid
pension liability $ 853 $ 882 $ (160) $ (411)
=============== =============== =============== ===============
</TABLE>
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
The settlement (discount) rates used to measure the projected benefit
obligations for all plans ranged from 7.25% to 8.5% for 1996 and from 6.5%
to 8.5% for 1997. The expected long-term rates of return on all plan assets
ranged from 7.5% to 8.5% for 1996 and from 7.5% to 9.0% for 1997.
ADCC's union employees are covered by a multi-employer defined benefit
pension plan sponsored by the union which represents the employees. The
Company makes contributions to the plan in accordance with the collective
bargaining agreement between the Company and the union. The Company
contributed $70, $63, and $59 to this plan in fiscal years 1995, 1996,
and 1997, respectively. The actuarial present value of accumulated plan
benefits at January 1, 1997 (the most recent valuation date) for the multi-
employer union plan as a whole determined through an actuarial valuation
performed as of that date was approximately $107,100. The market value of
the union plan's net assets available for benefits on that date was
approximately $143,100.
In addition to those benefits provided by the frozen defined benefit plans
described above, Interstate's union employees are covered by two multi-
employer defined benefit pension plans sponsored by two labor unions which
represent the employees. The Company makes contributions to the plans in
accordance with the collective bargaining agreements between Interstate and
the unions. The Company contributed $133 to these plans in fiscal year
1997. The actuarial present values of accumulated plan benefits at January
1, 1996 (the most recent valuation date) for the multi-employer union plans
as a whole determined through actuarial valuations performed as of that
date were $2,284,852 and $3,047,776. The market values of the union plans'
net assets available for benefits on that date were $3,441,855 and
$3,861,743.
11. DEFINED CONTRIBUTION PLANS
The Company maintains separate divisional or subsidiary defined
contribution 401(k) plans covering substantially all employees (other than
those covered by collective bargaining agreements). Company contributions
are based upon a multiple of operating income as a percentage of sales on a
divisional or subsidiary basis. However, the Company will match a minimum
of 20%.
In addition, BFC maintains two 401(k) plans which cover substantially all
salaried employees and all hourly employees subject to a collective
bargaining agreement. Company contributions to the salaried plan match up
to 50% of the employees' contribution, up to 5% of the employees'
compensation. Company matching contributions to the hourly plan are equal
to the amount required by the collective bargaining agreement. Unless
otherwise specified, the Company matching contributions shall equal 10% of
each employee's contribution or, if less, five cents for each hour of
service worked by the employee.
Bohn maintains a 401(k) plan covering substantially all salaried employees.
The Company will match 35% of the first 6% of the employees' contribution.
Additionally, the Company
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
contributes 3% of all salaried employees' annual compensation to the plan
without regard for employee contribution.
Interstate maintains a 401(k) plan covering all salaried employees. Company
matching contributions are discretionary.
MFC maintains two 401(k) plans which cover its salaried and hourly
employees. Company contributions to the salaried plan are 50% of the first
6% of the employee contribution. Company contributions to the hourly plan
are equal to $.05 per regular hour worked by the employee.
Previously, Oberdorfer maintained a 401(k) plan for all eligible employees
who were not governed by the terms of a collective bargaining agreement.
Effective June 30, 1995, Oberdorfer terminated its 401(k) plan and funded
all outstanding contributions due to the plan.
SACC maintains a 401(k) plan covering substantially all employees. The
Company match is based on the employees' contribution to the plan during
the year and is limited to 6% of the total compensation of all
participants. The Company may also make a non-elective contribution which
is made at the discretion of the board of directors.
TSC maintains three 401(k) plans which cover its salaried and hourly
employees. Company contributions to the salaried plan are based upon a
multiple of operating income as a percentage of sales. Company
contributions to the two hourly plans are 20% of the first 5% of the
employee contribution for one plan and 22% of the first 7% of the employee
contribution for the second plan.
Contribution expense recognized by the Company under the 401(k) plans
totaled $1,550, $2,068 and $3,237 in fiscal years 1995, 1996, and 1997,
respectively.
On August 17, 1995, the Board of Directors approved the nonqualified
deferred compensation plan which allows certain members of management and
highly compensated employees to defer a portion of their compensation. The
deferred compensation, which together with Company matching amounts and
accumulated interest, is distributable in cash after retirement or
termination of employment. The Company recognized expense related to this
plan of $98 and $110 in fiscal years 1996 and 1997, respectively. No
amounts were contributed in fiscal year 1995.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Interstate provides postretirement benefits other than pensions, including
health care and life insurance, to certain employee groups. Interstate
currently funds the cost of providing these benefits as they are incurred.
Employees governed by collective bargaining agreements receive the
following benefits:
* Health insurance coverage to age 65 if they retire after age 62.
* Life insurance coverage, in varying amounts, for the remainder of their
lives.
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
Certain salaried employees receive health care and life insurance benefits
for the remainder of their lives if they retire after age 60.
The net periodic postretirement benefit cost is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1997
-----------------
<S> <C>
Service cost $ 90
Interest cost 158
Amortization of unrecognized gain (8)
-----------------
$ 240
=================
</TABLE>
The measurement date for the plan assets and obligations for fiscal year 1997
is July 1, 1997. A reconciliation of the funded status of the plan is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 28,
1997
-----------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $ 958
Fully eligible active plan participants 288
Other active plan participants 936
-----------------
2,182
Plan assets at fair value 0
-----------------
Accumulated postretirement benefit obligation
in excess of plan assets 2,182
Unrecognized net gain 523
-----------------
Accrued postretirement benefit liability 2,705
Less current portion (150)
-----------------
$ 2,555
=================
</TABLE>
Assumptions affecting the calculation of the accumulated obligation are as
follows:
<TABLE>
<S> <C>
Health care cost trend rate 7.6%, with the rate decreasing until it levels out
at 6% for the year 2001 and thereafter.
Discount rate 8%
</TABLE>
The effect of a one percentage point increase in the assumed health care cost
trend rate would have increased the expense during fiscal year 1997 by $66
and would have increased the accumulated postretirement benefit obligation by
$289 at September 28, 1997.
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
13. COMMITMENTS AND CONTINGENT LIABILITIES
On July 8, 1993, the Company entered into a consulting and noncompetition
agreement with respect to the iron lost foam casting business of Robinson
Foundry, Inc. (Robinson). The agreement consists of Robinson transferring
existing business and orders to CFCC, providing technical and sales
assistance to CFCC, and agreeing not to compete with the Company in the
iron lost foam casting business for a period of five years. The agreement
requires the Company to make payments to Robinson in the amount of $300 at
the closing of the agreement and upon each of the next four anniversary
dates of the agreement. The agreement also requires the Company to pay
commissions to Robinson, at a rate of 6%, for all CFCC sales arising from
this agreement in excess of $5,000 and to pay an additional 5% commission
for all sales to new customers established by Robinson during the term of
the agreement. There were no commissions paid under this agreement during
fiscal years 1995, 1996, and 1997. In conjunction with the agreement, the
Company entered into a noncompetition agreement with Robinson's principal
owner requiring the Company to make annual payments of $100 to this owner
concurrent with the payments to Robinson. The liabilities and corresponding
intangible assets associated with these noncompetition agreements are
reflected in the Company's consolidated balance sheets. The intangible
assets are being amortized over the terms of the agreements.
The Company leases offices and equipment under operating lease agreements
expiring in various years through 2002. Rent expense under operating leases
was $505, $1,277, and $1,954 in fiscal years 1995, 1996, and 1997,
respectively. Minimum future rental payments under operating leases having
remaining terms in excess of one year are as follows for fiscal years:
<TABLE>
<S> <C>
1998 $ 1,504
1999 1,167
2000 843
2001 507
2002 402
Thereafter 87
------------
$ 4,510
============
</TABLE>
The Company is subject to legal proceedings and claims which arise in the
ordinary course of its business. In the opinion of management, the amount
of ultimate liability with respect to these actions will not materially
affect the consolidated financial position or results of operations of the
Company.
The Company is subject to numerous federal, state, and local environmental
laws and regulations. Management believes that the Company is in material
compliance with such laws and regulations and that potential environmental
liabilities, if any, are not material to the consolidated financial
position or results of operations of the Company.
The divisions and subsidiaries are primarily self insured for workman's
compensation claims and health plans. Stop loss insurance agreements are
utilized to limit the Company's liability on
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
both a specific and aggregate basis for the period of coverage. The
liability for unpaid claims includes an accrual for an estimate of claims
incurred but not reported.
14. RELATED PARTY TRANSACTIONS
The Company made payments totaling $234, $542, and $254 in fiscal years
1995, 1996, and 1997, respectively, to a law firm in which one of the
Company's stockholders is a partner.
15. FINANCIAL INSTRUMENTS
Financial instruments consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 29, 1996 SEPTEMBER 28, 1997
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Accounts receivable - trade, net $ 77,931 $ 77,931 $ 93,542 $ 93,542
Accounts payable $ 33,668 $ 33,668 $ 43,256 $ 43,256
Credit facility $ 133,055 $ 134,684 $ 170,393 $ 174,371
Interest rate swaps $ (830) $ (2,496)
Other long-term debt, including current
portion $ 10,545 $ 8,940 $ 13,840 $ 12,768
</TABLE>
The carrying amounts reported in the consolidated balance sheets for cash
and cash equivalents, accounts receivable, and accounts payable approximate
fair value because of the immediate or short-term maturity of these
financial instruments. The carrying amounts reported for the credit facility
and a portion of the other long-term debt approximates fair value because
the underlying instruments are at variable interest rates which reprice
frequently. Fair value for fixed rate long-term debt was estimated using
either quoted market prices for the same or similar issues or the current
rates offered to the Company for debt with similar maturities.
As discussed in Note 6, the Company is party to three interest rate swap
agreements with durations of five years to hedge against interest rate
exposures on $80,000 of long-term debt. The fair value of the interest rate
swaps is estimated based on valuations from the Company's lead bank.
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following represents noncash financing and investing activities:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
OCTOBER 1, SEPTEMBER 29,
1995 1996
---------------- ----------------
<S> <C> <C>
Issuance of common stock in acquisitions $ 2,310
Debt incurred in connection with acquisitions $ 12,600 $ 320
</TABLE>
There were no such transactions during the year ended September 28, 1997.
17. ACQUISITIONS
Effective January 1, 1995, the Company acquired the net assets of
Oberdorfer for the assumption of $3,900 of long-term debt plus $600 in cash
payable in four equal quarterly installments beginning April 1995. The
agreement provides for an increase in the purchase price of up to $1,000 if
Oberdorfer meets certain earnings criteria over the five-year period ending
December 31, 1999. 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 Oberdorfer based on their
estimated fair values at the date of acquisition. Operating results of
Oberdorfer since January 1, 1995 are included in the Company's consolidated
financial statements.
On February 24, 1995, the Company completed the purchase of the net assets
of IFC for $5,700 in cash and a $1,000 note payable due in February 1996.
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 IFC based on their estimated fair values at the
date of acquisition. Operating results of IFC since February 24, 1995 are
included in the Company's consolidated financial statements.
On May 8, 1995, the Company completed the purchase of the outstanding stock
of BFC for $13,000 in cash, a note payable for $2,000 payable over a three
year period, and 61,540 shares of common stock of the Company valued at
$1,000. 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 BFC based on their estimated fair values at the
date of acquisition. Operating results of BFC since May 8, 1995 are
included in the Company's consolidated financial statements.
On June 12, 1995, the Company completed the purchase of the stock of Penn
Steel for $700 cash, $300 in cash to be held in escrow for warranties, and
80,000 shares of the common stock of the Company valued at $1,310. 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 Penn Steel based on their estimated fair values at the date
of acquisition.
56
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
Operating results of Penn Steel since June 12, 1995 are included in the
Company's consolidated financial statements through the date the Company
was sold (See Note 18).
On August 1, 1995, the Company completed the purchase of the net assets of
CP for $47,800 in cash and a note payable for $9,000 payable over a six-
year period. 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 CP based on their estimated fair
values at the date of acquisition. Operating results of CP since August 1,
1995 are included in the Company's consolidated financial statements.
The estimated fair value of assets acquired and liabilities assumed in each
of the fiscal year 1995 acquisitions are summarized as follows:
<TABLE>
<CAPTION>
OBERDORFER IFC BFC PENN STEEL CP
------------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable, net $ 1,535 $ 2,549 $ 6,620 $ 3,016 $ 5,532
Inventories 1,408 1,945 852 3,459 5,084
Other current assets 353 210 725 321 1,043
Property, plant, and equipment 4,611 7,875 4,020 4,740 38,243
Intangible assets and other 1,030 11,673 72 12,399
Accounts payable and accrued expenses (3,491) (2,084) (5,763) (2,355) (5,501)
Long-term debt (4,846) (3,795) (2,127) (6,943)
------------- ------------ ------------ ------------- ----------
Purchase price $ 600 $ 6,700 $ 16,000 $ 2,310 $56,800
============== ============= ============= ============= ===========
</TABLE>
Effective January 5, 1996, the Company completed the purchase of the net
assets of TSC for $13,000 in cash and the assumption of $2,195 in long-term
debt. 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 TSC based on their estimated fair values at the
date of acquisition. Operating results of TSC since January 5, 1996 are
included in the Company's consolidated financial statements.
Effective February 4, 1996, the Company completed the purchase of the net
assets of Hi-Tech for $2,880 in cash, the assumption of $2,625 in long-term
debt, and a $320 note payable due in December 1996. 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 Hi-Tech based on their estimated fair values at the date of
acquisition. Operating results of Hi-Tech since February 4, 1996 are
included in the Company's consolidated financial statements.
Effective March 1, 1996, the Company completed the purchase of the
outstanding stock of SACC for $12,000 in cash and the assumption of $28,538
in long-term debt. 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 SACC based on their estimated
fair values at the date of acquisition. Operating results of SACC since
March 1, 1996 are included in the Company's consolidated financial
statements.
57
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
Effective April 1, 1996, the Company completed the purchase of the net assets
of Bohn for $8,250 in cash and the assumption of $2,012 in long-term debt.
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 Bohn based on their estimated fair values at the
date of acquisition. Operating results of Bohn since April 1, 1996 are
included in the Company's consolidated financial statements.
Effective October 29, 1996, the Company completed the purchase of the
outstanding stock of Interstate for $51,089 in cash plus the assumption of
$22,700 of long-term debt. In addition, the purchase agreement requires
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 fiscal year 1997, the Company distributed $2,542 to the previous
stockholders of Interstate representing the Company's contingent payment for
calendar year 1996 as required by the purchase agreement. This payment has
been included in the calculation of the cash paid for the Interstate
acquisition of $51,089. 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. Operating results of
Interstate since October 29, 1996 are included in the Company's consolidated
financial statements.
The estimated fair value of assets acquired and liabilities assumed in each
of the fiscal year 1996 and 1997 acquisitions are summarized as follows:
<TABLE>
<CAPTION>
TSC HI-TECH SACC BOHN INTERSTATE
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Accounts receivable, net $ 3,833 $ 801 $ 9,911 $ 4,139 $ 15,161
Inventories 4,795 367 5,975 1,300 12,946
Other current assets 211 8 19 112 3,014
Property, plant, and equipment 9,938 4,622 26,980 5,948 78,353
Intangible assets and other 521 437 5,046 2,777
Accounts payable and
accrued expenses (4,103) (410) (7,393) (4,014) (18,675)
Deferred income taxes (17,046)
Long-term debt (2,195) (2,625) (28,538) (2,012) (22,664)
------------ ------------ ------------ ------------ -------------
Purchase price $ 13,000 $ 3,200 $ 12,000 $ 8,250 $ 51,089
============ ============ ============ ============ =============
</TABLE>
The following unaudited pro forma summary for the year ended September 29,
1996 combines the results of operations of the Company with the acquisitions
of Bohn, Hi-Tech, Interstate, SACC, and Texas Steel, the sale of Penn Steel,
and the idling of the steel division operations at Texas Foundries as if the
acquisitions, sale and idling had occurred at the beginning of the 1996
fiscal year. For the year ended September 28, 1997, the pro forma summary
presents the results
58
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(In Thousands, Except Share and Per Share Data)
of operations of the Company as if the acquisitions of Interstate and the
sale of Penn Steel had occurred at the beginning of the 1997 fiscal year.
Certain adjustments, including additional depreciation expense, interest
expense on the acquisition debt, amortization of intangible assets and income
tax effects, have been made to reflect the impact of the purchase
transactions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisitions, sale, and idling been made at the beginning of the
respective fiscal years, or of results which may occur in the future.
<TABLE>
<CAPTION>
SEPTEMBER 29, SEPTEMBER 28,
1996 1997
----------------- -----------------
<S> <C> <C>
Sales $ 596,104 $ 658,108
Operating income $ 47,402 $ 53,292
Income before provision for income taxes $ 31,627 $ 38,401
Net income $ 18,976 $ 23,425
Net income per common share $ 1.07 $ 1.32
</TABLE>
Pro forma earnings per share for the years ended September 29, 1996 and
September 28, 1997 is calculated by dividing pro forma net income by the
weighted average shares outstanding of 17,693,974 and 17,733,157,
respectively.
The Company's April 30, 1993 acquisition of Mabry included an agreement for
contingent consideration based on earnings. The Company recorded additional
amounts due to the sellers of Mabry of $2,793 in fiscal year 1995 in full
settlement of such contingent consideration. This amount is included as an
addition to goodwill related to such acquisition.
18. SALE OF PENN STEEL
On October 31, 1996, the Company completed the sale of Penn Steel and
recorded a one-time pre-tax loss of $1,807 in the consolidated statement of
income for the year ended September 29, 1996.
19. SUBSEQUENT EVENT
Subsequent to year end, the Company acquired all of the stock of Camden
Casting Center, Inc. (Camden) of Camden, Tennessee from Kelsey Hayes Company
for a purchase price of approximately $2,000. The acquisition will be
accounted for under the purchase method of accounting. Coincident with the
purchase of Camden, the Company entered into a requirements supply contract
for the sale of castings to Kelsey Hayes Company.
Camden produces high volume ductile iron braking parts. Its annual sales for
the year ended December 31, 1997 are anticipated to be approximately
$20,000. Over 90% of its sales are to Kelsey Hayes Company.
59
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the fiscal years 1996 and 1997 and through the date of this report,
there has been no change in the Company's independent accountants, nor have any
disagreements with such accountants or reportable events occurred.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.
ITEM 11: EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference from the
section entitled "Security Ownership of Management and Certain Beneficial
Owners" and "Election of Directors" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Executive Compensation" in the Proxy Statement for the Annual
Meeting of Shareholders to be held February 17, 1998, as filed with the
Securities and Exchange Commission.
60
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
EXHIBITS
The exhibits set forth in the following index of exhibits are filed as a
part of this report:
<TABLE>
<CAPTION>
Exhibit
-------
Number Page
------- -----
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended /(1)/
3.2 Bylaws of the Company /(1)/
10.2(v) Amended and Restated Credit Agreement dated as of July 24, 1997 among
the Company and its subsidiaries, certain banks party to the
Agreement, The First National Bank of Chicago, and SouthTrust Bank,
National Association /(2)/
10.2(w) Agreement and Plan of Merger dated May 16, 1996 among Interstate
Forging Industries, Inc., Citation Forging Corporation, and Citation
Corporation, as amended /(3)/
10.3(a) Employment Agreement commencing on August 9, 1994 between Citation
Corporation and T. Morris Hackney /(1)/
10.3(b) Employment Agreement commencing on August 9, 1994 between Citation
Corporation and R. Conner Warren /(1)/
10.4 Citation Corporation Incentive Award Plan /(1)/
10.4(a) Citation Corporation Stock Plan for Non-Employee Directors/(4)/
10.4(b) Citation Non-Qualified Stock Option Plan for Non-Employee Directors/
(5)/
10.6 Tax Indemnification Agreement between Shareholders existing prior to
August 9, 1994 and Citation Corporation/(1)/
21 Subsidiaries of the Registrant 67
23 Consent of Coopers & Lybrand, L.L.P. 68
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format.
99.1 Report of Independent Certified Public Accountants on Supplementary
Information 69
99.2 Schedule II - Valuation and Qualifying Accounts 70
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933 (Registration No. 33-79804, as filed
August
61
<PAGE>
2, 1994). The exhibit numbers listed correspond to the exhibit numbers in
the Form S-1.
(2) Incorporated by reference to Exhibit 10.2(v) of the Company's report on
Form 10-Q for the quarter ended June 29, 1997.
(3) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K dated
October 29, 1996.
(4) Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
on Form 10-K for the year ended October 1, 1995.
(5) Incorporated by reference to Exhibit 10.4(b) of the Company's Annual Report
on Form 10-K for the year ended September 29, 1996.
FINANCIAL STATEMENT SCHEDULES
The Index to financial statements filed as a part of this Report is
contained at page 31.
The following schedule is filed as an exhibit to this report:
Report of Independent Certified Public Accountants on Supplementary
Information
Schedule II - Valuation and Qualifying Accounts
REPORTS ON FORM 8-K
No reports on Form 8-K were filed for the quarter ended September 28,
1997.
62
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITATION CORPORATION
/s/ T. Morris Hackney December 11, 1997
------------------------
By: T. MORRIS HACKNEY
Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ T. Morris Hackney Chief Executive Officer and December 11, 1997
- ------------------------------- Chairman of the Board
T. MORRIS HACKNEY (Principal Executive Officer)
/s/ Frederick F. Sommer President and Chief Operating December 11, 1997
- ------------------------------- Officer
FREDERICK F. SOMMER
/s/ R. Conner Warren Executive Vice President of December 11, 1997
- ------------------------------- Finance and Administration
R. CONNER WARREN Treasurer and Director
(Principal Financial Officer)
/s/ Thomas W. Burleson Vice President - Corporate December 11, 1997
- ------------------------------- Controller
THOMAS W. BURLESON (Principal Accounting Officer)
/s/ Hugh G. Weeks Director December 11, 1997
- -------------------------------
HUGH G. WEEKS
/s/ A. Derrill Crowe Director December 11, 1997
- -------------------------------
A. DERRILL CROWE
/s/ Franklyn Esenberg Director December 11, 1997
- -------------------------------
FRANKLYN ESENBERG
/s/ William W. Featheringill Director December 11, 1997
- -------------------------------
WILLIAM W. FEATHERINGILL
/s/ Frank B. Kelso, II Director December 11, 1997
- -------------------------------
FRANK B. KELSO, II
/s/ Van L. Richey Director December 11, 1997
- -------------------------------
VAN L. RICHEY
</TABLE>
63
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
EXHIBITS
TO
FORM 10-K
CITATION CORPORATION
For the fiscal year ended September 28, 1997 Commission file No. 0-24492
64
<PAGE>
TABLE OF CONTENTS
FOR EXHIBITS
The exhibits set forth in the following index of exhibits are filed as a
part of this report:
<TABLE>
<CAPTION>
Exhibit
-------
Number Page
------- ----
<S> <C>
3.1 Certificate of Incorporation of the Company, as amended /(1)/
3.2 Bylaws of the Company /(1)/
10.2(v) Amended and Restated Credit Agreement dated as of July 24, 1997 among
the Company and its subsidiaries, certain banks party to the Agreement,
The First National Bank of Chicago, and SouthTrust Bank, National
Association /(2)/
10.2(w) Agreement and Plan of Merger dated May 16, 1996 among Interstate
Forging Industries, Inc., Citation Forging Corporation, and Citation
Corporation, as amended /(3)/
10.3(a) Employment Agreement commencing on August 9, 1994 between Citation
Corporation and T. Morris Hackney /(1)/
10.3(b) Employment Agreement commencing on August 9, 1994 between Citation
Corporation and R. Conner Warren /(1)/
10.4 Citation Corporation Incentive Award Plan /(1)/
10.4(a) Citation Corporation Stock Plan for Non-Employee Directors/(4)/
10.4(b) Citation Non-Qualified Stock Option Plan for Non-Employee Directors/
(5)/
10.6 Tax Indemnification Agreement between Shareholders existing prior to
August 9, 1994 and Citation Corporation/(1)/
21 Subsidiaries of the Registrant 67
23 Consent of Coopers & Lybrand, L.L.P. 68
27 Financial Data Schedule, submitted to the Securities and Exchange
Commission in electronic format.
99.1 Report of Independent Certified Public Accountants on Supplementary 69
Information
99.2 Schedule II - Valuation and Qualifying Accounts 70
</TABLE>
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933 (Registration No. 33-79804,
65
<PAGE>
as filed August 2, 1994). The exhibit numbers listed correspond to the
exhibit numbers in the Form S-1.
(2) Incorporated by reference to Exhibit 10.2(v) of the Company's report on
Form 10-Q for the quarter ended June 29, 1997.
(3) Incorporated by reference to Exhibit 2.1 of the Company's Form 8-K dated
October 29, 1996.
(4) Incorporated by reference to Exhibit 10.4(a) of the Company's Annual Report
on Form 10-K for the year ended October 1, 1995.
(5) Incorporated by reference to Exhibit 10.4(b) of the Company's Annual Report
on Form 10-K for the year ended September 29, 1996.
66
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF CITATION CORPORATION STATE OF ORGANIZATION
Citation Automotive Sales Corp. Michigan
Mansfield Foundry Corporation Ohio
Iroquois Foundry Corporation Wisconsin
Oberdorfer Industries Corp. New York
Berlin Foundry Corporation Wisconsin
Castwell Products, Inc. Illinois
HTC Acquisition Corporation d/b/a HI-TECH Corporation Indiana
BAC Acquisition Corporation d/b/a Bohn Aluminum Corporation Indiana
Southern Aluminum Castings Company Alabama
Citation Castings, Inc. Alabama
Texas Steel Corporation Texas
TSC Texas Corporation Delaware
Texas Foundries, Ltd. Texas
Mabry Foundry Company, Ltd. Texas
Interstate Forging Industries, Inc. Wisconsin
ISW Texas Corporation (subsidiary of Interstate Forging
Industries, Inc.) Delaware
Interstate Southwest, Ltd. Texas
67
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Citation Corporation on Form S-8 (File No. 33-93630, File No. 33-93652, File
No. 333-4206, and File No. 333-4026) of our report, dated November 17, 1997, on
our audits of the consolidated financial statements and financial statement
schedules of Citation Corporation and subsidiaries as of September 28, 1997 and
September 29, 1996, and for each of the three years in the period ended
September 28, 1997, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Birmingham, Alabama
December 17, 1997
68
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES
33 AND 34 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER, 28 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-28-1997
<CASH> 2,645
<SECURITIES> 0
<RECEIVABLES> 95,227
<ALLOWANCES> (1,367)
<INVENTORY> 48,953
<CURRENT-ASSETS> 160,503
<PP&E> 374,393
<DEPRECIATION> (91,402)
<TOTAL-ASSETS> 493,296
<CURRENT-LIABILITIES> 93,957
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 172,462
<TOTAL-LIABILITY-AND-EQUITY> 493,296
<SALES> 648,961
<TOTAL-REVENUES> 648,961
<CGS> 538,502
<TOTAL-COSTS> 596,568
<OTHER-EXPENSES> (14)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,433
<INCOME-PRETAX> 37,974
<INCOME-TAX> 14,810
<INCOME-CONTINUING> 23,164
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,164
<EPS-PRIMARY> 1.31
<EPS-DILUTED> 1.31
</TABLE>
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SUPPLEMENTARY INFORMATION
To the Stockholders
Citation Corporation and Subsidiaries
Our report on the consolidated financial statements of Citation Corporation and
subsidiaries is included on page 32 of this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index in Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Birmingham, Alabama
November 17, 1997
69
<PAGE>
EXHIBIT 99.2
CITATION CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
for the years ending September 28, 1997, September 29, 1996, and October 1, 1995
<TABLE>
<CAPTION> Additions
Balance at --------------------
Beginning of Charged to Charged to Balance at
Description Period Expense Assets Deductions End of Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
- ----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $1,421,027 $ 63,766 $ 319,216 $ (437,317) $1,366,692
- ----------------------------------------------------------------------------------------------------------------------
Reserve for obsolete inventory 490,988 397,543 300,000 (216,988) 971,543
- ----------------------------------------------------------------------------------------------------------------------
Reserve for sales returns 1,075,236 3,009,944 439,846 (3,458,509) 1,066,517
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax asset valuation allowance 370,000 918,000 (370,000) 918,000
- ----------------------------------------------------------------------------------------------------------------------
Total $3,357,251 $4,389,253 $1,059,062 $(4,482,814) $4,322,752
----------
- ----------------------------------------------------------------------------------------------------------------------
1996
- ----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 770,672 $ 583,539 $ 208,519 $ (141,703) $1,421,027
- ----------------------------------------------------------------------------------------------------------------------
Reserve for obsolete inventory 267,890 259,922 217,455 (254,279) 490,988
- ----------------------------------------------------------------------------------------------------------------------
Reserve for sales returns 1,020,939 643,731 281,060 (870,494) 1,075,236
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax asset valuation allowance
-- 370,000 -- -- 370,000
- ----------------------------------------------------------------------------------------------------------------------
Total $2,059,501 $1,857,192 $ 707,034 $(1,266,476) $3,357,251
---------- ---------- ---------- ----------- ----------
- ----------------------------------------------------------------------------------------------------------------------
1995
- ----------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts $ 949,564 $ 460,840 $ 36,431 $ (676,163) $ 770,672
- ----------------------------------------------------------------------------------------------------------------------
Reserve for obsolete inventory 15,000 4,640 248,250 -- 267,890
- ----------------------------------------------------------------------------------------------------------------------
Reserve for sales returns 137,611 176,126 910,698 (203,496) 1,020,939
- ----------------------------------------------------------------------------------------------------------------------
Deferred tax asset valuation allowance
-- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total $1,102,175 $ 641,606 $1,195,379 $ (879,659) $2,059,501
---------- ---------- ---------- ----------- ----------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
70
