<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the quarterly period ended June 28, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from to
------------ ------------
Commission File No. 0-24492
-------
CITATION CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 63-0828225
(State of Incorporation) (IRS Employer I.D. No.)
2 Office Park Circle, Suite 204
Birmingham, Alabama 35223
(Address of principal executive offices)
(205) 871-5731
(Registrant's telephone number)
--------------------
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at July 15, 1998
- ---------------------------- ----------------------------
Common Stock, $.01 Par Value 17,887,113
<PAGE>
INDEX
Page No.
--------
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements 1
Interim Condensed Consolidated Balance Sheets................ 2
Interim Condensed Consolidated Statements of Income.......... 3
Interim Condensed Consolidated Statements of Cash Flows...... 4
Notes to Interim Condensed Consolidated Financial Statements. 5
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 12
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K..................... 17
SIGNATURES.................................................... 18
EXHIBITS:
Exhibit 27 - Financial Data Schedules
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
The financial statements listed below are included on the following pages
of this Report on Form 10-Q (Unaudited):
Interim Condensed Consolidated Balance Sheets at September 28, 1997
and June 28, 1998.
Interim Condensed Consolidated Statements of Income for the three
months and nine months ended June 29, 1997 and June 28, 1998.
Interim Condensed Consolidated Statements of Cash Flows for the nine
months ended June 29, 1997 and June 28, 1998.
Notes to Interim Condensed Consolidated Financial Statements.
------------------------------
[The remainder of this page intentionally left blank]
1
<PAGE>
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except share data)
<TABLE>
<CAPTION>
SEPTEMBER 28, 1997 JUNE 28, 1998
--------------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,645 $ 2,876
Accounts receivable, net 93,542 109,852
Inventories 48,953 57,105
Deferred income taxes, prepaid expenses and
other assets 15,363 18,807
-------- --------
Total current assets 160,503 188,640
Property, plant and equipment, net 282,991 319,069
Other assets 49,802 76,649
-------- --------
$493,296 $584,358
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 4,211 $ 10,204
Current portion of long-term debt 2,994 2,402
Accounts payable 43,256 41,697
Accrued expenses and other current liabilities 43,496 47,591
-------- --------
Total current liabilities 93,957 101,894
Long-term debt, net of current portion 181,239 238,550
Deferred income taxes and other deferred liabilities 45,461 47,441
-------- --------
Total liabilities 320,657 387,885
-------- --------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized, none issued and -- --
outstanding
Common stock, $0.01 par value; 30,000,000
shares authorized, 17,759,600 and
17,885,113 shares issued and
outstanding at September 28, 177 178
1997 and June 28, 1998, respectively
Additional paid-in capital 107,243 107,850
Retained earnings 65,219 88,445
-------- --------
Total stockholders' equity 172,639 196,473
-------- --------
$493,296 $584,358
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
2
<PAGE>
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except share and per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
----------------------------------- ---------------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
---------------- ----------------- --------------- ----------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 177,858 $ 196,446 $ 488,779 $ 559,760
Cost of sales 145,637 160,481 404,850 462,707
----------- ----------- ----------- -----------
Gross profit 32,221 35,965 83,929 97,053
Selling, general and administrative
expenses 15,648 15,943 43,743 48,168
----------- ----------- ----------- -----------
Operating income 16,573 20,022 40,186 48,885
Other (income) expenses:
Interest expense, net 3,778 4,115 11,131 11,040
Other, net -- 1 91 (230)
----------- ----------- ----------- -----------
3,778 4,116 11,222 10,810
----------- ----------- ----------- -----------
Income before provision for income
taxes 12,795 15,906 28,964 38,075
Provision for income taxes 4,990 6,203 11,296 14,849
----------- ----------- ----------- -----------
Net income $ 7,805 $ 9,703 $ 17,668 $ 23,226
=========== =========== =========== ===========
Earnings per share - basic (note 6) $ .44 $ .54 $ 1.00 $ 1.30
=========== =========== =========== ===========
Weighted average shares outstanding-
basic (note 6) 17,734,427 17,880,558 17,725,929 17,821,750
=========== =========== =========== ===========
Earnings per share - diluted (note 6) $ .44 $ .54 $ .99 $ 1.29
=========== =========== =========== ===========
Weighted average shares outstanding-
diluted (note 6) 17,937,900 18,123,034 17,889,442 18,066,793
=========== =========== =========== ===========
</TABLE>
See notes to interim condensed consolidated financial statements.
3
<PAGE>
CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
JUNE 29, JUNE 28,
1997 1998
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
<S> <C> <C>
Net income $ 17,668 $ 23,226
-------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 84 812
Depreciation 20,232 23,217
Amortization 2,388 3,082
Changes in operating assets and liabilities, net:
Accounts receivable (8,336) (7,468)
Inventories 521 (1,659)
Prepaid expenses and other assets 6,179 (1,205)
Accounts payable 436 (6,115)
Accrued expenses and other liabilities 12,869 26
-------- --------
Total adjustments 34,373 10,690
-------- --------
Net cash provided by operating activities 52,041 33,916
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (27,448) (37,378)
Proceeds from sale of Penn Steel 9,006 --
Cash paid for acquisitions and investment in joint
venture (50,014) (57,006)
-------- --------
Net cash used by investing activities (68,456) (94,384)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft (7,671) 5,993
Repayments of acquired debt (16,340) (2,621)
Change in credit facility and other financing
arrangements, net 41,197 56,719
Change in paid in capital 67 608
-------- --------
Net cash provided by financing activities 17,253 60,699
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 838 231
Cash and cash equivalents, beginning of period 2,267 2,645
-------- --------
Cash and cash equivalents, end of period $ 3,105 $ 2,876
======== ========
</TABLE>
See notes to interim condensed consolidated financial statements.
4
<PAGE>
CITATION CORPORATION
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
1. The condensed consolidated balance sheet of Citation Corporation (the
"Company") at September 28, 1997 has been derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles (GAAP). The interim condensed consolidated
financial statements at June 28, 1998 and for the three months and the nine
months ended June 29, 1997 and June 28, 1998 are unaudited; however, in the
opinion of management, all adjustments, consisting only of normal recurring
accruals necessary for a fair presentation, have been included. These
financial statements should be read in conjunction with the Company's 1997
annual report on SEC Form 10-K.
Recently Issued Accounting Standards. During the first quarter of fiscal
1998, the Company adopted SFAS No. 128, Earnings Per Share, which specifies
computation, presentation, and disclosure requirements for EPS. SFAS No.
128 requires dual presentation of basic and diluted EPS on the face of the
income statement and requires a reconciliation of the numerator and
denominator of the basic EPS computation to that of the diluted computation
(see Note 6).
The Company also is required to adopt during fiscal 1998, SFAS No. 129,
Disclosure of Information about Capital Structure. It contains no change
in disclosure requirements for public entities that were previously subject
to the requirements of Accounting Principles Board Opinion No. 10 and No.
15 and SFAS No. 47. As a result, SFAS No. 129 will not have an impact on
the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which requires the reporting and display of comprehensive income and its
components in an entity's financial statements, and SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be required. In
February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which revises employers'
disclosures about pension and other postretirement benefit plans. The
Company is required to adopt these statements in fiscal year 1999. The
Company intends to provide the appropriate disclosures required by these
statements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133 requires all derivatives to
be recognized at fair value as either assets or liabilities on the balance
sheet. Any gain or loss resulting from changes in such fair value is
required to be recognized in earnings to the extent the derivatives are not
effective as hedges. SFAS 133 is effective for fiscal years beginning after
June 15, 1999, and is effective for interim periods in the initial year of
adoption. The Company has not yet determined the effect, if any, of the
adoption of SFAS 133 on results of operations, financial position or
liquidity.
2. A summary of inventories is as follows:
<TABLE>
<CAPTION>
September 28, June 28,
1997 1998
---------------- --------------
<S> <C> <C>
Raw materials $10,981 $10,661
Supplies and containers 12,478 13,576
Finished goods 25,494 32,868
------- -------
$48,953 $57,105
======= =======
</TABLE>
5
<PAGE>
3. Balances of major classes of assets and accumulated depreciation are as
follows:
<TABLE>
<CAPTION>
September 28, June 28,
1997 1998
--------------- -------------
<S> <C> <C>
Land and improvements $ 11,096 $ 12,219
Buildings 50,217 59,614
Plant equipment 267,607 303,125
Office equipment 11,797 13,798
Transportation equipment 10,527 12,699
Construction in progress 23,149 30,674
-------- ---------
374,393 432,129
Less accumulated depreciation (91,402) (113,060)
-------- ---------
$282,991 $ 319,069
======== =========
</TABLE>
4. The Company's other assets consist of the following:
<TABLE>
<CAPTION>
September 28, June 28,
1997 1998
---------------- --------------
<S> <C> <C>
Goodwill, net $46,161 $72,831
Consulting and non-competition
agreements, net 1,178 690
Other, net 2,463 3,128
------- -------
$49,802 $76,649
======= =======
</TABLE>
5. Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 28, June 28,
1997 1998
------------- ---------
<S> <C> <C>
Credit facility $170,393 $229,479
Industrial development bonds 900 760
Other financing arrangements 12,940 10,713
-------- --------
184,233 240,952
Less current portion of long-term debt 2,994 2,402
-------- --------
$181,239 $238,550
======== ========
</TABLE>
6
<PAGE>
6. Earnings per share ("EPS")
<TABLE>
<CAPTION>
Quarter Ended June 29, 1997
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
EPS - basic:
Income available to
common stockholders $ 7,805 17,734,427 $ .44
Effect of dilutive common
shares:
Weighted average stock options
outstanding 656,836
Less:
Stock options - assumed buyback (1) (304,363)
Stock options - antidilutive (3) (149,000)
------- ---------- -----
EPS - diluted $ 7,805 17,937,900 $ .44
======= ========== =====
Nine Months Ended June 29, 1997
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $17,668 17,725,929 $1.00
Effect of dilutive common
shares:
Weighted average stock options
outstanding 659,046
Less:
Stock options - assumed buyback (2) (326,613)
Stock options - antidilutive (3) (168,920)
------- ---------- -----
EPS - diluted $17,668 17,889,442 $ .99
======= ========== =====
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended June 28, 1998
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
<S> <C> <C> <C>
EPS - basic:
Income available to
common stockholders $ 9,703 17,880,558 $ .54
Effect of dilutive common
shares:
Weighted average stock options
outstanding 705,561
Less:
Stock options - assumed buyback (1) (463,085)
Stock options - antidilutive (3) --
------- ---------- -----
EPS - diluted $ 9,703 18,123,034 $ .54
======= ========== =====
Nine Months Ended June 28, 1998
Income Shares Per Share
(numerator) (denominator) amount
----------- ------------- ---------
EPS - basic:
Income available to
common stockholders $23,226 17,821,750 $1.30
Effect of dilutive common
shares:
Weighted average stock options
outstanding 708,374
Less:
Stock options - assumed buyback (2) (451,335)
Stock options - antidilutive (3) (11,996)
------- ---------- -----
EPS - diluted $23,226 18,066,793 $1.29
======= ========== =====
</TABLE>
(1) The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the
period, as if exercised, by the average common market share price during
the period. The average common market share prices used in the above
calculations were $15.16 and $20.45 for the three month periods ended June
29, 1997 and June 28, 1998, respectively.
8
<PAGE>
(2) The number of stock options assumed to have been bought back by the
Company for computational purposes has been calculated by dividing gross
proceeds from all weighted average stock options outstanding during the
period, as if exercised, by the average common market share price during
the period. The average common market share prices used in the above
calculations were $13.24 and $19.09 for the nine month periods ended June
29, 1997 and June 28, 1998, respectively.
(3) Stock options to purchase shares of common stock at prices greater than
the average market price of the common shares during that period are
considered antidilutive.
7. Effective December 1, 1997 the Company completed the purchase of the
outstanding stock of Camden Casting Center, Inc. ("Camden Casting") for
$2,100 that was paid during January 1998. This acquisition has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price has been allocated to the assets and liabilities of Camden
Casting based on their estimated fair values at the date of acquisition.
Operating results of Camden Casting since December 1, 1997 are included in
the Company's condensed consolidated financial statements. Coincident with
the purchase of Camden Casting, the Company entered into a requirements
supply contract for the sale of castings to LucasVarity. Camden Casting
produces high volume ductile iron braking parts. Its annual sales for the
year ended December 31, 1997 were approximately $25,350. Over 90% of Camden
Casting's sales are to LucasVarity. Camden Casting has approximately 240
employees.
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 2,367
Inventories 735
Property, plant and equipment 2,631
Deferred income tax asset 1,045
Accounts payable and accrued expenses (3,973)
Deferred income taxes (705)
-------
Purchase Price $ 2,100
=======
8. Effective January 8, 1998, the Company completed the purchase of the
outstanding stock of Dycast, Inc. ("Dycast"), an aluminum die casting and
machining company in Lake Zurich, Illinois for a purchase price of $21,069
plus the assumption of approximately $2,621 of debt. The acquisition has
been accounted for using the purchase method of accounting and accordingly,
the purchase price has been allocated to the assets and liabilities of
Dycast based on their estimated fair values at the date of acquisition.
Dycast, which represents the Company's first acquisition in aluminum die
casting technology, produces aluminum die castings for automotive,
appliance, and small engine applications. Dycast operates 22 die casting
machines and is in the process of installing a squeeze casting machine.
Annual sales for fiscal year 1997 were approximately $26,000. Dycast has
approximately 210 employees.
9
<PAGE>
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 3,276
Inventories 992
Other current assets 512
Property, plant and equipment 12,302
Intangible assets and other 10,706
Accounts payable and accrued expenses (4,098)
Long-term debt (2,621)
--------
Purchase Price $21,069
========
9. On March 30, 1998, Citation Precision, Inc. ("Citation Precision"), a
newly formed subsidiary of the Company, acquired the net assets of Amcast
Precision Products, Inc. of Rancho Cucamonga, California from Amcast
Industrial Corporation for a purchase price of $25,431. The acquisition has
been accounted for using the purchase method of accounting and accordingly,
the purchase price has been allocated to the assets and liabilities of
Citation Precision based on the estimated fair values at the date of
acquisition. Citation Precision produces aluminum and stainless steel
investment castings supplying the Aircraft and Aerospace industry. The
castings are utilized in aircraft engines and the structural airframe.
Amcast Precision Products, Inc. had annual sales in fiscal 1997 of
approximately $19,000. Citation Precision has approximately 220 employees.
The estimated fair values of assets acquired and liabilities assumed are as
follows:
Accounts receivable, net $ 4,011
Inventories 4,766
Other current assets 90
Property, plant and equipment 6,984
Intangible assets and other 11,085
Accounts payable and accrued expenses (1,505)
--------
Purchase Price $25,431
========
10. In conjunction with the Company's acquisition of Interstate Forging
Industries, Inc. ("Interstate") during October 1996, the purchase
agreement requires the Company to make additional contingent payments equal
to five times the amount by which the average annual net earnings of
Interstate before all interest, income taxes, and franchise taxes during
the three-year period from January 1, 1996 through December 31, 1998
exceeds $10,000, computed in accordance with generally accepted accounting
principles on a pre-merger basis. Any additional payments made, as the
contingencies are resolved, will be accounted for as additional costs of
acquired assets and amortized over the remaining life of the assets. During
the second quarter of fiscal 1998, the Company distributed $7,227 to the
previous stockholders of Interstate representing the Company's contingent
payment for calendar year 1997 as required by the purchase agreement.
During fiscal year 1997, the Company distributed $2,542 in contingent
payments under the purchase agreement for calendar year 1996. These
payments have been included in the calculation of the cash paid for the
Interstate acquisition of $58,432. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase
price has been allocated to
10
<PAGE>
the assets and liabilities of Interstate based on their estimated fair
values at the date of acquisition.
The estimated fair values of assets acquired and liabilities assumed are
summarized as follows:
Accounts receivable, net $ 15,161
Inventories 12,946
Other current assets 3,014
Property, plant and equipment 78,353
Intangible assets and other 7,343
Accounts payable and accrued expenses (18,675)
Deferred income taxes (17,046)
Long-term debt (22,664)
---------
Purchase Price $ 58,432
=========
11. The following unaudited pro forma summary for the nine months ended June
29, 1997 combines the results of operations of the Company with the
acquisitions of Interstate, Camden Casting, Dycast and Citation Precision
as if the acquisitions had occurred at the beginning of the 1997 fiscal
year. For the nine months ended June 28, 1998, the pro forma summary
presents the results of operations of the Company as if the acquisitions of
Camden Casting, Dycast and Citation Precision had occurred at the beginning
of the 1998 fiscal year. Certain adjustments, including additional
depreciation expense, interest expense on the acquisition debt,
amortization of intangible assets and income tax effects, have been made to
reflect the impact of the purchase transactions. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made at
the beginning of either fiscal years 1997 or 1998, or of results which may
occur in the future.
Pro forma interim condensed consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
June 29, June 28,
1997 1998
-----------------------------------
<S> <C> <C>
Sales $ 550,219 $ 582,563
Operating income $ 44,451 $ 50,121
Income before provision for income taxes $ 26,461 $ 37,980
Pro forma net income $ 16,141 $ 23,168
Weighted average shares outstanding - basic (note 6) 17,725,929 17,821,750
Pro forma earnings per common share - basic $ .91 $ 1.30
Weighted average shares outstanding - diluted (note 6) 17,889,442 18,066,793
Pro forma earnings per common share - diluted $ .90 $ 1.28
</TABLE>
11
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and earnings during
the periods included in the accompanying interim condensed consolidated
financial statements.
Forward Looking Statements. The statements in this Form 10-Q that are not
historical fact are forward looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected. Readers are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date
hereof. Readers are also urged to carefully review and consider the various
disclosures made by the Company which attempt to advise interested parties of
the factors which affect the Company's business, including the disclosures made
in other periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission.
OVERVIEW
The Company manufactures cast, forged and machined components made primarily
from iron, steel and aluminum materials. The Company's products are used
primarily in the automotive, construction equipment, aerospace, agricultural
and capital goods industries in a wide range of applications, including braking,
steering, engine and drive train parts for passenger cars and light trucks;
suspension and transmission parts for heavy trucks; ground engaging tools for
construction equipment; parts for aircraft engines, landing gear and structural
airframes; and thousands of other critical parts for capital goods. The Company
distributes its products principally to manufacturers, including major original
equipment manufacturers ("OEMs") and Tier 1 suppliers.
The principal components of the cost of sales of the Company's products are
labor (including benefits) and materials, each of which constitutes
approximately 35% of total cost of sales. The remaining 30% of total cost is
comprised of supplies and maintenance, utilities, depreciation, outside services
and other costs.
A significant component of the Company's historical sales and earnings growth
has been attributable to the acquisition of other capital goods manufacturers,
and the Company's results of operations for the periods discussed below have
been affected by such acquisition-related growth. Since its initial public
offering in August 1994, the Company has completed 14 acquisitions (including
three during the current fiscal year) and one divestiture. See notes 7, 8 and 9
to the interim condensed consolidated financial statements in this report
related to the acquisitions consummated during the current fiscal year. The
Company believes that its future results of operations may be affected by a
number of factors, including (i) the ability to generate sufficient cash flows
to support acquisition strategies, capital expansion plans and general operating
activities; (ii) future acquisitions, if any, undertaken by the Company; (iii)
competitive product and pricing pressures; (iv) fluctuations in the cost and
availability of raw materials; (v) general economic and business conditions, as
well as conditions affecting the industries served by the Company; and (vi) the
Company's ability to penetrate new markets. The Company's fiscal year ends on
the Sunday closest to September 30. Consequently, the Company occasionally has
a 53-week fiscal year. The Company's last 53-week fiscal year was fiscal 1993,
and the next one will be the fiscal year ending October 3, 1999.
12
<PAGE>
The Company's operations are subject to seasonal fluctuations. The Company's
sales generally are lower in the first and fourth fiscal quarters due to
temporary plant closings by major customers for vacations, holidays and model
changeovers. Accordingly, the Company's financial condition and results of
operations may be adversely affected by such seasonal fluctuations, particularly
during periods of slow economic growth or recession.
The following discussion and analysis should be read in conjunction with the
Company's interim condensed consolidated financial statements and related notes
thereto, included elsewhere in this Form 10-Q.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items in the Company's consolidated statements of
income.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
------------------------------ ------------------------------
June 29, 1997 June 28, 1998 June 29, 1997 June 28, 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 18.12 18.31 17.17 17.34
Selling, general and administrative 8.80 8.12 8.95 8.61
Operating income 9.32 10.19 8.22 8.73
Interest expense, net 2.12 2.09 2.28 1.97
Income before provision for income taxes 7.20 8.10 5.94 6.80
Provision for income taxes 2.81 3.16 2.33 2.65
Net income 4.39% 4.94% 3.61% 4.15%
</TABLE>
QUARTER ENDED JUNE 28, 1998 COMPARED TO THE QUARTER ENDED JUNE 29, 1997
Sales. Sales increased 10.5%, or $18.6 million, to $196.5 million for the three
months ended June 28, 1998 from $177.9 million in the comparable prior year
period. The increase was attributable to the acquisitions of Camden Casting,
Dycast and Citation Precision (collectively the "1998 Acquisitions"). Sales
from the Company's existing operations were basically flat for the quarter.
Gross Profit. Gross profit increased 11.5%, or $3.7 million, to $35.9 million in
the 1998 third quarter from $32.2 million in the comparable 1997 period. The
overall gross margin increased slightly to 18.3% in the 1998 third quarter from
18.1% in the comparable 1997 period. The gross margin for the 1998 Acquisitions
in the third quarter of fiscal 1998 was approximately 19.2%. The gross margin
from existing units increased slightly to 18.2% in the 1998 third quarter from
18.1% in the comparable prior year period.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 1.9%, or $0.3 million, to $15.9
million in the third quarter from $15.6 million in the comparable 1997 period.
SGA expenses attributable to the 1998 Acquisitions were $2.1 million. SGA
expenses at existing Company operations decreased to 7.8% in the 1998 third
quarter from 8.8% in the comparable prior year period. As a percentage of
sales, overall SGA expenses decreased to 8.1% in the 1998 third quarter from
8.8% in the comparable prior year period. The improvement resulted from the
sales growth in the quarter without a corresponding increase in administrative
expenses.
Operating Income. Operating income increased 20.5%, or $3.4 million, to $20.0
million for the 1998 third quarter from $16.6 million for the comparable 1997
quarter. The overall operating margin increased to 10.2% in the 1998 third
quarter from 9.3% in the comparable 1997 period, which is primarily attributable
to improved operating efficiencies of the divisions. The operating margin for
the 1998 Acquisitions for the 1998 third quarter was approximately 8.6%. The
operating margin for existing Company operations increased to 10.3% in the 1998
third quarter from 9.3% in the comparable 1997 period.
Interest Expense. Interest expense increased to $4.1 million in the 1998 third
quarter from $3.8 million in the comparable 1997 period. This increase is
primarily attributable to higher average outstanding debt balances due to the
1998 Acquisitions during the first three quarters of fiscal 1998 and the
contingent payment related to the acquisition of Interstate resulting in
approximately $1.1 million of additional interest expense for fiscal third
quarter 1998. The total purchase price plus assumed debt for the 1998
Acquisitions was approximately $58.6 million. The increase related to the 1998
Acquisitions was offset by a decrease of interest expense from existing units to
$3.1 million in the 1998 third quarter from $3.8 million in the comparable 1997
period. This decrease is primarily attributable to the reduction of interest
rates by approximately 0.5% in July 1997 when the Company's credit facility was
amended. (See additional discussion under "Liquidity and Capital Resources").
Capitalized interest for the third fiscal quarters of 1997 and 1998 was
approximately $0.07 million and $0.4 million, respectively.
NINE MONTHS ENDED JUNE 28, 1998 COMPARED TO THE NINE MONTHS ENDED JUNE 29, 1997
Sales. Sales increased 14.5%, or $71.0 million, to $559.8 million for the nine
months ended June 28, 1998 from $488.8 million in the comparable prior year
period. The increase was attributable to fiscal year 1997 and 1998 acquisitions
as well as growth at the Company's existing units. The incremental sales at
Interstate, Camden Casting, Dycast and Citation Precision (collectively the
"Acquisitions") in the first nine months of fiscal 1998 were approximately $46.3
million. Sales from the Company's existing operations in the first nine months
of 1998 increased approximately 5.0%, or $24.7 million.
Gross Profit. Gross profit increased 15.6%, or $13.1 million, to $97.0 million
for the nine months ended June 28, 1998 from $83.9 million in the comparable
1997 period. The overall gross margin increased slightly to 17.3% for the first
nine months of fiscal 1998 from 17.2% in the comparable 1997 period. The
incremental gross margin for the Acquisitions included in the first nine months
of fiscal 1998 was approximately 17.2%. The gross margin for the Company's
existing units increased to approximately 17.4% during the first nine months of
fiscal 1998 from 17.2% in the comparable prior year period, primarily due to the
absorption of fixed costs over a larger volume of sales and increased
efficiencies at a number of operating units.
14
<PAGE>
Selling, General and Administrative Expenses. SGA increased 10.1%, or $4.4
million, to $48.2 million for the nine months ended June 28, 1998 from $43.7
million in the comparable 1997 period. SGA expenses attributable to the
Acquisitions were $4.3 million. SGA expenses at existing Company operations
increased approximately 0.3%, or $0.15 million. As a percentage of sales,
overall SGA expenses decreased to 8.6% in the first nine months of fiscal 1998
from 9.0% in the comparable 1997 period, primarily due to increased sales volume
and continued cost control.
Operating Income. Operating income increased 21.6%, or $8.7 million, to $48.9
million for the nine months ended June 28, 1998 from $40.2 million for the
comparable 1997 period. The overall operating margin increased to 8.7% for the
first nine months of fiscal 1998 from 8.2% in the comparable 1997 period. The
operating margin for the Acquisitions included in the first nine months of
fiscal 1998 was approximately 7.9%. The operating margin for existing Company
operations increased to 8.8% for the first nine months of fiscal 1998 from 8.2%
in the comparable 1997 period.
Interest Expense. Interest expense decreased slightly to $11.0 million for the
first nine months of fiscal 1998 from $11.1 million in the comparable 1997
period. This decrease is primarily attributable to the reduction of interest
rates by approximately 0.5% in July 1997 when the Company's credit facility was
amended. (See additional discussion under "Liquidity and Capital Resources").
However, the overall interest rate reduction was offset by higher average
outstanding debt balances relating to the acquisition of Interstate during the
first quarter of fiscal 1997 and the contingent payment during the second
quarter of 1998, and the acquisitions of Camden Casting, Dycast and Citation
Precision during the first nine months of fiscal 1998. The total purchase price
plus assumed debt of the Acquisitions was approximately $109.7 million.
Capitalized interest for the nine months ended June 29, 1997 and June 28, 1998
was approximately $0.1 million and $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are to fund capital expenditures
for existing facilities and to fund new business acquisitions. Historically,
the Company has used cash generated by operations, borrowings under its $300,000
revolving credit facility (the "Credit Agreement") and proceeds from public
equity offerings to fund its capital requirements. Additionally, the Company
requires capital to finance accounts receivable and inventory.
Under the Credit Agreement, the Company can borrow at interest rates from LIBOR
plus .5% to LIBOR plus 1.375% based upon the Company's ratio of debt to its cash
flow, measured by earnings before interest and taxes plus depreciation and
amortization (EBITDA). The Credit Agreement also makes available borrowings up
to $15,000 under a swing line of credit bearing interest at prime. At September
28, 1997 and June 28, 1998, the Company was able to borrow at LIBOR plus 1%. The
facility calls for an unused commitment fee payable quarterly, in arrears, at a
rate of .18% to .30% based upon the Company's ratio of debt to EBITDA. At
September 28, 1997 and June 28, 1998, the Company's unused commitment fee rate
was .25%. The facility is collateralized by substantially all of the assets of
the Company as well as the stock of its subsidiaries and expires on July 24,
2000. At September 28, 1997 and June 28, 1998, the total outstanding balance
under the Credit Agreement was $170,393 and $229,479, respectively, and $129,607
and $70,521, respectively, were available for borrowing.
15
<PAGE>
The Company had outstanding borrowings under the swing line of credit of $5,393
and $2,479 at September 28, 1997 and June 28, 1998, respectively, each bearing
interest at the prime rate of 8.5%. At June 28, 1998 the remaining $227,000
outstanding under the Credit Agreement related to eight revolving loans. The
Company had $22,000, $80,000, $15,000, $15,000 and $15,000 outstanding under
these loans at interest rates of 6.66%, 6.63%, 6.68%, 6.69% and 6.69% which
reprice on July 6, 1998, July 27, 1998, August 3, 1998, August 10, 1998 and
September 17, 1998, respectively. On July 3, 1998 the $22,000 loan above was
increased to $25,000 and repriced at an interest rate of 6.68%. The remaining
$80,000 outstanding under the Credit Agreement at June 28, 1998 consists of one
$40,000 and two $20,000 five-year interest rate swap agreements that were
entered into during fiscal year 1996. These agreements are repriced every 90
days and expire between August 2001 and February 2002. The agreements have
fixed interest rates plus a margin of .5% to 1.375%, based on the Company's
leverage ratio on the date the agreements are repriced. The Company's fixed
interest rates, including margins, were 7.91% and 8.09% on the two $20,000 swap
agreements and 7.85% on the $40,000 swap agreement at June 28, 1998. The Company
is exposed to credit risk in the event of nonperformance by the counterparty to
the interest rate swap agreements. The Company believes it mitigates credit
risk by dealing only with financially sound banks. Accordingly, the Company
does not anticipate loss for nonperformance by these counterparties.
The Credit Agreement 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 1 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recently issued accounting standards.
ACQUISITIONS
Notes 7, 8 and 9 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q describe the recent acquisitions of Camden,
Dycast and Citation Precision, Inc.
CONFORMANCE OF AUTOMATED SYSTEMS TO YEAR 2000
The Company is in the process of reviewing current software as well as embedded
systems in certain of its manufacturing equipment and has surveyed its
divisional operations to assess the impact of the year 2000 issue. Most of the
standard software in use at its corporate office and divisions and the computer
software for interface among its divisions and corporate office is year 2000
compliant. Programs to bring remaining software in compliance are anticipated to
be completed by the end of calendar year 1998. The Company's management believes
that its own compliance programs will not result in material costs to the
Company. With regard to manufacturing equipment, the Company anticipates
completing its evaluation by the end of calendar 1998 and remediation, if any,
by mid-year 1999. The costs associated with this project will be expensed as
incurred. At this time, the Company does not believe cost associated with this
project will be material 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
16
<PAGE>
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.
-------------------------------
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule, submitted to the Securities
and Exchange Commission in electronic format
(b) Reports on Form 8-K:
There were no Reports on Form 8-K filed during the quarter ended June
28, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: CITATION CORPORATION
July 21, 1998 /s/ T. Morris Hackney
-------------------------------------------------
T. MORRIS HACKNEY
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer)
July 21, 1998 /s/ Frederick F. Sommer
-------------------------------------------------
FREDERICK F. SOMMER
President and Chief Operating Officer
July 21, 1998 /s/ Thomas W. Burleson
-------------------------------------------------
THOMAS W. BURLESON
Vice President-Finance and Chief Financial Officer
(Principal Financial Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
FOUND ON PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE NINE MONTHS ENDED JUNE
28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> JUN-28-1998
<CASH> 2,876
<SECURITIES> 0
<RECEIVABLES> 111,816
<ALLOWANCES> (1,964)
<INVENTORY> 57,105
<CURRENT-ASSETS> 188,640
<PP&E> 432,129
<DEPRECIATION> (113,060)
<TOTAL-ASSETS> 584,358
<CURRENT-LIABILITIES> 101,894
<BONDS> 0
0
0
<COMMON> 178
<OTHER-SE> 196,295
<TOTAL-LIABILITY-AND-EQUITY> 584,358
<SALES> 559,760
<TOTAL-REVENUES> 559,760
<CGS> 462,707
<TOTAL-COSTS> 510,875
<OTHER-EXPENSES> (230)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,040
<INCOME-PRETAX> 38,075
<INCOME-TAX> 14,849
<INCOME-CONTINUING> 23,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,226
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
***RESTATED FINANCIAL DATA SCHEDULE***
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
CONDENSED CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME
FOUND ON PAGES 2 AND 3 OF THE COMPANY FORM 10-Q FOR THE NINE MONTHS ENDED JUNE
29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 3,105
<SECURITIES> 0
<RECEIVABLES> 100,071
<ALLOWANCES> (1,951)
<INVENTORY> 47,257
<CURRENT-ASSETS> 159,795
<PP&E> 362,399
<DEPRECIATION> (85,512)
<TOTAL-ASSETS> 487,045
<CURRENT-LIABILITIES> 91,952
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 166,877
<TOTAL-LIABILITY-AND-EQUITY> 487,045
<SALES> 488,779
<TOTAL-REVENUES> 488,779
<CGS> 404,850
<TOTAL-COSTS> 448,593
<OTHER-EXPENSES> 91
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,131
<INCOME-PRETAX> 28,964
<INCOME-TAX> 11,296
<INCOME-CONTINUING> 17,668
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,668
<EPS-PRIMARY> 1.00<F1>
<EPS-DILUTED> .99<F1>
<FN>
<F1>WE HAVE CALCULATED AND RESTATED EARNINGS PER SHARE AMOUNTS IN ACCORDANCE
WITH FAS 128 "EARNINGS PER SHARE." WE HAVE ENTERED BASIC AND DILUTED AMOUNTS IN
PLACE OF PRIMARY AND FULLY DILUTED, RESPECTIVELY. NO OTHER CHANGES HAVE BEEN
MADE TO THE PREVIOUSLY FILED AMOUNTS FOR THE NINE MONTHS ENDED JUNE 29, 1997.
</FN>
</TABLE>
