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Growth through acquisitions: Citation's unique structure pays.

Seeing the trend of industry consolidation, the 20-year-old firm is positioning itself as one of tomorrow's foundry leaders.

What does it take for a company with annual sales of $2.7 million in 1975 to grow to $200 million in fewer than 20 years?

Following Citation Corp.'s recipe, it consists of proper costing systems, visions toward acquisition, modernizing and expanding its facilities, and a decentralized corporate structure that holds division managers responsible for the profitability of their operations.

Last August, the firm went public - making Citation one of only a handful of North American foundry groups to sell stock to the public.

Citation Corp.'s headquarters are located on a single floor of a dormitory-like office building between the oak-lined Red and Shades Mountains in Birmingham, Alabama. The firm oversees seven foundries (at 10 locations) and 2400 employees. The purchase of another foundry with 250 employees is pending.

Primarily a ductile iron group, it shipped 110,481 tons of castings last year, and has grown at a 25.1% compounded annual growth rate since 1980. Citation officials are projecting $300 million in sales by the end of 1995.

Under the vision of Chairman and CEO T. Morris Hackney and Executive Vice President R. Conner Warren, the company has aggressively acquired new foundries and expanded internally to secure its position in a rapidly changing industry.

Meager Beginnings

Hackney, the company's founder, happened into the foundry business somewhat by chance. Shortly after selling his interest in the Hackney Corp. (his family's fence-making business), he was "relieved of his duties" by the new parent in 1972. Looking for a company to buy, he came across Jones Foundry in Bessemer, Alabama, which had supplied Hackney Corp. with ductile iron castings.

The owner of the foundry had died, and it was held by the trust. "The foundry was available," Hackney said, "so I bought it in 1974."

Life "on the other side of the fence" wasn't easy for Hackney and his foundry, which he renamed Southern Ductile. Bought at the outset of the 1975 recession, sales were down to $2.7 million, nearly $1 million below the previous year. Hackney confessed he knew nothing about the foundry industry, and after a few months, he recruited Warren, an industrial engineer and systems specialist working at Hackney Corp. Neither was a foundryman by trade, but both knew the elements of running a business.

"When we started out, our desks sat face to face in a crowded office at the Bessemer foundry," Warren remembered.

After two lean years of learning and struggling, the economy began to improve. Hugh Weeks was then hired from Newberry Manufacturing Co. to add direct foundry floor experience. Weeks, who was instrumental on the operations side, recently left Citation to pursue other interests.

It was during the first four years in the Southern Ductile office that the trio developed the principles, practices and culture that have been the key ingredients to their success.

Decentralized Approach

By some standards, the most unique thing about Citation is management's deliberate avoidance of getting in the way of its foundries. It exists only to provide overall guidance and support to its seven foundries.

This "support" is directed from the Birmingham headquarters. In addition to Hackney and Warren, Rod Paulette and Virgil Reid, are vice presidents of the high- and mid-volume foundries, repectively. Five staffers from headquarters assist foundries in human resources, industrial engineering, operations, environmental affairs and finances. Headquarters provide overall management and direction, set profit targets, approve capital expenditures, and handle insurance and financing.

Unlike other firms, each foundry division operates as its own stand-alone company. Pricing, production, sales and all other daily activities are handled at the division level, not by decisions made at headquarters.

Referred to as a "decentralized organization," this structure is given full credit by Hackney and Warren for Citation's efficiency and growth.

"Division general managers have complete profit and loss responsibility," Warren said. "They are responsible for both pricing and production - they've got control of both sides of the fence."

Hackney said the idea behind the structure is that decisions are best made as close to the action as possible. "The division general managers are the ones seeing the opportunities," he said. "By keeping responsibility down there, it creates incentives for them to be alert to opportunities and to build their businesses."

Hackney never liked centralized organizations, which may reflect his days as an officer in the U.S. Navy. Centralized corporations, he said, became common throughout the 1940-60s because of computer technology. Computer technology was so expensive, firms centralized themselves to take advantage of it.

With today's inexpensive technology, he said, it's more clerically intensive to be centralized, without a reduction in manpower. "And," Hackney said, "centralization robs each plant of a sense of control over their own destiny."

Accountability Counts

According to Warren, some traditionally organized firms run into problems because systems get muddled, and there's nothing tying the operation together.

"When there's no single person responsible for the foundry's profitability, there's finger pointing when the firm isn't making money," he said. "The fighting is usually between sales and production.

"We're firm believers in accountability. The problem is evident when you go into foundries and ask who's responsible for something, and no one raises a hand. That's the acid test. Whether its sweeping floors, scheduling machines, taking orders or anything - someone must have responsibility for every job, and acknowledge that they're responsible for it."

As Citation's general managers build their businesses, they also don't get smothered in corporate bureaucracy. Each has Citation's blessing to run their operation and react to customer needs on the spot. Bonuses are based on individual foundry operations only, so that managers of profitable foundries aren't receiving the same as those in facilities losing money, which occurs in some organizations.

"We do our own scheduling, purchasing and accounting," said Alan Adams, general manager of Alabama Ductile Casting Co., Brewton, Alabama. "We make our own decisions and take our lumps."

He said as long as the foundries are obtaining acceptable profit levels, officers and staffers from headquarters don't thrust themselves on them. "They provide good advice and act as a sounding board for us. They're exposed to the other foundries and can help us out."

Southern Ductile general manager John Ballinger, whose foundry is at full capacity added, "If our operation doesn't think the customer fits, we can redirect them to another Citation foundry. If one has growth potential, we can give him preferential treatment."

Communication Is Key

Citation keeps its foundries striving for high efficiencies by distributing benchmark reports. Foundries are required to submit data to headquarters each month. The data is placed on a spreadsheet and mailed back to the foundries. They can then see how they compare to the other foundries in their group in areas such as: man-hours per ton, percent scrap, plant labor efficiencies, number of quotations, machine cycles/hour, selling price/lb, and many more.

"It becomes a benchmark tool for each foundry," Warren said. "If a foundry is lacking in an area, the manager can get on the phone and find out what he's doing wrong. They work hard to clone the successes of other foundries."

Ballinger said Citation puts a lot of emphasis on efficiency, costing and pricing: "We spend a lot of money on process control equipment. We put the control and charting into the computer rather than in a man's head."

Through the companywide innovations, Ballinger said his foundry has reduced costs, and savings is shared with customers. He said they've made productivity gains through others' suggestions - from using Siamese cores to rearranging core machines to reduce the number of steps.

"A structure is in place to evaluate each division's profit margin," Reid said. "The key is understanding what the manufacturing costs are. We're refining them and getting better every day, and feel we're among the best in the industry."

Sales & Competition

"We recently centralized sales of the automotive area because the automakers requested it - they wanted to deal with just one salesman," Hackney said, noting that Alabama Ductile and Texas Foundries are represented by a six-person staff in Detroit, Michigan. "We didn't remove sales responsibility from them, but created 'central sales' that functions much like a rep organization."

Each of the mid-volume foundries, however, employs its own sales force. Using both direct and indirect salespeople, they actually compete with each other. As long as it isn't cutthroat competition in which underbidding takes place, management views it as a positive.

Warren said that for a ductile iron customer in Tennessee, both Foundry Service and Southern Ductile should be quoting on the job. But, as Hackney pointed out: "The overlap isn't as great as you would think. in certain states, three foundries might compete without knowing it, while it's amazing how many other times only one is quoting. If you had only one sales force in the area, there's a lot you would miss."

Warren added foundry general managers often help each other out. "When the volume gets too high for a mid-run foundry, the general manager has asked the customer if Alabama Ductile can quote on the job," he said. "Although the smaller foundry is losing the job, they don't want anyone outside of Citation getting it."

Buying Foundries

Describing his penchant for buying foundries, Hackney said, "The whole point of the game is to get bigger and be more profitable."

He said as foundries get to a certain size, and if the owner isn't growth oriented, at some point he has no option but to sell. This is one factor behind the industry's consolidation, and Citation is poised to take advantage of it.

"It is going to become increasingly difficult for small and mid-sized foundries to compete," Hackney said. "Consolidation is going to cover all mainstream markets with the most volume. There will still be niche foundries that serve a specific geographic area. But the preponderance of foundry business will be done by 20 companies, maybe less."

Acquiring six foundries since 1980, Citation has four general rules for the foundries it acquires.

1. It has to be profitable. "It must be able to increase our earnings," Warren said. "We typically double the profits of any company we bring on board."

2. Equipment can't be too run down or obsolete.

3. Good management teams and work force are desirable. If it's a union shop, there must be a good relationship.

4. The wage structure must allow the castings to be sold competitively.

Citation looks at available foundries and how they fit into its scheme. "Usually, they don't fit our needs exactly," Hackney said, "so we spend money on them to maximize their operation."

With its pending Oberdorfer Foundry acquisition, Citation also veered from its history of ferrous foundries. "Aluminum and iron work well in combination," Hackney said. "There's a lot of similar technology between the two and similar customers who often buy both metal types."

He also noted that Citation is interested in investment casting to add broad-based capabilities. "Instead of a small wagon with a few items to sell," he said, "we want a large wagon with a lot of items to sell."

One reason for diverse acquisitions is Citation's concern of becoming a cyclical company. Some foundries depend too much on the auto market and must deal with its downturns.

"We want to be diversified enough that we ourselves aren't cyclical," Hackney said. "While businesses are individually cyclical, we can even them out internally for protection."

Noting that the auto and heavy trucks markets are about 50% of Citation's business, Hackney plans to keep them at 50% by adding - not restricting - business in other areas.

Another underlying reason for Citation's growth is the human element. As a firm grows, it needs more competent people. "Any company that decides not to grow jeopardizes its ability to retain good people," Hackney said.

Citation's structure makes integration of acquired foundries easier by minimizing operational changes and providing common costing and management information systems. Otherwise, problems with management, sales and production would make acquisitions cumbersome.

After buying a foundry, Citation sends a transition team (H.Q.'s staff specialists) to review how the foundry is operating. It helps them install basic administrative systems they need for good information. New foundries can then turn to the others for help in bringing substandard performances in-line.

"Usually, we keep management teams in place," Warren said. "Most of them want to stay and do a good job. We help set clear goals and make sure they have what they need. If they manage foundries on bad information, they'll make bad decisions.

"Resources are what we provide. The average employee at a foundry like Mansfield will never know they've been acquired."

Going Public

A company can grow in one of three ways, Warren said. It can borrow money; take profits and reinvest; or "it can cut others in on the deal." By going public, the money raised isn't on the debt side, but rather on the stockholder equity side.

Hackney has experience with public offerings. He took Hackney Corp. public in 1968 to rapidly expand the company into the dominant player in chain link fence industry.

Late last spring, Citation felt it was time to position itself more dominantly, and made its stock available for public sale. Last summer, Hackney and Warren barnstormed on its "initial public offering road show."

Over a two-week period, the tandem traveled through Birmingham; Little Rock, Arkansas; Atlanta; Los Angeles; San Francisco; Milan, Italy; Edinborough, Scotland; London, England; Minneapolis; Chicago; New York; Boston; Baltimore; and Philadelphia. In New York, nine presentations were given in one day.

They discussed the foundry industry and the history of the company since 1980, and informed investors of their future plans.

When asked of investors' opinion of the foundry industry, Warren said: "They were concerned at first about the ties with the auto industry because the market was down a little at that time. But there has been a shift among investors to more basic industries. They recognize the foundry industry isn't flashy like pharmaceutical companies, but it has been around and is here to stay."

At $8/share, Citation raised $40 million through the public offering. About $30 million was used to pay off debt. Being almost debt-free, Citation will use the remainder to leverage itself for more acquisitions. "For every $1 of equity," Warren said, "you can borrow $2."

Describing the difference in operating publicly, Warren said, "The only downside is you're living in a fishbowl and have to show the world your performance." He also noted the extra paper-work and rules and regulations dictated by the Security Exchange Commission.

Hackney believes being held publicly has benefits beyond the increased capital. In the past, he said there were occasions when he took excessive risks for growth's sake that didn't prove to be profitable.

"When I was the primary owner," he said, "it was nobody's business but mine. When you have public stockholders, you've got to consider their interests in everything you do. Most pressures of being a public company will be beneficial to us, with greater focus on profitability."


New acquisitions account for only 50% of the firm's growth. Modernization and internal expansions are the flip side for Citation's ability to grow its business.

Warren stressed the need to reinvest and add capacity to Citation's facilities. "We've always plowed the money back in," he said.

Texas Foundries, for example, is undergoing a $20 million dollar expansion of two DISA high-volume molding lines, almost doubling its capacity. "Together the two machines will increase capacity by $40 million in sales," said James Milstead, general manager of the facility, which houses two foundries with 12 acres under one roof.

In 1993, Citation made major molding line modernizations at Foundry Service (Roberts Sinto) and Citation Foam (Vulcan Engineering). In 1992, the firm invested $10 million for a DISA line and cleaning/finishing operation at Alabama Ductile.

The company spent more than $17.5 million in capital expenditures in 1994.

"Each year, we spend a minimum of the depreciation on upgrading the equipment just to keep up to speed," Warren said. "It's the key to success in the long run. We need technology to be one of the lowest-cost foundries in the world to compete with nations such as Brazil, Mexico and Korea."

Look to Future

Believing in continuing consolidation (Warren said it will become increasingly harder for small foundries to cope with regulations), Citation plans to acquire more foundries, add internal capacity and expand its market base.

Hackney said that the foundry industry must be more profit-oriented than in the past. Technology is needed to stay up to date, but only profit-geared companies will be able to take advantage of it.

He said the industry has greatly improved itself over the last 15 years. Hackney said Intermet was a leader in giving the industry an example of a growth company that sells throughout the nation. He added that Waupaca, Grede, Wagner and Wheland are among some of the top U.S. foundries.

"It's a good casting market right now and it's easy to perform," Hackney said. "What'll be a real test is three or four years from now when we're in another downturn. That's when you really need a costing/pricing system."

Concluded Warren: "You don't have to be exotic to make money. There's no foo-foo dust - it's just 'Foundry 101.' We're just basic foundry guys. Our newly acquired foundries are amazed at how basic we are. When you don't cover the basics is when you get in trouble."


1974 - Morris Hackney purchases Jones Foundry, a mid-volume ductile iron foundry in Bessemer, Alabama, and renames it Southern Ductile. (Centreville and Selma locations were added to the division as part of Simsco purchase in 1984).

1980 - Acquires Foundry Service, a mid-volume ductile iron foundry in Biscoe, North Carolina. Enters the heavy truck market.

1984 - Acquires Simsco's three mid-volume foundries. Significantly expands production capacity. Columbiana, Alabama, plant is now home to Citation Foam.

1987 - Acquires Alabama Ductile, a high-volume ductile iron foundry in Brewton, Alabama. Expands Citation's customer base, primarily in the auto/light truck market.

1989 - Acquires Texas Foundries, a high-volume ductile iron foundry and a small steel foundry in Lufkin, Texas. Expands firm's position in the heavy truck market, adds steel, broadens its geographical base and obtains additional unused capacity.

1993 - Acquires Mabry Foundry, a mid-volume ductile and gray iron foundry in Beaumont, Texas. Expands customer base and product lines within the industrial market, particularly in oil-field services.

1994 - Acquires Mansfield Foundry, a high-volume malleable and ductile iron foundry in Mansfield, Ohio. Enters railroad market. With minor investments, capacity can be greatly enhanced.

Pending Acquisition

Oberdorfer Foundries, a mid-volume aluminum foundry in Syracuse, NewYork. Will be the firm's first aluminum foundry.


Hackney: 'Most foundries don't know what their costs are'

"We can improve profitability to an extent by improved operations," Hackney explained. "But cost control and cost improvement are the primary things that determine profitability, especially where no two castings are the same."

Based on Hackney's and Warren's costing systems, Citation has continually refined the art of costing/pricing castings to a science. Costing is the basis for all decisions, and isn't understated by Citation's management.

Hackney said the foundry industry has poor costing capabilities, especially the small- and mid-sized foundries. Citation has found through its acquisitions that most foundries don't know their costs - and it is hurting the entire industry because of underpriced castings.

"Of the foundries we've bought, all were inadequate in costing and pricing," he said. "Some were worse than that - with dramatically wrong prices. We found up to one-third of the products were priced at losses to marginal profits."

One area they've had some success is in the coreroom. Four years ago, Citation began treating its core operations as profit centers and kept track of how they performed. Companywide, they were losing $1.5 million a year in the coreroom. Today, it's down to $300,000, and they're still working on it.

"Most foundries think cored work is more profitable than uncored work," Hackney said. "I'll bet that is almost never the case. Most foundries lose money on cored work. They make money on the work overall, but cored work is less profitable because they don't cost the cores correctly. The biggest mistake is failing to realize that unrecognized core costs will not be reflected in the casting price."

Citation officials say they'd like to share their costing/pricing systems with all foundries, since better cost control would benefit the entire industry.
COPYRIGHT 1995 American Foundry Society, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1995, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related articles; Citation Corp.
Author:Lessiter, Michael J.
Publication:Modern Casting
Article Type:Company Profile
Date:Jan 1, 1995
Previous Article:1994: the year in review.
Next Article:Improved grinding and cutoff technology for today's foundry.

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