<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 27, 1998
------------------
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________ to ____________
Commission File No. 0-24492
-------
CITATION CORPORATION
(Exact name of registrant as specified in its Charter)
DELAWARE 63-0828225
(State of Incorporation) (IRS Employer I.D. No.)
2 Office Park Circle, Suite 204
Birmingham, Alabama 35223
(Address of principal executive offices)
(205) 871-5731
(Registrant's telephone number)
____________________________________________
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _______
--------
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practicable date.
Class Outstanding at February 8, 1999
- ------------------------------- -------------------------------
Common Stock, $.01 Par Value 17,889,113
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INDEX
<TABLE>
<CAPTION>
Page No.
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PART I: FINANCIAL INFORMATION
<S> <C>
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.................................................. 11
PART II: OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K....................................... 16
SIGNATURES...................................................................... 17
</TABLE>
EXHIBITS:
Exhibit 27 - Financial Data Schedule
<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 27, 1998
and December 27, 1998.
Interim Condensed Consolidated Statements of Income for the three
months ended December 28, 1997 and December 27, 1998.
Interim Condensed Consolidated Statements of Cash Flows for the three
months ended December 28, 1997 and December 27, 1998.
Notes to Interim Condensed Consolidated Financial Statements.
____________________________________
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1
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CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 27,
1998 1998
------------------- -------------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,322 $ 1,318
Accounts receivable, net 103,152 113,105
Inventories 56,353 59,290
Deferred income taxes, prepaid expenses
and other assets 21,851 23,877
------------ ------------
Total current assets 183,678 197,590
Property, plant and equipment, net 307,008 340,259
Other assets 78,579 108,941
------------ ------------
$ 569,265 $ 646,790
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 5,304 $ 11,919
Current portion of long-term debt 6,316 11,567
Accounts payable 46,802 43,673
Accrued expenses and other current liabilities 40,634 43,626
------------ ------------
Total current liabilities 99,056 110,785
Long-term debt, net of current portion 237,525 298,607
Deferred income taxes and other long-term liabilities 46,650 48,515
------------ ------------
Total liabilities 383,231 457,907
------------ ------------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000
shares authorized, none issued and
outstanding (Note 10) - -
Common stock, $0.01 par value; 30,000,000
shares authorized, 17,889,113 shares issued
and outstanding at September 27, 1998 and
December 27, 1998 179 179
Additional paid-in capital 107,844 107,565
Distributions to former S-corp shareholders (Note 11) - (466)
Retained earnings 78,011 81,605
------------ ------------
Total stockholders' equity 186,034 188,883
------------ ------------
$ 569,265 $ 646,790
============ ============
</TABLE>
See notes to interim condensed consolidated financial statements.
2
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CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
----------------- ------------------
(unaudited) (unaudited)
<S> <C> <C>
Net sales $ 170,223 $ 184,860
Costs of sales 143,225 158,192
------------ --------------
Gross profit 26,998 26,668
Selling, general and administrative expenses 15,381 16,035
------------ --------------
Operating income 11,617 10,633
Interest expense, net 3,225 4,643
------------ --------------
Income before provision for income taxes 8,392 5,990
Provision for income taxes 3,273 2,396
------------ --------------
Net income $ 5,119 $ 3,594
============ ==============
Earnings per share - basic (Note 6) $ 0.29 $ 0.20
============ ==============
Weighted average shares
outstanding - basic (Note 6) 17,781,325 17,889,113
============ ==============
Earnings per share - diluted (Note 6) $ 0.28 $ 0.20
============ ==============
Weighted average shares
outstanding - diluted (Note 6) 18,013,716 17,940,418
============ ==============
</TABLE>
See notes to interim condensed consolidated financial statements.
3
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CITATION CORPORATION
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
DECEMBER 28, DECEMBER 27,
1997 1998
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) (unaudited)
<S> <C> <C>
Net income $ 5,119 $ 3,594
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for losses on receivables 94 90
Depreciation 7,343 9,225
Amortization 875 1,300
Changes in operating assets and liabilities, net:
Accounts receivable 227 1,495
Inventories (1,061) 863
Prepaid expenses and other assets (1,318) 139
Accounts payable (2,970) (11,631)
Accrued expenses and other liabilities 923 (3,152)
------------ ------------
Total adjustments 4,113 (1,671)
------------ ------------
Net cash provided by operating activities 9,232 1,923
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property, plant and equipment expenditures - net (11,459) (10,224)
Investment in joint venture - (2,767)
Cash paid for acquisition - (35,719)
------------ ------------
Net cash used by investing activities (11,459) (48,710)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash overdraft 3,468 5,336
Repayments of acquired debt - (12,670)
Distributions to former S-corp shareholders (Note 11) - (466)
Change in credit facility and other financing
arrangements, net (2,674) 53,862
Change in paid in capital 128 (279)
------------ ------------
Net cash provided by financing activities 922 45,783
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS
FOR THE PERIOD (1,305) (1,004)
Cash and cash equivalents, beginning of period 2,645 2,322
------------ ------------
Cash and cash equivalents, end of period $ 1,340 $ 1,318
============ ============
</TABLE>
See notes to interim condensed consolidated financial statements.
4
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CITATION CORPORATION
NOTES TO INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except share and per share data)
1. The condensed consolidated balance sheet of Citation Corporation (the
"Company") at September 27, 1998 has been derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles (GAAP). The interim condensed consolidated
financial statements at December 27, 1998 and for the three months ended
December 27, 1998 and December 28, 1997 are unaudited; however, in the
opinion of management, all adjustments, consisting only of normal recurring
accruals necessary for a fair presentation, have been included. Certain
minor reclassifications have been made in the previous year's financial
statements in order to conform them to current year classifications. These
financial statements should be read in conjunction with the Company's 1998
annual report on SEC Form 10-K.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be required. In February 1998, the FASB issued
SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which revises employers' disclosures about pension
and other postretirement benefit plans. The Company is required to adopt
these statements in fiscal year 1999. The Company intends to provide the
appropriate disclosures required by these statements in its fiscal year
1999 annual report.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 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 its results of operations, financial position or
liquidity.
2. A summary of inventories is as follows:
<TABLE>
<CAPTION>
September 27, December 27,
1998 1998
---------------------------
<S> <C> <C>
Raw materials $ 10,210 $ 8,571
Supplies and containers 14,052 14,452
Finished goods 32,091 36,267
---------------------------
$ 56,353 $ 59,290
===========================
</TABLE>
5
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3. Balances of major classes of property, plant and equipment and accumulated
depreciation are as follows:
September 27, December 27,
1998 1998
-------------------------------
Land and improvements $ 12,454 $ 14,215
Buildings 59,509 65,833
Plant equipment 319,092 344,837
Office equipment 14,258 17,135
Transportation equipment 12,753 12,682
Construction in progress 9,923 15,658
-------------------------------
427,989 470,360
Less accumulated depreciation (120,981) (130,101)
-------------------------------
$ 307,008 $ 340,259
===============================
4. The Company's other assets consist of the following:
September 27, December 27,
1998 1998
-------------------------------
Goodwill, net $ 72,973 $ 100,106
Investment in joint venture 1,441 4,208
Consulting and non-competition
agreements, net 579 499
Other, net 3,586 4,128
-------------------------------
$ 78,579 $ 108,941
===============================
5. Long-term debt consists of the following:
September 27, December 27,
1998 1998
-------------------------------
Credit facility $ 232,993 $ 287,991
Other financing arrangements 10,848 22,183
-------------------------------
243,841 310,174
Less current portion of long-term debt 6,316 11,567
-------------------------------
$ 237,525 $ 298,607
===============================
6
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6. Earnings per share ("EPS")
<TABLE>
<CAPTION>
Quarter Ended December 28, 1997
-------------------------------------------------
Income Shares Per Share
(numerator) (denominator) amount
-------------------------------------------------
<S> <C> <C> <C>
EPS - basic:
Income available to
common stockholders $ 5,119 17,781,325 $ 0.29
Effect of dilutive common
shares:
Weighted average stock options
outstanding 638,023
Less:
Stock options - assumed buyback /(1)/ (405,634)
Stock options - antidilutive /(2)/ -
----------------------------------------------------
EPS - diluted $ 5,119 18,013,716 $ 0.28
====================================================
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended December 27, 1998
Income Shares Per Share
(numerator) (denominator) amount
----------------------------------------------------
<S> <C> <C> <C>
EPS - basic:
Income available to
common stockholders $ 3,594 17,889,113 $ 0.20
Effect of dilutive common
shares:
Weighted average stock options
outstanding 714,638
Less:
Stock options - assumed buyback /(1)/ (161,333)
Stock options - antidilutive /(2)/ (502,000)
----------------------------------------------------
EPS - diluted $ 3,594 17,940,418 $ 0.20
====================================================
</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 $18.06 and $10.79 for the three month periods ended
December 28, 1997 and December 27, 1998, respectively.
(2) Stock options to purchase shares of common stock at prices greater than
the average market price of the common shares during that period are
considered antidilutive.
7
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7. Effective November 17, 1998, the Company completed the purchase of the
outstanding stock of Custom Products Corporation ("Custom") of Milwaukee,
Wisconsin, for $35,719 in cash. In addition, the agreement provides for
contingent payments equal to five times the amount by which the average
annual net earnings of Custom before all interest, income taxes, and
franchise taxes during the three year period from October 1, 1998 through
September 29, 2001 exceeds $9,500. Earnings shall be computed in accordance
with generally accepted accounting principles on a pre-acquisition basis,
and the aggregate amount of contingent payments shall not exceed $16,500.
The acquisition has been accounted for using the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
assets and liabilities of Custom based on their estimated fair values at
the date of acquisition. Custom is a machiner of cast and forged metal
products, primarily for the diesel engine, construction equipment, farm
implement and automotive markets. Custom's revenues for its 1998 fiscal
year were approximately $75,000. Custom has approximately 650 employees.
The estimated fair values of assets acquired and liabilities assumed are as
follows:
<TABLE>
<S> <C>
Accounts receivable, net $ 11,538
Inventories 3,800
Other current assets 4,751
Property, plant and equipment 32,125
Intangible assets and other 28,317
Deferred income tax asset 800
Accounts payable and accrued expenses (18,966)
Deferred income taxes (1,743)
Long-term debt (24,903)
---------
Purchase Price $ 35,719
=========
</TABLE>
8. The following unaudited pro forma summary for the three months ended
December 28, 1997 combines the results of operations of the Company with
the fiscal year 1998 acquisitions of Camden Casting, Dycast and Citation
Precision and fiscal year 1999 acquisition of Custom as if all of the
acquisitions had occurred at the beginning of the 1998 fiscal year. For the
three months ended December 27, 1998, the pro forma summary presents the
results of operations of the Company as if the acquisition of Custom had
occurred at the beginning of the 1999 fiscal year. Certain adjustments,
including additional depreciation expense, interest expense on the
acquisition debt, amortization of intangible assets and income tax effects,
have been made to reflect the impact of the purchase transactions. These
pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of what would have occurred had the
acquisitions been made at the beginning of either fiscal years 1998 or
1999, or of results which may occur in the future.
8
<PAGE>
Pro forma interim condensed consolidated statements of income are as
follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
December 28, December 27,
1997 1998
------------------------------------
<S> <C> <C>
Sales $205,385 $194,519
Operating income $ 12,291 $ 10,220
Income before provision for income taxes $ 7,124 $ 4,891
Pro forma net income $ 4,346 $ 2,935
Weighted average shares outstanding - basic (Note 6) 17,781,325 17,889,113
Pro forma earnings per common share - basic $ 0.24 $ 0.16
Weighted average shares outstanding - diluted (Note 6) 18,013,716 17,940,418
Pro forma earnings per common share - diluted $ 0.24 $ 0.16
</TABLE>
9. Subsequent to December 27, 1998, the Company acquired all of the stock of
CT-South of Marion, Alabama, for a purchase price of approximately $15,000
in cash. The acquisition has been accounted for under the purchase method
of accounting. Following the acquisition, the name of CT-South was changed
to Citation Marion, Inc. ("Marion"). Marion is a producer of ductile iron
thin-walled manifolds primarily for the passenger car and light truck
markets, and it had revenues for its most recent fiscal year of
approximately $30,000.
10. On November 6, 1998, Drummond Company, Inc. of Birmingham, Alabama
("Drummond") entered into a Call Option Agreement (the "Call Option
Agreement") with Mr. T. Morris Hackney, the Company's Chairman of the Board
and largest shareholder, by which Drummond acquired a 120-day option to
purchase 4 million shares of the Company's common stock held by Mr.
Hackney, constituting approximately 22.4% of the Company's outstanding
common stock, at a price of $20 per share, and a right of first-refusal on
the approximately 1,005,800 additional shares held by Mr. Hackney. In an
agreement dated as of November 9, 1998, Drummond entered into an agreement
to acquire 1,336,400 shares of the Company's stock, constituting
approximately 7.5% of the Company's outstanding shares, from Mr. Hugh
Weeks, a director of the Company, for $15 per share. The shares subject to
the option under the Call Option Agreement plus the shares owned by Mr.
Weeks would constitute an aggregate of approximately 29.8% of the Company's
outstanding shares as of December 27, 1998 (before considering the effect
of the Shareholder Rights Plan discussed below).
The Company's Board of Directors appointed a special committee of
independent directors (the "Special Committee") to review the Company's
response to the above events. On November 25, 1998, upon recommendation of
the Special Committee, the Company adopted a shareholder rights plan (the
"Shareholder Rights Plan") and designated 300,000 shares of its 5,000,000
authorized shares of preferred stock as Series A Junior Participating
Preferred Stock (the "Preferred Stock"). In connection with the adoption of
the Shareholder Rights Plan, the Company declared a dividend of one
preferred share
9
<PAGE>
purchase right (a "Right") for each outstanding share of the Company's
common stock to all stockholders of record as of December 7, 1998. The
Rights will not become exercisable, and will continue to trade with the
underlying common stock, unless a person or group acquires 15% or more of
the Company's common stock or announces a tender offer, the consummation of
which would result in ownership by a person or group of 15% or more of the
Company's common stock. Each Right entitles the holder to purchase one one-
hundredth of a share of the Company's newly created Preferred Stock at an
exercise price of $45 per one one-hundredth of a share. The Rights will
expire on November 25, 2008.
In the event that any person or group acquires 15% or more of the Company's
outstanding common stock, each holder of a Right (other than the acquiring
person or group) will be entitled to receive, upon payment of the exercise
price, that number of shares of common stock (or other equivalent security
such as the Preferred Stock) having a market value equal to twice the
exercise price. Pursuant to the Shareholder Rights Plan, the shares held by
the Chairman of the Board and the related option granted to Drummond are
grandfathered. However, any exercise by Drummond of such option, which
results in Drummond's direct ownership of more than 15% of the Company's
outstanding common stock, without the prior approval of the Company's Board
of Directors, would trigger the Rights issued under the Shareholder Rights
Plan. The Company adopted the Shareholder Rights Plan because it wants any
third party investor wishing to purchase more than 15% of the Company's
stock to fully discuss its intentions with the Company's Board of Directors
so that the Board will be in a position to act in the best interest of the
Company's employees and stockholders.
The Company also amended its two stock option plans so that participants
will be immediately fully vested in the event of a change in control and
entered into change of control severance agreements with certain of its key
executives. Further, the Company amended its bylaws to provide for an
orderly administration of a consent solicitation and to require a two-
thirds majority vote of shareholders to effect amendment of the bylaws.
Subsequent events. On January 4, 1999, after the end of the fiscal
quarter, Drummond consummated the acquisition of the 1,336,400 shares from
Mr. Weeks, for an aggregate price of $20,046,000. On January 21, 1999,
Drummond notified Mr. Hackney of its election to cancel the Call Option
Agreement without exercising the option to purchase his shares.
11. On October 23, 1998, the Company made distributions aggregating $466,420 to
Citation's former S corporation stockholders as a consequence of an
Internal Revenue Service audit of the 1993 and 1994 tax years (prior to the
Company's 1994 initial public offering), which resulted in an increase to
the Company's taxable income for those years. This distribution was made
in accordance with the terms of the 1994 Tax Indemnification Agreement
between the Company and its former S corporation stockholders, by which the
Company and the former S corporation stockholders agreed to indemnify each
other for subsequent determinations of income tax liability or increased
earnings, respectively, attributable to fiscal periods prior to termination
of the S corporation status.
10
<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" within the meaning of the
Private Securities Litigation Reform Act of 1995. Those statements appear in a
number of places in this report and include statements regarding the intent,
belief or expectations of the Company and its management with respect to, among
other things: (i) the Company's operating performance; (ii) the Company's
expectations concerning sales growth and earnings per share growth; (iii) the
intent, belief or expectations of the Company and its directors and officers
with respect to anticipated acquisitions and acquisition strategies; (iv) trends
in the industries served by the Company; and (v) trends that may affect the
Company's financial condition or results of operations. Such statements are
subject to numerous risks and uncertainties which could cause actual results to
differ materially from anticipated results. The following are some of such
factors, risks and uncertainties: (i) competitive product and pricing pressures;
(ii) fluctuations in the cost and availability of raw materials; (iii) general
economic and business conditions, as well as conditions affecting the industries
served by the Company; (iv) the ability to generate sufficient cash flows to
support acquisition strategies, capital expansion plans and general operating
activities; (v) recent management changes; and (vi) the Company's ability to
penetrate new markets. Readers are cautioned not to place undue reliance on
these forward looking statements which speak only as of the date hereof.
Readers are also urged to carefully review and consider the various disclosures
made by the Company which attempt to advise interested parties of the factors
which affect the Company's business, including the disclosures made in other
periodic reports on Forms 10-K, 10-Q and 8-K filed with the Securities and
Exchange Commission.
QUARTER ENDED DECEMBER 27, 1998 COMPARED TO THE QUARTER ENDED DECEMBER 28, 1997
Sales. Sales increased 8.6%, or $14.6 million, to $184.9 million for the three
months ended December 27, 1998, from $170.2 in the comparable prior year period.
The increase includes $23.4 million attributable to the acquisitions of Custom
Products during the quarter, Citation Precision and Dycast during fiscal 1998,
and Camden Casting Center, which was acquired in December 1997 (collectively the
"Acquisitions"), offset by a 5.2% decrease or $8.8 million in reduced revenues
from the Company's existing operations. The Company's Industrial Group, Special
Foundry Group and Interstate Forging had reduced shipments from existing units
due to a reduction in orders, principally from customers in the construction
equipment, mining equipment, farm implement, and/or oil tool industries.
Shipments by the Company's existing units in its Automotive Group and Aerospace
and Technology Group increased 8.6% or $6.4 million, principally due to new
business.
Gross Profit. Gross profit decreased $0.3 million or 1.2% to $26.7 million in
the first quarter of fiscal 1999, from $27.0 million in the comparable quarter
for fiscal 1998. The gross profit margin declined to 14.4% in the first quarter
of fiscal 1999 from 15.9% in the comparable quarter
11
<PAGE>
of last year. The gross margin for the Acquisitions in the first quarter was
11.7%. The gross margin for existing units in the quarter was 14.8%, down from
15.9% in the comparable quarter of fiscal 1998 principally due to reduced sales
in the Company's Industrial Group, Special Foundry Group and Interstate Forging.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SGA") increased 4.2% or $0.7 million to $16.0 million
in the first quarter of fiscal 1999 from $15.4 million in the first quarter of
fiscal 1998. SGA costs attributable to Acquisitions was $2.4 million. SGA
costs at existing units was $13.6 million in the fiscal 1999 first quarter
versus $15.4 million in the first quarter of fiscal 1998. SGA costs as a
percentage of sales declined to 8.7% in the fiscal 1999 first quarter versus
9.0% in the comparable quarter last year. The reduction is attributable to
improved efficiencies, including centralization of the selling effort as well as
the reduced use of sales representatives.
Operating Income. Operating income for the first quarter of fiscal 1999
decreased $1.0 million or 8.5% to $10.6 million as compared to $11.6 million in
the first quarter of fiscal 1998. The overall operating margin decreased to
5.8% in the first quarter as compared to 6.8% in the first quarter of the
previous year. The operating margin attributable to Acquisitions was 1.4% for
the quarter while the margin for the existing units in the same period was 6.4%.
Interest Expense. Interest expense for the first quarter of fiscal 1999
increased to $4.6 million from $3.2 million in the comparable quarter of fiscal
1998, an increase of $1.4 million. The increase reflects the cost of financing
the Acquisitions as well as a continued high level of capital expenditures.
During the first quarter, capital expenditures and investment in joint venture
were approximately $13.0 million, versus capital expenditures during the
comparable period of 1998 of $11.5 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 revolving
credit facility (discussed below) and proceeds from public equity offerings to
fund its capital requirements. Additionally, the Company requires capital to
finance accounts receivable and inventory.
As of September 27, 1998, the Company had a $300,000 revolving credit facility
with a consortium of banks, led by the First National Bank of Chicago-NBD
("First Chicago-NBD") to be used for working capital purposes and to fund future
acquisitions. On November 3, 1998, the Company's credit facility was increased
from $300,000 to $400,000. The facility consists of a swing line of credit up to
$15,000 bearing interest at prime and revolving credit borrowings which bear
interest at LIBOR plus .625% to LIBOR plus 1.50% based upon the Company's ratio
of debt to its cash flow, measured by earnings before interest and taxes plus
depreciation and amortization (EBITDA). At September 27, 1998 and December 27,
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 .20% to .375%
based upon the Company's ratio of debt to EBITDA. At September 27, 1998 and
December 27, 1998, the Company's unused commitment fee rate was .25%. The
facility is collateralized by the stock of the Company's subsidiaries and
expires on October 15,
12
<PAGE>
2001. At September 27, 1998 and December 27, 1998, the total outstanding balance
under this credit facility was $232,993 and $287,991, respectively.
As of September 27, 1998, the Company had $2,993 outstanding under the swing
line of credit at the prime rate of 8.5%. The remaining $230,000 outstanding
under this facility at September 27, 1998 related to four revolving loans. The
Company had one loan at $150,000 at an interest rate of 6.60%, which was
repriced on October 14, 1998, November 12, 1998, and December 10, 1998 at
interest rates of 6.42%, 6.30% and 6.13%, respectively. This loan will reprice
again on June 10, 1999. The remaining $80,000 outstanding under this facility at
September 27, 1998 consists of one $40,000 and two $20,000 five-year interest
rate swap agreements that were entered into during fiscal year 1996. These
agreements have fixed interest rates plus a margin of .625% to 1.50%, based on
the Company's leverage ratio on the date the agreements are repriced. The
Company's fixed interest rates, including margins, were 7.91% and 8.09% on the
two $20,000 swap agreements and 7.85% on the $40,000 swap agreement at September
27, 1998.
As of December 27, 1998, the Company had $7,991 outstanding under the swing line
of credit at the prime rate of 7.75%. The remaining $280,000 outstanding under
this facility at December 27, 1998 related to five revolving loans. The Company
had $150,000 and $50,000 outstanding under these loans at interest rates of
6.13% and 6.05%, respectively, which reprice on June 10, 1999 and June 15, 1999,
respectively. The remaining $80,000 outstanding under this facility at December
27, 1998 consists of one $40,000 and two $20,000 five-year interest rate swap
agreements that were entered into during fiscal year 1996. These agreements have
fixed interest rates plus a margin of .625% to 1.50%, based on the Company's
leverage ratio on the date the agreements are repriced. The Company's fixed
interest rates, including margins, were 7.91% and 8.09% on the two $20,000 swap
agreements and 7.85% on the $40,000 swap agreement at December 27, 1998. The
Company is exposed to credit risk in the event of nonperformance by the
counterparty to the interest rate swap agreements. The Company mitigates credit
risk by dealing with only financially sound banks. Accordingly, the Company
does not anticipate loss for nonperformance by these counterparties.
The Company's credit facility contains certain restrictive covenants that
require the maintenance of a funded debt to EBITDA ratio and a specified fixed
charge coverage ratio; place a minimum level of stockholders' equity; place
limitations on capital expenditures, and place limitations on dividends and
other borrowings. The credit facility also has a covenant prohibiting a change
in control in excess of 30% of the Company's outstanding stock other than by the
Company's current largest shareholder, Mr. Hackney. As discussed in Note 10 to
the condensed consolidated financial statements included elsewhere in this Form
10-Q, subsequent to fiscal 1998, Drummond Company, Inc. ("Drummond") entered
into an agreement to acquire stock from Mr. Hugh Weeks, a director of the
Company and also acquired a 120-day option to purchase stock from Mr. Hackney
which, if both the stock purchase were consummated and the option were
exercised, Drummond would subsequently hold a 29.8% ownership interest in the
outstanding stock of the Company (before considering the effect of the
Shareholder Rights Plan also discussed in Note 10 to the condensed consolidated
financial statements included elsewhere in this Form 10-Q). On January 4, 1999,
after the end of the fiscal quarter, Drummond consummated the acquisition of the
1,336,400 shares from Mr. Weeks, for an aggregate price of $20,046,000. On
January 21, 1999, Drummond notified Mr. Hackney of its election to cancel the
Call Option Agreement without exercising the option to purchase his shares.
Drummond now owns approximately 7.5% of the Company's outstanding stock.
13
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
Note 1 of the interim condensed consolidated financial statements included
elsewhere in this Form 10-Q describes the recently issued accounting standards.
ACQUISITIONS
Notes 7 and 9 of the interim condensed consolidated financial statements
included elsewhere in this Form 10-Q describe the recent acquisitions of Custom
and Marion.
CONFORMANCE OF AUTOMATED SYSTEMS TO YEAR 2000
General. As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
process accurately certain data before, during or after the year 2000. The
Company continues to address the "Year 2000" issue through a company-wide Y2K
Project (the "Project").
The Project involves reviewing current software as well as embedded systems in
certain manufacturing equipment and surveying each of the Company's divisional
operations to assess the impact of the Y2K issue. The Project is being
coordinated by a twenty-five member team. This team includes five personnel
from corporate headquarters, including the overall coordinator, and a
coordinator at each division. The Project, which is approximately 80% complete
to date, is expected to be completed by mid-year 1999. The Company has
developed a contingency plan that involves manual processing, system backups,
increased inventory from critical suppliers and the selection of alternative
suppliers of critical materials.
Project. The Company's Project is divided into five major sections:
infrastructure, applications software, manufacturing software, process control
and instrumentation ("PC&I") and third party suppliers/customers. The Company
has designated a Y2K team leader at each of its locations to help direct the
phases of the project. These phases, which are common to the five major
sections, are as follows: (1) inventorying Y2K items; (2) assessing compliance
to Y2K for the items identified; (3) developing a strategy for remediation of
non-compliant items; (4) implementation of the remediation strategy; and (5)
independent validation from external resources as to the Company's compliance.
The infrastructure and applications software sections consist of an analysis of
hardware and systems software. The applications software includes both the
conversion of applications that are not Y2K compliant and, where available from
the supplier, the replacement of such software. At calendar year end 1998, the
inventory, assessment, implementation and validation for the infrastructure,
applications software and manufacturing software are approximately 95% complete.
With respect to the manufacturing software, approximately 80% of the Company's
divisions are compliant, with approximately 60% using B&L Information Systems,
which is Y2K compliant, and another 20% using other manufacturing software that
is also Y2K compliant. The remaining 20% non-compliant manufacturing software
has been inventoried and identified. The Company expects these three sections of
the Project to be complete by mid-year 1999.
The PC&I section includes the hardware, software and associated embedded
computer chips that are used in the operation of all facilities operated by the
Company. Approximately 95% of the
14
<PAGE>
PC&I Y2K items have been inventoried and identified. Furthermore, approximately
65% of those systems are deemed to be Y2K compliant. The Company expects
substantially all of its PC&I equipment to be compliant by mid-year 1999.
The third party suppliers/customers section of the Project involves sending a
Y2K compliance questionnaire to all key suppliers as well as dealing with any
independent review of the Company's compliance by certain of its customers. The
Company obtains evidence from its key suppliers documenting their compliance
with the Y2K issue and will continue to monitor vendors that are non-compliant
for contingency planning purposes. The Company's contingency plan addresses
non-compliance of key suppliers by having alternative suppliers as well as
increasing critical inventory prior to the year 2000. This section of the
project is approximately 90% complete and full implementation is expected by
mid-year 1999.
Once the strategy of all sections has been implemented, the Company will have
independent validation of its Y2K compliance. Major customers will continue to
review various divisions' systems along with external resources hired by the
Company. The Company anticipates this external review will be completed by mid-
year 1999. The costs associated with the Project have been and will continue to
be expensed as incurred. The Company does not separately track these internal
costs incurred for the Y2K Project; these costs however, to date, consist
principally of the related payroll costs of its information systems group.
Risks. The failure to correct a material Y2K problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Y2K issue, resulting in part from the uncertainty of
the Y2K readiness of third-party suppliers and customers, the Company is unable
to determine at this time whether the consequences of Y2K failures will have a
material impact on the Company's results of operations, liquidity or financial
condition. The Y2K Project is expected to significantly reduce the Company's
level of uncertainty about the Y2K issue and, in particular, about the Y2K
compliance and readiness of external parties. The Company believes that, with
the implementation and completion of the Project as scheduled, the possibility
of significant interruptions of normal operations should be reduced. The
Company does not believe it has any material exposure to contingencies related
to the Y2K issue for products it has sold.
______________________________________
15
<PAGE>
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:
In a Report on Form 8-K filed December 1, 1998, the Company reported that,
upon the recommendation of an independent committee of its Board of
Directors, the Company had adopted a Shareholder Rights Plan, effective
November 25, 1998, and in connection therewith declared a dividend
distribution of one preferred share purchase right on each outstanding
share of Citation's common stock.
16
<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
February 8, 1999 /s/ Frederick F. Sommer
-----------------------------------------
FREDERICK F. SOMMER
President and Chief Executive Officer
February 8, 1999 /s/ Thomas W. Burleson
------------------------------------------
THOMAS W. BURLESON
Vice President-Finance and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<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
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> 1,318
<SECURITIES> 0
<RECEIVABLES> 116,059
<ALLOWANCES> (2,954)
<INVENTORY> 59,290
<CURRENT-ASSETS> 197,590
<PP&E> 470,360
<DEPRECIATION> (130,101)
<TOTAL-ASSETS> 646,790
<CURRENT-LIABILITIES> 110,785
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 188,704
<TOTAL-LIABILITY-AND-EQUITY> 646,790
<SALES> 184,860
<TOTAL-REVENUES> 184,860
<CGS> 158,192
<TOTAL-COSTS> 174,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,643
<INCOME-PRETAX> 5,990
<INCOME-TAX> 2,396
<INCOME-CONTINUING> 3,594
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,594
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
