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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8676
FANSTEEL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-1058780
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
NUMBER ONE TANTALUM PLACE, NORTH CHICAGO, ILLINOIS 60064
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (847) 689-4900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
COMMON STOCK PAR VALUE $2.50 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 21, 2000 was $15,606,498.
8,698,858
(Number of shares of common stock outstanding as of February 21, 2000)
Part III incorporates information by reference from the Company's definitive
proxy statement for the annual meeting of shareholders to be held on April 26,
2000.
The total number of pages in this Form 10-K is 51 with the exhibit index being
on page 50.
PART I
ITEM 1 - BUSINESS
(a) On August 27, 1998, the Company acquired the property, plant
and equipment of Attwood de Mexico S. de R.L. de C.V. and
Attwood Corporation in Reynosa, Mexico for a cash price of
$3,779,307. A new Company, Fansteel de Mexico S. de R.L. de
C.V., was established to produce steel alloy investment
castings in conjunction with the Company's Escast Inc.
subsidiary, which is in the Industrial Metal Components
business segment.
On September 30, 1997, the Company acquired all the assets and
certain liabilities of Schulz Products, Inc. (Schulz) for the
cash price of $1,865,986. The nature of the business of Schulz
is the machining of aircraft components. While Schulz will
operate from a separate facility, the operating management has
been combined with our forging operation which also serves the
aircraft/aerospace market. The acquisition was accounted for
as a purchase and is included in the Company's Advanced
Structures business segment.
The Precision Sheet Metal (PSM) plant in Los Angeles,
California completed the phase-out of all operations during
1993. In 1998, the remaining land and buildings of PSM, which
had been classified in Other Assets - Property held for sale,
were sold. Proceeds, less retained liabilities for
environmental clean-up, were approximately equal to carrying
amounts.
(b) Incorporated by reference from the Notes to Consolidated
Financial Statements pages 30 through 45.
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for
use in the metalworking; automotive; energy (coal mining, oil
and gas drilling); military and commercial aircraft, aerospace
and weapon systems; agricultural machinery; lawn and garden
equipment; and plumbing and electrical hardware industries.
The principal products of the Industrial Tools business
segment include tungsten carbide cutting tools, milling tools,
toolholding devices, mining tools and accessories,
construction tools, and wear resistant parts. The principal
products of the Advanced Structures business segment include
titanium, nickel base and alloy steel forgings; high integrity
aluminum and magnesium sand mold castings; and machined
forgings and castings. The principal products of the
Industrial Metal Components business segment include carbon
steel, stainless steel, brass and aluminum special wire forms
and fasteners; brass, bronze and ferrous alloy investment
castings; and ferrous and non-ferrous powdered metal
components.
Sales of the Company's products are made through a direct
sales organization and through distributors, manufacturers'
representatives and agents. In each of the three business
segments, distributors, manufacturers' representatives and
agents account for the majority of sales.
ITEM 1 - BUSINESS (Contd.)
(c)(1)(i)
The percentage of net sales for classes of similar products
which equaled or exceeded ten percent of the Company's
consolidated net sales for the years indicated is set forth
below:
Consolidated Net Sales
Products Business Segment 1999 1998 1997
Tungsten carbide
cutting tools Industrial Tools 25% 26% 27%
Nonferrous Advanced
forgings Structures 12 16 15
Investment Industrial Metal
castings Components 12 10 10
(ii) At this time, there are no new products in production or in
the development stage in continuing operations that require
investment of a material amount of the Company's assets.
However, the Company is involved in substantial investment in
design, engineering, equipment and start-up of a reclamation
processing plant as discussed in Note 4 to the Consolidated
Financial Statements contained in Item 8 hereof.
(iii) The most important raw materials used by the Company are
tungsten carbide powder, cobalt, titanium, magnesium,
aluminum, iron, bronze, copper, stainless steel, and alloy
steel. Prices of some of these raw materials have been
volatile in recent years, and changes in raw material prices
have had an impact on the Company's dollar sales volume.
Several of the raw materials used, including cobalt, are
purchased principally from foreign sources, many of them
located in developing countries, and availability can be
affected by political developments and trade restrictions,
both domestic and foreign. The Company believes that the
sources and availability of these materials are adequate for
present needs, although spot shortages of certain raw
materials may occur from time to time.
(iv) The Company owns a number of patents which relate to a wide
range of products and processes and is licensed under certain
patents. The Company does not consider any of its patents or
group of patents to be material to any of its business
segments taken as a whole.
(v) None of the operations of any business segment are seasonal.
(vi) Working capital requirements for each business segment are
substantial, but the Company's investment in working capital
is fairly typical of the specialty metals manufacturing
industry.
ITEM 1 - BUSINESS (Contd.)
(c)(1) (vi) The Company serves a wide variety of industries. No one
individual customer accounts for a significant portion of the
Company's overall business.
Substantial sales for those operating units within the
Advanced Structures segment servicing the aerospace market are
concentrated in a relatively small customer base. The loss of
any individual customer within this base could have an adverse
effect on the segment. Relations with these customers have
existed for years and the Company believes them to be sound.
However, in the last half of 1998 the major commercial
aircraft producers significantly revised their production
schedules for 1999 and later years. As a result, the forgings
and machining product lines within the Advanced Structures
business segment experienced a notable decline in order
activity for 1998 and 1999.
(viii) The backlog of orders not shipped and believed to be firm as
of the dates shown are set forth below (in thousands):
December 31,
1999 1998
Industrial Tools $ 5,681 $ 5,723
Advanced Structures 33,213 38,482
Industrial Metal Components 10,918 10,180
$ 49,812 $ 54,385
In the Industrial Tools and Industrial Metals Components
business segments, virtually all backlog is shipped in less
than 12 months, generally within 3 months. In the Advanced
Structures segment, shipments are typically made between 1 and
24 months after an order is received. The Company believes
that approximately 97% of the backlog at December 31, 1999
will be shipped before the end of 2000.
Because of the substantial size of some orders received by the
Company, particularly orders for products sold by the Advanced
Structures segment, the Company's backlog can fluctuate
substantially from one fiscal period to another. Because of
the differences in lead-time for filling orders among the
Company's business segments, overall backlogs at different
times will not necessarily be comparable as predictors of the
Company's near-term sales.
(ix) The Company's Advanced Structures segment has orders subject
to termination at the election of the government. The Company
would be compensated for costs up to the date of termination
if terminated for the convenience of the government.
Termination without compensation could result if the Company
was in default as determined by the government. The Company
is not aware of any current orders which would be terminated
for default.
ITEM 1 - BUSINESS (Contd.)
(c) (1)(x) In general, the Company competes in its markets on the basis
of technical expertise, product reliability, quality, sales
support, availability and price. Most of the Company's
products are sold in highly competitive markets, and some of
the Company's competitors are larger in size and have greater
financial resources than Fansteel.
(xi) The development of new products and processes and the
improvement of existing products and processes is conducted by
each operating unit.
The Company has a staff of technically trained people who
support sales, manufacturing and quality assurance. The
majority of the Company's products and processes require
technically sophisticated application engineering and process
control. This kind of technical support is charged to the
cost of products sold.
(xii) The Company expensed $460,000 to continuing operations in 1999
for costs related to compliance with government environmental
regulations. The Company did not have any capital expenditures
in 1999 related to government environmental regulations.
During 1999, the Company paid $649,000 for continuing
operations for environmental remediation for which liabilities
had been established in previous years. In addition to the two
sites included in the discontinued operations, the Company has
a total of seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken.
Certain of these sites were identified as a result of
environmental studies conducted by the Company during 1997 at
all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the
environmental studies.
In 1998, the remaining land and buildings of PSM, which had
been classified in Other Assets - Property held for sale, were
sold. The cost of preparing the property for sale, principally
environmental clean-up, had been capitalized. Proceeds, less
retained liabilities for environmental clean-up, were
approximately equal to carrying amounts. The Company believes
the liabilities established for other costs associated with
the environmental clean-up of PSM are adequate to cover such
costs. An identification of additional contamination on-site
could require the liabilities to be adjusted.
The Company has also been notified that it is a potentially
responsible party at six sites owned by third parties. The
Company's participation at four sites is de minimis, and at
the other two sites the Company is either being defended by
its insurance carriers or has meritorious defenses to
liability.
The Company has accrued for estimated environmental
investigatory and noncapital remediation costs based upon an
evaluation of currently available facts with respect to each
individual site, including the results of environmental
studies and testing conducted in 1997, and considering
existing technology, presently enacted laws and regulations,
and prior experience in remediation of contaminated sites. An
additional
ITEM 1 - BUSINESS (Contd.)
(c) (1)(xii) provision of $6,900,000 for continuing operations was recorded
in 1997 for the estimated potential exposure for such costs
expected to be incurred in the future. Actual costs to be
incurred in future periods at identified sites may vary from
the estimates, given the inherent uncertainties in evaluating
environmental exposures. Future information and developments
will require the Company to continually reassess the expected
impact of these environmental matters. The Company does not
expect that any sums it may have to pay in connection with
these environmental liabilities would have a materially
adverse effect on its consolidated financial position.
The Company discontinued its Metal Products business segment
in 1989. Environmental reclamation and decommissioning is
required for the segment's primary plant that processed
certain ores that are subject to regulations of several
government agencies. The residues from these processed ores
were stored on-site. Remaining assets were written down to
estimated realizable value, and provisions were made for the
estimated costs for decommissioning. Prior to decommissioning,
the Company expects to operate for approximately ten years a
commercial plant to complete the processing of residues
currently contained in storage ponds at the site, which will
materially reduce the amount of radioactive materials to be
disposed of during decommissioning. The processing plant will
extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal
elements from the feedstock residues. Pilot production
processing began in the third quarter of 1999.
The Company, in association with outside consultants,
developed a decommissioning plan for the site involved
including construction of an engineered on-site cell for
containment of contaminated soils; consolidation and
stabilization of the contaminated soils in the containment
cell; and the performance of required plant surveys and
characterization after residue processing ceases to determine
whether additional contaminated soils exist which may require
remediation, and submitted that plan and a related
decommissioning funding plan to the Nuclear Regulatory
Commission ("NRC") as required by law. The NRC requested in
May 1999 that the Company change its submittal to separate the
property (approximately 100 acres) being considered for
unrestricted use from property (approximately 10 acres) being
considered for the on-site containment cell. The unrestricted
use property plan was submitted in June 1999 and approved in
August 1999, with the NRC license amended accordingly. The
plan dealing with the on-site containment cell was submitted
in August 1999. In September 1999, the NRC published its
intent to review this submittal for the purpose of amending
the license. In response to the notice, a petition was filed
with the NRC by the Oklahoma Attorney General requesting a
hearing in order to dispute the appropriateness of
constructing the on-site containment cell. If a hearing is
granted, the Company expects that it would be held no earlier
than the conclusion of the NRC's initial review of the plan,
which should require about one year.
ITEM 1 - BUSINESS (Contd.)
(c) (1)(xii) In October 1995 the NRC advised the Company that a
decommissioning funding plan cost estimate based upon on-site
disposal of most of the radioactive wastes at the site was
appropriate to consider. The NRC cautioned the Company,
however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the
required NRC approval, local and other federal agencies may
have to be satisfied that the Company's disposal plan is
sound. The approval process for on-site containment can be
expected to extend over a number of years. Management believes
that a decommissioning plan including on-site containment will
ultimately be acceptable to the appropriate regulatory
authorities, and will be approved, based on current NRC
regulations or provisions of the Nuclear Waste Policy Act of
1982. However, there is no assurance that a plan providing for
on-site containment will ultimately be approved.
Implementation of a decommissioning plan for the Company's
site that includes off-site disposal may not be financially
feasible.
The NRC decommissioning regulations require licensees to
estimate the cost for decommissioning and to assure in advance
that adequate funds will be available to cover those costs.
NRC regulations identify a number of acceptable methods for
assuring funds for decommissioning, including surety
instruments such as letters of credit, cash deposits and
combinations thereof. The level of assurance for
decommissioning, including on-site containment, is currently
$4,456,000 provided through letters of credit. The amount does
not include assurance for costs of operation of the residue
processing facility even though the NRC had previously
indicated that the cost of processing should be included in
the cost estimate. This level of assurance, however, may be
changed upon further review by the NRC. The Company's
available cash and/or borrowing capacity will be reduced by
the amount of funding assurance as required at any particular
time. As the decommissioning plan is implemented, deposited
funds or the amount of any surety instruments may be reduced,
provided the Company can demonstrate the sufficiency of the
remaining funds or surety to assure the completion of
decommissioning.
During 1999, the Company paid $100,000 for discontinued
operations for environmental remediation and decommissioning
for which liabilities had been established in previous years.
In addition, the Company expended $10,407,000 for design,
engineering costs, and equipment for the processing plant.
At December 31, 1999 and 1998, the Company had recorded
liabilities of $9.7 million and $9.8 million, respectively,
for discontinued operations including the estimated net costs
of reclaiming and decommissioning the site during and after
the approximate ten years of processing the residues and the
Company's estimated share of costs at a second site which had
been part of the Metal Products business segment. The second
site is regulated under the Resource Conservation and Recovery
Act and, as a result of alleged migration of contaminants from
this second site, the Company also has been identified as a
potentially responsible party under the Comprehensive
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) Environmental Response, Compensation and Liability Act
(CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the
first site during the residue processing period include
estimated annual revenues of approximately $8 million per year
over the ten year processing period and estimated annual
operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated
value of materials to be extracted is based on analysis of
samples taken from the residues and a valuation of such
materials using current market prices discounted to reflect
possible price decreases, including those which will result
from the increased quantities of certain of these materials
made available for sale. However, there can be no assurance as
to the level of demand for the extracted materials or the
actual prices which may be obtained for them, which could vary
over time. The estimated costs of residue processing were
developed by Company personnel and independent consultants
using third-party evaluations based on the pilot testing
performed. Unforeseen production complications could cause
processing costs to increase from current estimates.
The ultimate costs to the Company for the remediation of the
sites in which the Company is involved cannot be predicted
with certainty due to the often unknown magnitude of the
pollution or the necessary clean-up, the varying costs of
alternative clean-up methods, the evolving nature of clean-up
technologies and government regulations, and the inability to
determine the
Company's share of multi-party clean-ups or the extent to
which contribution will be available from other parties. The
Company has established liabilities for environmental
remediation costs in amounts which it believes are probable
and reasonably estimable. Although the ultimate outcome of
pending environmental matters cannot be determined with
certainty, management believes that any resulting costs, after
considering existing liabilities, will not have a material
adverse effect on the consolidated financial position of the
Company.
(xiii) The Company employed 1,222 persons as of December 31, 1999.
(d) Net sales, income and identifiable assets of foreign
operations and export sales are not significant. The Company
considers the United States as one inseparable geographic area
for its domestic operations.
ITEM 2 - PROPERTIES
Manufacturing facility locations and corresponding square
footage are as follows:
Business Square Feet
Location Segment Owned Leased Total
Plantsville, Connecticut Industrial 60,000 0 60,000
Tools
Gulfport, Mississippi Industrial 32,000 0 32,000
Tools
Latrobe, Pennsylvania Industrial 43,000 0 43,000
Tools
Lexington, Kentucky Industrial 98,000 2,000 100,000
Tools
Los Angeles, California Advanced 48,000 5,000 53,000
Structures
San Gabriel, California Advanced 0 9,000 9,000
Structures
Creston, Iowa Advanced 293,000 0 293,000
Structures
Sarasota, Florida Industrial 6,000 0 6,000
Metal
Components
Addison, Illinois Industrial 0 46,000 46,000
Metal
Components
Reynosa, Mexico Industrial 69,000 0 69,000
Metal
Components
Washington, Iowa Industrial 100,000 0 100,000
Metal
Components
Emporium, Pennsylvania Industrial 44,000 0 44,000
Metal
Components
ITEM 2 - PROPERTIES (Contd.)
All plants are well-maintained and in good operating order.
The plants have sufficient capacity to meet present market
requirements. All of the properties described above are fully
utilized on a 1 or 2 shift basis, except the Lexington
facility, which is operating at approximately 90% utilization.
The Company owns properties in North Chicago, Illinois and
Muskogee, Oklahoma associated with operations discontinued in
prior years. These properties are included as part of net
assets of discontinued operations. The Company's PSM facility
in Los Angeles, California completed the phase out of all
operations in 1993. In 1998, the remaining land and buildings
of PSM, which had been classified in other assets - property
held for sale, were sold. Proceeds, less retained liabilities
for environmental clean-up, were approximately equal to
carrying amounts.
The Company's executive offices are located in North Chicago,
Illinois.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or
its subsidiaries are a party or of which any of their property
is the subject other than ordinary routine litigation
incidental to the Company's business. None of these legal
proceedings are material.
However, the Company is involved in certain regulatory
proceedings involving environmental matters which are
discussed in Note 4 to the Consolidated Financial Statements
contained in Item 8 hereof.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 1999.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the principal executive officers and directors of the
Company:
Years of Service
In
Position with the Company and With Present
Name Age Principal Occupation Fansteel Position
Gary L. 55 Director; Chairman of the Board, 1 1
Tessitore President and Chief Executive
Officer
Edward P. 58 Director; Personal Investments 3 3
Evans
Robert S. 55 Director; Chairman and Chief 8 8
Evans Executive Officer, Crane Co.
Thomas M. 62 Director; Personal Investments 14 14
Evans, Jr.
Peter J. 50 Director; Kirkpatrick and 4 4
Kalis Lockhart, LLP (Attorneys);
Chairman of the Management
Committee
R. Michael 46 Vice President and Chief 20 9
McEntee Financial Officer
Michael J. 47 Vice President, General Counsel 14 13
Mocniak and Secretary
Jack S. 70 Director; Vice President and 15 15
Petrik Director (Retired), Turner
Broadcasting System, Inc.
Jack W. 55 Vice President, Operational 1 1
Stawski Analysis and Process Improvement
Additional information as to Directors of the Company is herein incorporated by
reference to the information under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement for the annual meeting of
shareholders on April 26, 2000.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The New York Stock Exchange is the principal market upon which
the shares of the Company are traded.
The number of shareholders of the Company as of February 21,
2000 were 708.
Per share stock market and dividend information for each
quarter of the last two fiscal years are set forth below:
Cash
Dividends
High Low Declared
1999:
First Quarter $ 6 1/4 $ 5 $ -
Second Quarter 6 1/16 4 7/8 -
Third Quarter 6 1/4 4 -
Fourth Quarter 4 11/16 3 5/8 -
1998:
First Quarter $ 8 7/16 $ 6 3/16 $ -
Second Quarter 9 1/4 7 1/2 -
Third Quarter 9 5/16 5 -
Fourth Quarter 6 1/2 5 -
The Company announced on November 10, 1995 the suspension of
its regular quarterly cash dividend pending review of its
dividend policy relative to comparable publicly traded
companies and its capital requirements. The Company believes
it is in the best interests of shareholders to conserve
capital in light of anticipated acquisitions and production
facility expansions as well as uncertainties surrounding
funding requirements for decommissioning at the Company's
discontinued operations at Muskogee, Oklahoma. While the
Company believes that its current reserve for environmental
clean-up for discontinued operations is adequate, it decided
to take this action pending greater certainty as to the costs
which ultimately may be incurred.
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for the five year period ended December
31, 1999 are as follows:
Years Ended December 31,
(thousands of dollars
except per share 1999 1998 1997 1996 1995
data)
Operating Results
Net Sales $144,394 $153,797 $140,194 $120,834 $102,598
Income (Loss) from
Continuing
Operations 3,916 5,406 (2,508) 4,277 3,333
Loss from Discon-
tinued Operations - - (5,856) - -
Net Income (Loss) 3,916 5,406 (8,364) 4,277 3,333
Per Weighted Average
Common Shares
Outstanding: (a)
Income (loss)
from continuing
.46 .63 (.29) .50 .39
operations
Loss from
discontinued - - (.68) - -
operations .46 .63 (.97) .50 .39
Net income (loss) - - - - .30
Cash dividends
Shareholders' 6.56 5.53 5.46 6.43 5.93
equity
Financial Position
Working capital $ 21,553 $ 27,589 $ 35,126 $ 28,542 $ 21,862
Net property, plant
and equipment 20,318 20,456 14,665 14,306 10,220
Total assets 98,438 88,717 88,832 82,127 74,530
Long-term debt 2,271 2,507 1,600 1,779 298
Shareholders' 56,417 47,547 46,920 55,284 51,023
equity
Other Data
Weighted average
common shares
outstanding 8,598,858 8,598,858 8,598,858 8,598,858 8,598,858
Number of
shareholders (b) 727 772 826 812 891
Number of employees 1,222 1,283 1,127 1,031 911
(a) Basic earnings per share and diluted earnings per share are the same.
(b) Number of shareholders consists of the approximate shareholders of record
which include nominees and street name accounts.
ITEM 6 - SELECTED FINANCIAL DATA
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except per
share data) Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1999
Net sales $ 37,045 $ 38,226 $ 34,744 $ 34,379
Gross profit 6,452 7,004 5,724 5,397
Net income 1,012 1,573 825 506
Net income per weighted average
common shares outstanding (a) .12 .18 .10 .06
1998
Net sales $ 39,789 $ 39,644 $ 36,746 $ 37,618
Gross profit 7,186 6,882 5,672 6,461
Net income 1,729 1,621 825 1,231
Net income per weighted average
common shares outstanding (a) .20 .19 .10 .14
(a) Basic earnings per share and diluted earnings per share are the same.
Results in the first quarter of 1999 include one-time charges related to
management changes which decreased earnings by $.04 per share.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "prospects", "estimated", "should", "may" or the negative thereof or
other variations thereon or comparable terminology indicating the Company's
expectations or beliefs concerning future events. The Company cautions that
such statements are qualified by important factors that could cause actual
results to differ materially from those in the forward-looking statements, a
number of which are identified in the discussion which follows. Other factors
could also cause actual results to differ materially from expected results
included in these statements.
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the related notes to the consolidated
financial statements.
Results of Operations - 1999 Compared to 1998
Net sales for Fansteel in 1999 were $144,394,000 compared with $153,797,000
in 1998, a decrease of $9,403,000, or 6.1%. Increased sales of investment
castings and road construction tools were more than offset by lower sales of
forgings to the aircraft market and tungsten carbide cutting tools to the
metalworking industry.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
The Company's operating income for 1999 was $5,854,000 compared with
$8,320,000 in 1998, a decrease of $2,466,000, or 29.6%. The decrease resulted
primarily from the lower sales volume and one-time charges for management
changes and inventory write-offs.
The Company incurred other expenses of $222,000 in 1999 compared with other
income of $319,000 in 1998. Interest income was lower in 1999 due to less cash
being available for investment due to expenditures for the start-up of Fansteel
de Mexico and continued expenditures for the reclamation plant in Muskogee,
Oklahoma. Results in 1998 included nonrecurring gains of $127,000 from the sale
of unused land.
The Company's net income for 1999 was $3,916,000, or $.46 per share, compared
with $5,406,000, or $.63 per share, for 1998. One-time charges related to
management changes in the first quarter of 1999 decreased earnings by $.04 per
share in 1999. The effective tax rate was lower in 1999 compared with the prior
year due to the reduction in the valuation allowance for deferred taxes related
to environmental reserves, which had a favorable impact on net income in 1999 of
$.04 per share.
Net sales for the Industrial Tools business segment for 1999 were $55,025,000
compared with $58,437,000 for 1998, a decrease of $3,412,000, or 5.8%. Tungsten
carbide cutting tool sales, which have slowed since the first half of 1998,
experienced lower demand from the metalworking market. Wear part sales also
declined, primarily for downhole drilling products, as the oil industry suffered
from low oil prices for most of 1999. Construction tool sales have increased
61.3% over 1998 due to an increase in road construction and repairs resulting in
strong demand for the new pyramid-tipped construction tool and the addition of
new road construction customers. Coal mining tool sales have declined in 1999,
particularly in the last half of the year, principally due to a slowdown in coal
production. Sales in this segment also declined due to price reductions to
selected customers that were necessary to meet competitive pricing.
Despite the sales decline in the Industrial Tools segment, operating income of
$3,909,000 in 1999 for this segment improved slightly compared with operating
income of $3,896,000 in 1998. As a percentage of net sales, operating income was
7.1% for 1999 compared with 6.7% in the prior year. Efforts to reduce operating
costs along with lower raw material costs have resulted in the improvement to
operating income.
Advanced Structures business segment net sales for 1999 were $47,406,000, a
decrease of $7,106,000, or 13.0%, compared with $54,512,000 in 1998. Sales of
forgings and machined aircraft parts were adversely affected by the slowdown in
the aircraft market. Sales of magnesium and aluminum sand casting products were
flat as the decline in older programs was offset by new program deliveries.
Advanced Structures operating income for 1999 was $268,000 compared with
$2,640,000 for 1998. As a percentage of net sales, operating income for 1999
fell to 0.6% compared with 4.8% for the prior year. The decreased volume at the
both the forging and machined components facilities had a negative impact on
this segment's operating income. In addition, inefficient utilization of
equipment at the forging facility, as a result of substantial machine repairs
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
and the new boiler not being operational until the third quarter of 1999,
unfavorably impacted operating income. The sand casting operation incurred
operating losses in the third and fourth quarters as a result of lower sales
volume, higher than normal scrap, an unfavorable product mix and one-time
charges for inventory write-offs.
Industrial Metal Components business segment net sales for 1999 were
$41,963,000, an increase of 2.7% compared with $40,847,000 in 1998. Additional
capacity from Fansteel de Mexico allowed for increased investment casting sales
of engine components for the medium-duty truck industry as well as the addition
of parts for the marine industry. Sales of both wire formed products and
powdered metal components declined in 1999, as a result of lower demand from the
lawn and garden market and inventory adjustments made by key customers.
Industrial Metal Components operating income for 1999 was $2,216,000, an
increase of $376,000 compared with $1,840,000 in 1998. As a percentage of net
sales, operating income for 1999 improved to 5.3% from 4.5% in the prior year.
Improvement to operating income for this segment resulted from lower operating
costs associated with full production at the Fansteel de Mexico facility.
Order backlog at December 31, 1999 was $49,812,000, a decrease of $4,573,000,
or 8.4%, from December 31, 1998. Advanced Structures experienced the largest
decline in backlog, with reduced orders from aircraft manufacturers. The
Industrial Tools backlog also declined due to the slowdown in the metalworking
industry. Industrial Metal Components backlog improved due to increased orders
for investment castings used in the medium truck industry and in the marine
industry.
Results of Operations - 1998 Compared to 1997
Net sales for Fansteel for the year ended December 31, 1998 were $153,797,000
compared to $140,194,000 in 1997, an increase of $13,603,000, or 9.7%.
The Company's operating income for 1998 was $8,320,000 compared to a 1997
operating loss of $1,892,000. Operating loss in 1997 included unusual charges of
$2,800,000, related primarily to the write-off of non-salable inventories at the
sand casting operation, and a provision of $6,900,000 for environmental
remediation.
Other income for the Company for 1998 was $319,000, an increase of $58,000
from $261,000 in 1997. Nonrecurring gains increased $195,000, the majority of
which was from the sale of unused land. Bad debts decreased $212,000 from 1997.
Interest earned on marketable securities decreased $243,000, as less cash was
available for investment since the September, 1997 acquisition of Schulz
Products, the August, 1998 acquisition of property, plant and equipment for
Fansteel de Mexico, and the start-up of the construction phase for the
environmental reclamation and decommissioning at the discontinued operation in
Muskogee, Oklahoma.
Fansteel's net income for 1998 was $5,406,000, or $.63 per share, compared to
a net loss of $8,364,000, or $.97 per share in 1997. The net loss in 1997
included unusual charges, net of tax benefits, of $1,818,000, or $.21 per
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
share, related primarily to the write-off of non-salable inventories at the sand
casting operation. The 1997 net loss also included provisions for environmental
remediation, net of tax benefits, of $5,589,000 or $.65 per share for continuing
operations and $5,856,000 or $.68 per share for discontinued operations.
Net sales for the Industrial Tools business segment for 1998 were $58,437,000,
an increase of $2,146,000, or 3.8%, from 1997. Tungsten carbide cutting tools
experienced a strong first half of 1998, particularly in rotary tools. Rotary
tools benefited from equipment investments made in 1997 which provided the
production capacity needed to meet the higher customer demand and improved stock
availability. Insert sales, also classified within the cutting tools product
line, showed improvement as customers placed heavier emphasis on a mix of
products related to diamond-tipped inserts. Construction tool sales posted its
highest quarterly sales of the last two years in the second and third quarters
of 1998, resulting in full year sales gains over 1997. The improvement in
construction tool sales was attributable to new tool designs and increased
marketing efforts, as well as increased demand from road construction and repair
programs across the country. Coal mining tool sales improved as order activity
from the mines continued to be solid throughout 1998. Shipments of wear parts
decreased from 1997 primarily due to slowdowns in the die market and
particularly in the oil drilling market as the price of oil declined
approximately 25% since year-end 1997.
Industrial Tools business segment operating income was $3,896,000 for 1998
compared to $3,860,000 for 1997. As a percentage of net sales, operating income
was 6.7% for 1998 compared to 6.9% in 1997. While the segment experienced higher
production volume, the full benefit of the volume increase was hampered by
expansion expenses. As a percentage of net sales, operating income was
positively impacted by lower material and outside processing costs. This was
more than offset by higher labor and overhead costs which resulted from capacity
constraints and the related facility expansions. Compared with 1997, selling,
general and administrative expenses in 1998 increased as a percentage of sales
due to a higher level of investment in conventional marketing strategies.
Advanced Structures business segment net sales for 1998 were $54,512,000
compared to $45,827,000 in 1997, an increase of $8,685,000, or 19.0%. Machined
aircraft components, produced by Schulz Products which was acquired September
30, 1997, were responsible for $2,596,000 of this increase. Forging sales
improved by 16.5% from 1997, and sand casting products improved 9.9% based
primarily on the strong commercial aircraft market.
Advanced Structures business segment operating income for the period ended
December 31, 1998 was $2,640,000, compared to an operating loss of $1,056,000 in
1997. Results for 1997 included unusual charges of $2,800,000, related primarily
to the write-off of non-salable inventories at the sand casting operation. As a
percentage of net sales, operating income was 4.8% in 1998 compared with 3.8%,
excluding the unusual charges, in 1997. The sand casting operation was able to
improve operating margins as some sales price increases were attained, scrap
costs were better controlled, and rework was reduced. Operating margin in 1998
was negatively impacted by production inefficiencies at the forging facility
related primarily to the steam delivery system.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
Industrial Metal Components business segment net sales for 1998 were
$40,847,000 compared to $38,075,000 for 1997, an increase of $2,772,000, or
7.3%. Wire formed products reported its highest quarterly sales ever in the
first and second quarters of 1998, which led to a 10.7% increase in sales over
1997. Improvements were due primarily to the strong demand from the lawn and
garden equipment industry as well as from intensified efforts to increase the
customer base within this product line. Investment casting revenues, which
improved 8.3% over 1997, were positively impacted by increased demand for engine
components used in the medium-duty truck industry. Sales of powdered metal
components remained flat in 1998 compared to 1997 as key customers experienced
capacity constraints and production problems.
Industrial Metal Components business segment operating income for 1998 was
$1,840,000 compared to $2,273,000 in 1997. As a percentage of net sales,
operating income was 4.5% for 1998 compared to 6.0% in 1997. Operating income
was negatively impacted by production inefficiencies at the investment casting
facility which was operating over capacity, adversely impacting direct labor,
outside services, and process yields. Fansteel de Mexico was established in
August, 1998 to relieve capacity constraints. The segment was negatively
impacted by start-up expenses associated with Fansteel de Mexico.
Order backlog at December 31, 1998 was $54,385,000 compared to $57,280,000 at
December 31, 1997, a decrease of $2,895,000, or 5.1%, with order activity
softening in the second half of 1998. The tungsten carbide cutting tool backlog
was responsible for a large portion of the Industrial Tools business segment
decline as these product sales suffered from lower order rates from the
metalworking industry. Advanced Structures business segment backlog decreased
from the prior year, primarily in the forgings and machining backlogs which
experienced lower order activity in the last half of 1998, especially in the
last two months of 1998. This decline in order activity was related to the
significant revision of production schedules by the major commercial aircraft
producers for 1999 and later years. Industrial Metal Components business segment
backlog increased due to strong orders received during 1998 for investment
castings that resulted partially from a continued effort to increase its
customer base. However, the order activity from the light truck market remained
the key factor in the growth of the investment castings backlog.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Outlook
Sales and order rates in a number of key markets including metalworking and
the commercial aircraft market experienced decreases in the last half of 1998
compared to the first half of 1998. For 1999, these markets remained at a lower
level. The metalworking market for 2000 is projected to improve slightly while
the commercial aircraft market is expected to remain flat. The Company is
seeking increased share of current markets, as well as new markets, through
improvements in the Company's production processes, new product development, and
investment in current operating units, such as the 1998 Fansteel de Mexico
start-up which began full production in 1999. Cost control programs remain
active in all operating plants throughout the Company.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
Liquidity and Capital Resources
Cash and cash equivalents were $17,000 at December 31, 1999, a decrease of
$2,015,000 from December 31, 1998. In accordance with management's program to
expand the operations of the Company, investments of $2,121,000 were made in
capital equipment. Engineering, equipment and start-up costs of $10,407,000 were
incurred for the processing plant being built for reclamation and
decommissioning purposes in Muskogee, Oklahoma.
In the fourth quarter of 1995, the Company announced the suspension of the
quarterly shareholder dividend for the purpose of conserving cash for capital
reinvestment, possible future acquisitions, and due to potential changes in
funding requirements for decommissioning at the Company's discontinued operation
in Muskogee, Oklahoma.
Cash and cash equivalents on hand have been sufficient to date to meet the
demands of working capital investments, expenditures for machinery and
equipment, environmental costs and other normal operating requirements. However,
the Company's line of credit was increased to $33 million on May 20, 1999. As of
December 31, 1999, there were no borrowings from the revolving line of credit,
but $8.1 million was being used for letters of credit needed for funding
assurance related to environmental issues, self-insurance policies and
development loans. The Company may further use a portion of this unused credit
during 2000 to fund the start-up of the reclamation processing plant in
Muskogee.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. All of the Company's debt is related to
development loans obtained from various states.
Environmental Remediation and Discontinued Operations
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores that are subject to regulations of
several government agencies. The residues from these processed ores were stored
on-site. Remaining assets were written down to estimated realizable value, and
provisions were made for the estimated costs for decommissioning. Prior to
decommissioning, the Company expects to operate for approximately ten years a
commercial plant to complete the processing of residues currently contained in
storage ponds at the site, which will materially reduce the amount of
radioactive materials to be disposed of during decommissioning. The processing
plant will extract commercially valuable materials such as tantalum, columbium,
scandium and other rare earth and rare metal elements from the feedstock
residues. Pilot production processing began in the third quarter of 1999.
The Company, in association with outside consultants, developed a
decommissioning plan for the site involved including construction of an
engineered on-site cell for containment of contaminated soils; consolidation and
stabilization of the contaminated soils in the containment cell; and the
performance of required plant surveys and characterization after residue
processing ceases to determine whether additional contaminated soils exist which
may require remediation , and submitted that plan and a related decommissioning
funding plan to the Nuclear Regulatory Commission ("NRC") as
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
required by law. The NRC requested in May 1999 that the Company change its
submittal to separate the property (approximately 100 acres) being considered
for unrestricted use from property (approximately 10 acres) being considered for
the on-site containment cell. The unrestricted use property plan was submitted
in June 1999 and approved in August 1999, with the NRC license amended
accordingly. The plan dealing with the on-site containment cell was submitted
in August 1999. In September 1999, the NRC published its intent to review this
submittal for the purpose of amending the license. In response to the notice, a
petition was filed with the NRC by the Oklahoma Attorney General requesting a
hearing in order to dispute the appropriateness of constructing the on-site
containment cell. A hearing was granted, but the Company expects that it would
be held no earlier than the conclusion of the NRC's initial review of the plan,
which should require at least one year.
On-site containment of the contaminated soils may require preparation of an
Environmental Impact Statement and, in addition to the required NRC approval,
local and other federal agencies may have to be satisfied that the Company's
disposal plan is sound. The approval process for on-site containment can be
expected to extend over a number of years. Management believes that a
decommissioning plan including on-site containment will ultimately be acceptable
to the appropriate regulatory authorities, and will be approved, based on
current NRC regulations or provisions of the Nuclear Waste Policy Act of 1982.
However, there is no assurance that a plan providing for on-site containment
will ultimately be approved. Implementation of a decommissioning plan for the
Company's site that includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost
for decommissioning and to assure in advance that adequate funds will be
available to cover those costs. NRC regulations identify a number of acceptable
methods for assuring funds for decommissioning, including surety instruments
such as letters of credit, cash deposits and combinations thereof. The level of
assurance for decommissioning, including on-site containment, is currently
$4,456,000 provided through letters of credit. The amount does not include
assurance for costs of operation of the residue processing facility even though
the NRC had previously indicated that the cost of processing should be included
in the cost estimate. This level of assurance, however, may be changed upon
further review by the NRC. The Company's available cash and/or borrowing
capacity will be reduced by the amount of funding assurance as required at any
particular time. As the decommissioning plan is implemented, deposited funds or
the amount of any surety instruments may be reduced, provided the Company can
demonstrate the sufficiency of the remaining funds or surety to assure the
completion of decommissioning.
At December 31, 1999 and 1998, the Company had recorded liabilities of
$9.7 million and $9.8 million, respectively, for discontinued operations
including the estimated net costs of reclaiming and decommissioning the site
during and after the approximate ten years of processing the residues and the
Company's estimated share of costs at a second site which had been part of the
Metal Products business segment. The second site is regulated under the
Resource Conservation and Recovery Act and, as a result of alleged migration of
contaminants from this second site, the Company also has been identified as
a potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) at a neighboring third-party site.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues at full
production of approximately $8 million per year over the ten year processing
period and estimated annual operating costs, including depreciation, of
approximately the same amount, related to residue processing. The estimated
value of materials to be extracted is based on analysis of samples taken from
the residues and a valuation of such materials using current market prices
discounted to reflect possible price decreases, including those which will
result from the increased quantities of certain of these materials made
available for sale. However, there can be no assurance as to the level of
demand for the extracted materials or the actual prices which may be obtained
for them, which could vary over time. The estimated costs of residue processing
were developed by Company personnel and independent consultants using
third-party evaluations based on the testing performed. Unforeseen production
complications could cause processing costs to increase from current estimates.
In addition to the two sites included in the discontinued operations, the
Company has a total of seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken. Certain of these
sites were identified as a result of environmental studies conducted by the
Company during 1997 at all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the environmental studies.
The Company has also been notified that it is a potentially responsible
party at six sites owned by third parties. The Company's participation at four
sites is de minimis, and at the other two sites the Company is either being
defended by its insurance carriers or has meritorious defenses to liability.
At December 31, 1999 and 1998, the Company had recorded liabilities of
$7.8 million and $8.4 million, respectively, for estimated environmental
investigatory and remediation costs based upon an evaluation of currently
available facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. Actual costs to be incurred in future periods
at identified sites may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Future information and
developments will require the Company to continually reassess the expected
impact of these environmental matters. The Company does not expect that any
sums it may have to pay in connection with these environmental liabilities would
have a materially adverse effect on its consolidated financial position.
Year 2000 Disclosure
Many existing information technology ("IT") products and systems and non-IT
products and systems containing embedded processor technology were originally
programmed to represent any date by using six digits (e.g., 12/31/99), as
opposed to eight digits (e.g., 12/31/1999). Accordingly, such products and
systems may experience miscalculations, malfunctions, or disruptions when
attempting to process information containing dates that fall after December 31,
1999. These potential problems are collectively referred to as the "Year 2000"
problem.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
During 1999 and prior years, the Company engaged in an ongoing, comprehensive
project to assess and remediate the impact on its computer systems and programs
of the Year 2000 problem. To date, there have been no significant Year 2000
issues related to the Company's computer systems or to the computer systems of
the Company's major customers and suppliers.
Market Risk
The company is exposed to the impact of interest rate changes. Currently, the
Company does not enter into derivatives relating to this risk.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flow and related weighted-average
interest rates by expected maturity dates. Weighted-average variable rates are
based on implied forward rates as derived from appropriate annual spot rate
observations as of the reporting date. Interest rate sensitivity at December 31,
1999 and December 31, 1998 consisted of the following:
Interest Rate Sensitivity at December 31, 1999
Long-Term Debt Including Current Portion
(thousands of dollars except percentages)
Fixed Variable
Average Average
Cash Interest Cash Interest
Flow Rate Flow Rate
2000 $ 266 3.45% $ - 4.75%
2001 145 4.28% 100 4.75%
2002 116 4.65% 100 5.02%
2003 96 4.46% 100 5.06%
2004 94 4.43% 100 5.09%
Thereafter 719 5.08% 700 5.13%
Total $1,436 4.58% $1,100 4.97%
Fair Market Value $1,378 $1,100
Interest Rate Sensitivity at December 31, 1998
Long-Term Debt Including Current Portion
(thousands of dollars except percentages)
Fixed Variable
Average Average
Cash Interest Cash Interest
Flow Rate Flow Rate
1999 $ 307 3.58% $ - 4.36%
2000 266 3.45% - 4.36%
2001 138 4.52% 100 4.41%
2002 109 4.97% 100 4.46%
2003 89 4.84% 100 4.50%
Thereafter 804 5.05% 800 4.60%
Total $1,713 4.48% $1,100 4.46%
Fair Market Value $1,553 $1,100
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Fansteel Inc.:
We have audited the accompanying consolidated balance sheets of Fansteel Inc. as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of Fansteel Inc. management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fansteel Inc. at December 31, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
\s\ Ernst & Young LLP
Chicago, Illinois
January 19, 2000
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
1999 1998 1997
Net Sales $144,394,456 $153,796,547 $140,194,075
Cost and Expenses
Cost of products sold 119,817,193 127,595,846 118,677,180
Selling, general and
administrative 18,723,565 17,881,015 16,508,472
Environmental remediation - - 6,900,000
138,540,758 145,476,861 142,085,652
Operating Income (Loss) 5,853,698 8,319,686 (1,891,577)
Other Income (Expense)
Interest income on investments 14,935 438,276 681,157
Interest expense (108,703) (102,393) (88,780)
Other (128,401) (17,212) (331,397)
(222,169) 318,671 260,980
Income (Loss) from Continuing
Operations Before Income Taxes 5,631,529 8,638,357 (1,630,597)
Income Tax Provision 1,716,000 3,232,000 877,000
Income (Loss) from Continuing
Operations 3,915,529 5,406,357 (2,507,597)
Loss from Discontinued
Operations - - (5,856,000)
Net Income (Loss) $ 3,915,529 $ 5,406,357 $ (8,363,597)
Income (Loss) Per Weighted
Average Common Shares
Outstanding:(a)
Continuing operations $.46 $.63 $(.29)
Discontinued operations - - (.68)
Net income (loss) $.46 $.63 $(.97)
(a) Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET
At December 31,
1999 1998
ASSETS
Current Assets
Cash and cash equivalents $ 16,516 $ 2,031,835
Accounts receivable, less allowance of
$299,000 in 1999 and $259,000 in 1998 18,885,942 22,148,457
Inventories
Raw material and supplies 4,396,715 5,341,512
Work-in-process 16,096,014 15,177,294
Finished goods 7,350,692 8,686,552
27,843,421 29,205,358
Less:
Reserve to state certain inventories at
LIFO cost 6,896,999 6,763,841
Total inventories 20,946,422 22,441,517
Other assets - current
Deferred income taxes 2,339,890 2,575,684
Other 1,030,489 1,325,492
Total Current Assets 43,219,259 50,522,985
Net Assets of Discontinued Operations 24,075,586 13,668,396
Property, Plant and Equipment
Land 1,911,631 1,911,631
Buildings 13,046,957 13,046,957
Machinery and equipment 57,602,970 55,552,823
72,561,558 70,511,411
Less accumulated depreciation 52,243,537 50,055,789
Net Property, Plant and Equipment 20,318,021 20,455,622
Other Assets
Prepaid pension asset 8,087,825 -
Deferred income taxes - 1,087,598
Goodwill, net of accumulated amortization
of $787,000 in 1999 and $557,000 in 1998 2,667,668 2,897,972
Other 69,825 84,799
Total Other Assets 10,825,318 4,070,369
$98,438,184 $88,717,372
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31,
1999 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,415,399 $11,185,587
Accrued liabilities 11,756,110 10,733,582
Income taxes 229,311 707,772
Current maturities of long-term debt 265,915 306,578
Total Current Liabilities 21,666,735 22,933,519
Long-term Debt 2,270,831 2,506,746
Other Liabilities
Environmental remediation 15,337,000 15,646,000
Pension liabilities - 84,017
Deferred income taxes 2,746,682 -
Total Other Liabilities 18,083,682 15,730,017
Shareholders' Equity
Preferred stock without par value
Authorized and unissued 1,000,000 shares - -
Common stock, par value $2.50
Authorized 12,000,000 shares; issued and
outstanding 8,698,858 shares in 1999 and
8,598,858 shares in 1998 21,747,145 21,497,145
Capital in excess of par value 316,000 -
Unamortized cost of restricted stock (392,136) -
awards
Retained earnings 34,745,161 30,829,632
Other comprehensive income
Minimum pension liability - (4,778,714)
Foreign currency translation 766 (973)
Total other comprehensive income 766 (4,779,687)
Total Shareholders' Equity 56,416,936 47,547,090
$98,438,184 $88,717,372
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
1999 1998 1997
Cash Flows From Operating
Activities
Net income (loss) $ 3,915,529 $ 5,406,357 $(8,363,597)
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,482,012 2,257,476 2,155,974
Amortization of restricted
stock awards 173,864 - -
Provision for environmental
remediation & discontinued
operations - - 14,000,000
Net pension (credit) charge (424,150) (170,463) 204,026
Deferred income tax charge
(credit) 1,101,096 1,228,638 (2,286,078)
Gain from disposals of
property, plant and equipment (9,481) (143,798) -
Changes in assets and
liabilities:
Decrease in marketable
securities - 41,196 121,767
Decrease (increase) in
accounts receivable 3,262,515 (365,585) (2,433,940)
Decrease (increase) in
inventories 1,495,095 (2,977,800) (974,196)
Decrease (increase) in other
assets - current 295,003 250,841 (193,753)
(Decrease) increase in
accounts payable and accrued
liabilities (1,054,921) (2,759,902) 2,750,059
(Decrease) increase in income
taxes payable (478,461) 206,027 (88,348)
Decrease (increase) in other
assets 14,974 (43,078) (109,499)
Net cash provided by
operating activities 10,773,075 2,929,909 4,782,415
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31,
1999 1998 1997
Cash Flows From Investing
Activities
Payments for acquisitions $ - $(3,779,307) $(1,865,986)
Proceeds from disposition of
marketable securities - 5,000,000 5,000,000
Proceeds from sale of assets
held for sale - 2,442,221 -
Proceeds from sale of property,
plant and equipment 16,000 266,537 2,800
Capital expenditures (2,120,626) (4,161,663) (1,727,523)
Increase in net assets of
discontinued operations-
design, engineering and
equipment for processing
plant (10,407,190) (9,594,954) (1,541,011)
Net cash used in investing
activities (12,511,816) (9,827,166) (131,720)
Cash Flows From Financing
Activities
Payments on long-term debt (306,578) (334,137) (335,522)
Proceeds from long-term debt 30,000 1,225,000 143,404
Principal payments for capital
leases - - (8,638)
Net cash (used in) provided
by financing activities (276,578) 890,863 (200,756)
Net (Decrease) Increase In Cash
And Cash Equivalents (2,015,319) (6,006,394) 4,449,939
Cash And Cash Equivalents at
Beginning of Year 2,031,835 8,038,229 3,588,290
Cash And Cash Equivalents at End
of Year $ 16,516 $ 2,031,835 $ 8,038,229
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Capital Unamor-
in tized Accumulated
Excess Cost of Other
of Restricted Compre-
For the Years Ended Common Par Stock Retained hensive
December 31, Stock Value Awards Earnings Income
Total
1997
Balance at January 1 $21,497,145 $ - $ - $33,786,872 $ -
$55,284,017
Net loss (8,363,597) (8,363,597)
Balance at December 31 21,497,145 - - 25,423,275 -
46,920,420
1998
Net income 5,406,357 5,406,357
Other comprehensive
income
Minimum pension liabil-
ity adjustment, net of
$2,969,000 in taxes (4,778,714) (4,778,714)
Foreign currency trans-
lation adjustment (973) (973)
Comprehensive income 626,670
Balance at December 31 21,497,145 - - 30,829,632 (4,779,687) 47,547,090
1999
Net income 3,915,529 3,915,529
Other comprehensive
income
Minimum pension liabil-
ity adjustment, net of
$2,969,000 in taxes 4,778,714 4,778,714
Foreign currency trans-
lation adjustment 1,739 1,739
Comprehensive income 8,695,982
Restricted stock
(100,000 shares) 250,000 316,000 (566,000) -
Amortization of
restricted stock 173,864 173,864
Balance at December 31 $21,747,145 $316,000 $(392,136) $34,745,161 $ 766 $56,416,936
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The consolidated financial statements include the accounts of Fansteel Inc.
and its subsidiaries (the "Company").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents. At December 31, 1999 the Company had not
purchased any investments with a maturity of three months or less. At December
31, 1998, the Company had purchased $1,775,000 of securities through banks under
agreements to resell on January 4, 1999. Due to the short-term nature of the
agreements, the Company did not take possession of the securities which were
instead held in the Company's safekeeping accounts at the banks.
All investments with a maturity greater than three months are accounted for
under Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The Company determines
the appropriate classification at time of purchase. Securities are classified
as held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at cost,
adjusted for amortization of premiums and discounts to maturity. Marketable
securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
which is based on quoted prices. Unrealized gains and losses, net of tax, are
reported as a separate component of shareholders' equity. The cost of securities
available-for-sale is adjusted for amortization of premiums and discounts to
maturity. Interest and amortization of premiums and discounts for all securities
are included in interest income. Realized gains and losses are included in other
income. Cost of securities sold is determined on a specific identification
basis.
Inventories are valued at the lower of cost, determined principally on the
"last-in, first-out" (LIFO) basis, or market. Costs include direct material,
labor and applicable manufacturing overhead. Inventories valued using the LIFO
method comprised 85% and 88% of inventories at current cost at December 31, 1999
and 1998, respectively.
Acquisitions of properties and additions to existing facilities and equipment
are recorded at cost. For financial reporting purposes, straight-line
depreciation is used for assets placed in service after December 31, 1995, while
accelerated depreciation is the principal method used for assets
placed-in-service before January 1, 1996. For assets placed-in-service beginning
in 1996, depreciation is recorded using the straight-line method over the
estimated useful life in order to better match expenses and revenues for
financial reporting purposes. Accelerated depreciation is used for income tax
purposes.
Goodwill of $2,668,000 at December 31, 1999, from the acquisition of American
Sintered Technologies, Inc. on July 31, 1996, represents the excess
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
of cost over fair value of the assets acquired and is being amortized over its
estimated useful life of 15 years using the straight-line method for financial
reporting and income tax purposes. Amortization of goodwill was $230,000 in
1999, 1998 and 1997.
Revenue from sales of products is generally recognized upon shipment to
customers. Revenue from sales of tooling, patterns and dies is generally
recognized upon acceptance by the customer.
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred tax liabilities and assets. Deferred tax
liabilities and assets are determined based on the differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recognized if it is anticipated that some or all of a
deferred tax asset may not be realized.
The functional currency for the Company's foreign operation is the applicable
local currency. The translation from the applicable foreign currency to U.S.
Dollars is performed for the balance sheet accounts using current exchange rates
in effect at the balance sheet date and for revenue and expense accounts using
an average exchange rate during the period. The resulting translation
adjustments are recorded as a component of shareholders' equity. Gains or losses
resulting from foreign currency translations are included in other income.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
effective for periods beginning after June 15, 2000. Because of the Company's
minimal use of derivatives, management does not anticipate that the adoption of
the Statement will have a significant effect on earnings or the financial
position of the Company.
Certain reclassifications have been made to prior years' financial statements
to conform with the 1999 presentation.
2. Earnings Per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" requires a dual presentation of earnings per share, basic and diluted.
Basic earnings per share are computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflects the increase in average common shares
outstanding that would result from the assumed exercise of outstanding stock
options, calculated using the treasury stock method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The following table sets forth the computation of basic and diluted earnings
per share:
1999 1998 1997
Numerator:
Net income $ 3,915,529 $ 5,406,357 $(8,363,597)
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 8,598,858 8,598,858 8,598,858
Effect of dilutive securities
Employee stock options - - -
Employee restricted stock 10,672 - -
Dilutive potential common
shares 8,609,530 8,598,858 8,598,858
Basic earnings per share $.46 $.63 $(.97)
Diluted earnings per share $.46 $.63 $(.97)
Options to purchase shares of common stock were outstanding during 1999 and
1998 (see note 11) but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares, and, therefore, would be antidilutive.
3. Accrued Liabilities
Accrued liabilities at December 31, 1999 and 1998 include the following:
1999 1998
Payroll and related costs $ 4,033,931 $ 3,907,148
Taxes, other than income 393,002 337,076
Profit sharing 845,958 1,142,492
Insurance 2,634,858 3,075,719
Environmental 2,764,366 1,363,462
Professional fees 423,383 248,524
Other 660,612 659,161
$ 11,756,110 $ 10,733,582
4. Discontinued Operations, Contingent Liabilities, and Other Liabilities
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores that are subject to regulations of
several government agencies. The residues from these processed ores were stored
on-site. Remaining assets were written down to estimated realizable
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
value, and provisions were made for the estimated costs for decommissioning.
Prior to decommissioning, the Company expects to operate for approximately ten
years a commercial plant to complete the processing of residues currently
contained in storage ponds at the site, which will materially reduce the amount
of radioactive materials to be disposed of during decommissioning. The
processing plant will extract commercially valuable materials such as tantalum,
columbium, scandium and other rare earth and rare metal elements from the
feedstock residues. Pilot production processing began in the third quarter of
1999.
The Company, in association with outside consultants, developed a
decommissioning plan for the site involved including construction of an
engineered on-site cell for containment of contaminated soils; consolidation and
stabilization of the contaminated soils in the containment cell; and the
performance of required plant surveys and characterization after residue
processing ceases to determine whether additional contaminated soils exist which
may require remediation, and submitted that plan and a related decommissioning
funding plan to the Nuclear Regulatory Commission ("NRC") as required by law.
The NRC requested in May 1999 that the Company change its submittal to separate
the property (approximately 100 acres) being considered for unrestricted use
from property (approximately 10 acres) being considered for the on-site
containment cell. The unrestricted use property plan was submitted in June 1999
and approved in August 1999, with the NRC license amended accordingly. The plan
dealing with the on-site containment cell was submitted in August 1999. In
September 1999, the NRC published its intent to review this submittal for the
purpose of amending the license. In response to the notice, a petition was filed
with the NRC by the Oklahoma Attorney General requesting a hearing in order to
dispute the appropriateness of constructing the on-site containment cell. If a
hearing is granted, the Company expects that it would be held no earlier than
the conclusion of the NRC's initial review of the plan, which should require
about one year.
On-site containment of contaminated soils may require preparation of an
Environmental Impact Statement and, in addition to the required NRC approval,
local and other federal agencies may have to be satisfied that the Company's
disposal plan is sound. The approval process for on-site containment can be
expected to extend over a number of years. Management believes that a
decommissioning plan including on-site containment will ultimately be acceptable
to the appropriate regulatory authorities, and will be approved, based on
current NRC regulations or provisions of the Nuclear Waste Policy Act of 1982.
However, there is no assurance that a plan providing for on-site containment
will ultimately be approved. Implementation of a decommissioning plan for the
Company's site that includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost for
decommissioning and to assure in advance that adequate funds will be available
to cover those costs. NRC regulations identify a number of acceptable methods
for assuring funds for decommissioning, including surety instruments such as
letters of credit, cash deposits and combinations thereof. The level of
assurance for decommissioning, including on-site containment, is currently
$4,456,000 provided through letters of credit. The amount does not include
assurance for costs of operation of the residue processing facility
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
even though the NRC had previously indicated that the cost of processing should
be included in the cost estimate. This level of assurance, however, may be
changed upon further review by the NRC. The Company's available cash and/or
borrowing capacity will be reduced by the amount of funding assurance as
required at any particular time. As the decommissioning plan is implemented,
deposited funds or the amount of any surety instruments may be reduced, provided
the Company can demonstrate the sufficiency of the remaining funds or surety to
assure the completion of decommissioning.
At December 31, 1999 and 1998, the Company had recorded liabilities of $9.7
million and $9.8 million, respectively, for discontinued operations including
the estimated net costs of reclaiming and decommissioning the site during and
after the approximate ten years of processing the residues and the Company's
estimated share of costs at a second site which had been part of the Metal
Products business segment. The second site is regulated under the Resource
Conservation and Recovery Act and, as a result of alleged migration of
contaminants from this second site, the Company also has been identified as a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated value of materials to
be extracted is based on analysis of samples taken from the residues and a
valuation of such materials using current market prices discounted to reflect
possible price decreases, including those which will result from the increased
quantities of certain of these materials made available for sale. However, there
can be no assurance as to the level of demand for the extracted materials or the
actual prices which may be obtained for them, which could vary over time. The
estimated costs of residue processing were developed by Company personnel and
independent consultants using third-party evaluations based on the pilot testing
performed. Unforeseen production complications could cause processing costs to
increase from current estimates.
Expenditures for environmental reclamation and decommissioning for
discontinued operations were $100,000, $1,009,000 and $1,859,000 in 1999, 1998,
and 1997, respectively. Costs which are expected to be incurred within the next
year are included as environmental costs in Accrued Liabilities. Costs expected
to be incurred after one year are reflected on the balance sheet in
Environmental Remediation as part of Other Liabilities. Based upon continuing
assessment of the proposed decommissioning plan, taking into consideration the
most current information, existing technology and regulations in effect,
management believes that the amounts reserved at December 31, 1999 are adequate
to cover the costs of environmental clean-up for discontinued operations and
that the Company has the ability to meet the NRC decommissioning funding
assurance requirements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The net assets of discontinued operations at December 31, 1999 and 1998
include the following (in thousands of dollars):
1999 1998
Land $ 107 $ 110
Building 6,155 5,885
Machinery & equipment 13,650 9,694
19,912 15,689
Less accumulated depreciation 4,805 4,805
Net fixed assets 15,107 10,884
Design and engineering costs
for processing plant 8,969 2,784
$ 24,076 $ 13,668
In addition to the two sites included in the discontinued operations, the
Company has a total of seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken. Certain of these
sites were identified as a result of environmental studies conducted by the
Company during 1997 at all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the environmental studies.
The Company has also been notified that it is a potentially responsible party
at six sites owned by third parties. The Company's participation at four sites
is de minimis, and at the other two sites the Company is either being defended
by its insurance carriers or has meritorious defenses to liability.
At December 31, 1999 and 1998, the Company had recorded liabilities of $7.8
million and $8.4 million, respectively, for estimated environmental
investigatory and remediation costs based upon an evaluation of currently
available facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. Actual costs to be incurred in future periods
at identified sites may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Future information and
developments will require the Company to continually reassess the expected
impact of these environmental matters. The Company does not expect that any sums
it may have to pay in connection with these environmental liabilities would have
a materially adverse effect on its consolidated financial position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
5. Debt
Long-term debt at December 31, 1999 and 1998 consisted of the following:
1999 1998
Mississippi Business Finance
Corporation 5.487% Note, due 2011 $ 950,000 $ 1,005,000
Loans from various Pennsylvania
Economic Agencies with interest rates
ranging from 2.0% to 5.0%, due from
2000 to 2010 1,496,424 1,667,773
Loans from various Iowa Economic
Agencies with interest rates ranging
from 0.0% to 4.0%, due 2000 to 2004 90,322 140,551
2,536,746 2,813,324
Less current maturities 265,915 306,578
Total long-term debt $ 2,270,831 $ 2,506,746
The above loans are collateralized by machinery and equipment with a net book
value of $1,167,000.
The aggregate maturities for long-term debt for the five years after December
31, 1999 are $266,000, $245,000, $216,000, $196,000, and $194,000, respectively.
Interest paid on debt for the years ended December 31, 1999, 1998 and 1997
amounted to $109,000, $107,000, and $89,000, respectively.
The fair value of the Company's debt at December 31, 1999 and 1998 was
$2,478,000 and $2,653,000, respectively, which was estimated using a discounted
cash flow analysis, based upon the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
The Company has a $30,000,000 unsecured revolving credit agreement expiring on
May 20, 2002 and a credit agreement for $3,000,000 expiring on June 30, 2000. As
of December 31, 1999, there were no borrowings from the lines of credit, but
$8.1 million was being used for letters of credit needed for funding assurance
related to environmental issues, self-insurance policies and development loans.
6. Income Taxes
Deferred income taxes reflect the tax effect of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Valuation allowances were established in 1997 in accordance with provisions of
FASB Statement No. 109, "Accounting for Income Taxes". The valuation allowances
are attributable to federal and state deferred tax assets.
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
1999 1998
Deferred tax assets - current:
Environmental costs $ 463,869 $ 699,102
Self-insurance accruals 734,480 829,370
Vacation accruals 381,222 338,097
State income taxes 350,081 388,108
Other 410,238 321,007
$ 2,339,890 $ 2,575,684
Deferred tax assets (liabilities) -
non-current:
Environmental costs $ 1,959,991 $ 3,321,505
Pensions (2,010,015) 32,230
Tax depreciation in excess of book
depreciation (726,176) (648,265)
Other 160,107 176,683
(616,093) 2,882,153
State income tax net operating loss
carryforwards 321,832 424,827
State income taxes (139,421) 599,113
182,411 1,023,940
Valuation allowances (2,313,000) (2,818,495)
$ (2,746,682) $ 1,087,598
At December 31, 1999 and 1998, the Company had potential state income tax
benefits from net operating loss carryforwards that expire in various years
through 2011. Valuation allowances include $233,500 and $336,495 at December 31,
1999 and 1998 for net operating loss carryforwards not anticipated to be
realized before expiration. State income tax benefits of $13,000 expired after
returns were filed for the year ended December 31, 1998, which were offset by
$13,000 of valuation allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Details of the provision (benefit) for income taxes in the consolidated
statement of operations are as follows:
1999 1998 1997
Current taxes
Federal $ 549,000 $ 1,662,000 $ 1,378,000
Foreign 50,000 - -
State 106,000 341,000 541,000
705,000 2,003,000 1,919,000
Deferred income tax
charge (credit)
Federal 1,234,000 1,196,000 (4,489,000)
State 269,000 33,000 (753,000)
Valuation allowances (492,000) - 2,956,000
1,011,000 1,229,000 (2,286,000)
Total $ 1,716,000 $ 3,232,000 $ (367,000)
Allocated to discontinued
operations - - (1,244,000)
Continuing operations $ 1,716,000 $ 3,232,000 $ 877,000
The deferred income tax charge in 1999 and 1998 resulted primarily from
payments for certain environmental costs accrued in prior years, and from tax
depreciation exceeding book depreciation.
The deferred income tax credit in 1997 resulted from provisions for
environmental costs accrued for continuing and discontinued operations reduced
by valuation allowances established in 1997.
A reconciliation of the total provision for income taxes with amounts
determined by applying the statutory U.S. Federal income tax rate to income
before income tax provision is as follows:
1999 1998 1997
Income tax provision at
statutory rate $ 1,915,000 $ 2,937,000 $(2,968,000)
Add:
State income taxes, net of
federal income tax provision 248,000 338,000 (395,000)
Change in valuation
allowances (457,000) (91,000) 2,956,000
Other, net 10,000 48,000 40,000
Total income tax provision $ 1,716,000 $ 3,232,000 $ (367,000)
Income taxes paid for each of the three years in the period ended December 31,
1999 amounted to $1,364,000, $2,267,000, and $2,161,000, respectively. Income
tax refunds in the three year period ended December 31, 1999 amounted to
$318,000, $469,000, and $262,000, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
7. Retirement Plans
The Company has several non-contributory defined benefit plans covering
approximately 26% of its employees. Benefits for salaried plans are generally
based on salary and years of service, while hourly plans are based upon a fixed
benefit rate in effect at retirement date and years of service. The Company's
funding of the plans is equal to the minimum contribution required by ERISA.
Contributions to defined benefit plans totaled $1,141,000, $600,000 and $81,000
in 1999, 1998 and 1997, respectively.
A minimum pension liability adjustment is required when the actuarial
present value of accumulated benefits exceeds plan assets and accrued pension
liabilities. A minimum pension liability adjustment of $4,778,714, net of tax
benefit, was recorded in 1998 as a reduction to shareholders' equity. In 1999,
plan assets and accrued pension liabilities exceeded the actuarial present value
of accumulated benefits. A minimum pension liability adjustment was not required
as a reduction to shareholders' equity.
The net pension expense (credit) in 1999 and 1998 is comprised of:
1999 1998
Change in benefit obligation
Benefit obligation at beginning of year $ 41,818,431 $ 41,057,007
Service cost 426,403 483,670
Interest cost 2,957,183 2,899,232
Amendments 97,887 124,467
Actuarial gain (3,618,637) 837,991
Benefits paid 792,206 (3,583,936)
Benefit obligation at end of the year 42,473,473 41,818,431
Change in plan assets
Fair market value of plan assets at
beginning of year 40,532,893 40,112,613
Actual return on plan assets 6,003,359 3,927,608
Employer contribution 1,113,623 76,608
Benefits paid (3,618,637) (3,583,936)
Fair value of plan assets at end of year 44,031,238 40,532,893
Funded status 1,557,765 (1,285,538)
Unrecognized actuarial loss 5,708,005 8,164,401
Unrecognized transition asset (27,000) (84,163)
Unrecognized prior service cost 793,420 818,725
Net amount recognized $ 8,032,190 $ 7,613,425
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 8,087,825 $ -
Accrued benefit liability (55,635) (860,627)
Intangible asset - 726,270
Accumulated other comprehensive income - 7,747,782
Net amount recognized $ 8,032,190 $ 7,613,425
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
1999 1998
Weighted-average assumptions of December 31
Discount rate 7.25% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.50% 3.50%
1999 1998
Components of net periodic benefit cost
Service cost $ 426,403 $ 483,670
Interest cost 2,957,183 2,899,232
Expected return on plan assets (3,155,113) (3,071,621)
Amortization of prior service cost 123,192 123,192
Amortization of transition asset (57,163) (622,244)
Recognized actuarial loss 427,903 609,792
Net periodic benefit cost $ 722,405 $ 422,021
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $37,422,242, $36,824,545, and $36,014,168,
respectively, as of December 31, 1998.
The Company has several defined contribution plans covering approximately 78%
of its employees. Almost all of the defined contribution plans have funding
provisions which, in certain situations, require Company contributions based
upon formulae relating to employee gross wages, participant contributions or
hours worked. Almost all of the defined contribution plans also allow for
additional discretionary Company contributions based upon profitability. The
costs of these plans for 1999, 1998 and 1997 were $1,305,000, $1,519,000 and
$1,494,000, respectively.
The Company makes medical insurance available and provides limited amounts of
life insurance to retirees. Retirees electing to be covered by Company sponsored
health insurance pay the full cost of such insurance. The Company accrues the
cost of the retiree life insurance benefits in relation to the employee's
service with the Company. Costs of postretirement benefits other than pensions
for the years ended December 31, 1999, 1998 and 1997 were $40,000, $49,000 and
$40,000, respectively.
8. Business Segments
The Company is a specialty metals manufacturer. For financial reporting
purposes, the Company classifies its products into the following three business
segments:
Industrial Tools:
Tungsten carbide cutting tools, milling tools, toolholding devices, mining
tools and accessories, construction tools, wear parts and related industrial
parts.
Advanced Structures:
Titanium, nickel base and high alloy steel forgings; aluminum and magnesium
sand castings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Industrial Metal Components:
Special wire products, powdered metal components, and investment castings.
The Company's business segments have separate management teams and
infrastructures that offer different products and services. Financial
information concerning the Company's segments for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
NET SALES:
INDUSTRIAL TOOLS
Sales $ 55,034,771 $ 58,442,892 $ 56,292,542
Intersegment sales (9,344) (5,582) (1,133)
55,025,427 58,437,310 56,291,409
ADVANCED STRUCTURES
Sales 47,405,656 54,512,070 45,827,350
Intersegment sales - - -
47,405,656 54,512,070 45,827,350
INDUSTRIAL METAL COMPONENTS
Sales 42,011,710 40,860,593 38,144,417
Intersegment sales (48,337) (13,426) (69,101)
41,963,373 40,847,167 38,075,316
TOTAL NET SALES $144,394,456 $153,796,547 $140,194,075
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 3,908,676 $ 3,895,736 $ 3,860,150
ADVANCED STRUCTURES 267,632 2,639,782 (1,055,575)
INDUSTRIAL METAL
COMPONENTS 2,216,056 1,840,208 2,273,052
CORPORATE (538,666) (56,040) (6,969,204)
TOTAL OPERATING INCOME
(LOSS) $ 5,853,698 $ 8,319,686 $ (1,891,577)
Intersegment sales are accounted for at prices equivalent to the competitive
market prices for similar products.
The operating loss for Corporate in 1997 includes a provision for
environmental remediation of $6,900,000 of which $3,076,000 relates to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Industrial Tools facilities, $3,781,000 relates to Advanced Structures
facilities, and $43,000 relates to Industrial Metal Components facilities.
The percentages of net sales for classes of similar products which exceeded
ten percent of the Company's consolidated net sales, for the period indicated,
are set forth below:
Percentage of
Consolidated Net Sales
Products Business Segments 1999 1998 1997
Tungsten carbide
cutting tools Industrial Tools 25% 26% 27%
Nonferrous forgings Advanced Structures 12% 16% 15%
Investment castings Industrial Metal 12% 10% 10%
Components
The identifiable assets, depreciation and amortization, and capital
expenditures for the years ended December 31, 1999, 1998 and 1997 are as
follows:
1999 1998 1997
Identifiable assets
Industrial Tools $19,678,862 $21,853,599 $19,854,696
Advanced Structures 23,121,801 25,560,655 24,746,415
Industrial Metal Components 19,020,071 20,429,505 14,993,384
Corporate/Discontinued 36,617,450 20,873,613 29,237,920
Total assets $98,438,184 $88,717,372 $88,832,415
Depreciation and amortization
Industrial Tools $ 686,365 $ 674,904 $ 684,961
Advanced Structures 669,985 623,556 630,153
Industrial Metal Components 1,125,662 959,016 840,860
Corporate/Discontinued - - -
Total depreciation and
amortization $ 2,482,012 $ 2,257,476 $ 2,155,974
Capital expenditures
Industrial Tools $ 315,450 $ 1,866,258 $ 890,465
Advanced Structures 1,143,943 1,239,232 644,483
Industrial Metal Components 661,233 4,835,480 751,629
Corporate/Discontinued - - -
Total capital expenditures $ 2,120,626 $ 7,940,970 $ 2,286,577
Capital expenditures for the Advanced Structures segment include $559,000 from
the acquisition of Schulz Products, Inc. in 1997. Capital expenditures for the
Industrial Metal Components segment include $3,779,000 for the acquisition of
Fansteel de Mexico in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
9. Lease Commitments
The Company leases data processing, transportation and other equipment, as
well as certain facilities, under operating leases. Such leases do not involve
contingent rentals, nor do they contain significant renewals or escalation
clauses.
Total minimum future rentals under non-cancelable leases at December 31, 1999
were $297,000, including $214,000 in 2000, $53,000 in 2001, $14,000 in 2002,
$9,000 in 2003, and $7,000 in 2004 and thereafter. Rental expense was $1,589,000
in 1999, $1,455,000 in 1998, and $1,224,000 in 1997.
10. Acquisitions
On August 27, 1998, the Company acquired the property, plant and equipment of
Attwood de Mexico S. de R. L. de C.V. and Attwood Corporation in Reynosa, Mexico
for a cash price of $3,779,307. A new Company, Fansteel de Mexico S. de R. L. de
C.V., was established to produce steel and alloy investment castings in
conjunction with the Company's Escast Inc. subsidiary, which is in the
Industrial Metal Components business segment.
On September 30, 1997, the Company acquired all the assets and certain
liabilities of Schulz Products, Inc. (Schulz) for the cash price of $1,865,986.
The nature of the business of Schulz is the machining of aircraft components.
Schulz is included in the Advanced Structures business segment. The acquisition
of Schulz was accounted for as a purchase. The Company's results for the year of
the acquisition would not be materially different if the acquisition was made at
the beginning of the year. The fair value of assets purchased and liabilities
assumed for Schulz in 1997 is shown below:
1997
Accounts receivable $ 648,005
Inventory 972,615
Other assets - current 12,518
Property, plant and equipment 559,054
Accounts payable and accrued liabilities (326,206)
Net cash paid $ 1,865,986
11. Stock-Based Compensation Plan
The Shareholders approved the 1998 Long-Term Incentive Plan (Incentive Plan)
on May 20, 1998. The Incentive Plan is administered by the Compensation and
Nominating Committee of the Board of Directors. No member of the Committee is
eligible to receive awards under the Incentive Plan. Officers, key employees and
non-employees, who in the judgment of the Committee, render significant service
to the Company, are eligible to participate. The Incentive Plan provides for the
award of a broad variety of stock-based compensation alternatives such as
non-qualified stock options, incentive stock options, restricted stock,
performance awards and stock appreciation rights. The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Incentive Plan provided 800,000 shares of common stock to be offered from
either authorized and unissued shares or issued shares which have been
reacquired by the Company. Options granted will vest equally over three or four
years and expire ten years after the grant date. The exercise price is equal to
100% of the fair market value of a common stock on the grant date.
A summary of the Company's stock option activity, and related information for
the years ended December 31, 1999 and 1998 follows:
Weighted
Average
Exercise
Options Price
Outstanding at December 31, 1997 - -
Granted 175,000 $9.19
Forfeited (12,200) 9.19
Outstanding at December 31, 1998 162,800 9.19
Granted 324,000 5.64
Forfeited (41,200) 9.19
Outstanding at December 31, 1999 445,600 6.38
Options Exercisable at :
December 31, 1998 - -
December 31, 1999 40,534 9.19
December 31, 2000 121,534 6.61
December 31, 2001 121,532 6.61
December 31, 2002 81,000 5.64
December 31, 2003 81,000 5.64
The weighted-average remaining contractual life of the options exercisable at
December 31, 1999 is 8.7 years.
The fair value of the Company stock options estimated on the date of grant
using the Black-Scholes option-pricing model was $2.49 and $3.90 for 1999 and
1998, respectively, with the following assumptions:
1999 1998
Expected life in years 8 8
Interest rate 5.71% 5.71%
Volatility 24.40% 24.40%
Dividend Yield 0.00% 0.00%
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plan under APB Opinion 25
"Accounting for Stock Issued to Employees" and adopt the disclosure only
provisions of SFAS No. 123. Under APB 25, no compensation costs are recognized
because the option exercise price is equal to the fair market price of the
common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at grant date using the Black-Scholes valuation model and compensation
costs are recognized ratably over the vesting period. Had compensation costs
been determined as prescribed by SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to pro forma amounts indicated below:
1999 1998
Net Earnings
As Reported $3,915,529 $5,406,357
Pro Forma 3,721,950 5,329,072
Net Earnings Per Share
As Reported $.46 $.63
Pro Forma .43 $.62
Pro forma diluted income per common share has not been presented for 1999 or
1998 because assuming the conversion of stock options would have an
anti-dilutive effect.
On January 26, 1999, the Board of Directors granted 100,000 shares of
restricted stock to the Chairman, President and Chief Executive Officer. The
shares vest one-third on the anniversary date of the grant. The fair market
value of the shares at grant date were $5.66. Compensation expense for
restricted stock in 1999 was $173,864.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive
officers is included in Part I page 11.
Additional information concerning the Company's directors is
incorporated by reference to information under the caption
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 26, 2000.
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated herein by reference to information under the
caption "Compensation of Directors and Executive Officers" in
the Company's definitive proxy statement for the annual
meeting of shareholders to be held on April 26, 2000.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)(b)(c) The information required by this Item 12 is incorporated
herein by reference to the information under the captions
"Voting Securities and Principal Holders Thereof" and
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 26, 2000.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the information under the
caption "Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 26, 2000.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a)(1) Index to Consolidated Financial Statements:
Form 10-K
Page
Summary of Quarterly Results of Operations
for the years ended December 31, 1999 and
1998. 14
Report of Independent Auditors. 23
Consolidated Statement of Operations for each
of the three years in the period ended
December 31, 1999. 24
Consolidated Balance Sheet at December 31,
1999 and 1998. 25-26
Consolidated Statement of Cash Flows for each
of the three years in the period ended
December 31, 1999. 27-28
Consolidated Statement of Shareholders'
Equity for each of the three years in the
period ended December 31, 1999. 29
Notes to Consolidated Financial Statements. 30-45
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule
for each of the three years ended
December 31, 1999:
II. Valuation and qualifying accounts 48
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the Consolidated Financial Statements and Notes thereto.
(a)(3) The following exhibits required by Item 601 of Regulation S-K
are submitted as follows:
Exhibit 3.1 - Certificate of Incorporation
Exhibit 3.2 - By-Laws
Exhibit 22 - Subsidiaries of the Registrant
All other exhibits are omitted since the required information is not
present or is not present in amounts sufficient to require submission.
(b) No reports have been filed on Form 8-K during the last quarter
of the year ended December 31, 1999.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Cost and Deductions at End
of Year Expenses (1) of Year
Allowance for Doubtful
Accounts:
Year ended 12/31/99 $ 259,247 $ 8,889 $ (31,030) $ 299,166
Year ended 12/31/98 $ 280,440
$ 22,746 $ 43,939 $ 259,247
Year ended 12/31/97 $ 276,440 $ 234,463 $ 230,463 $ 280,440
(1) Accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FANSTEEL INC.
Registrant
Date: 03/14/2000 By: /s/ Gary L. Tessitore
Gary L. Tessitore, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated:
Signature Title Date
/s/ Gary L. Tessitore Director; Chairman of the 03/14/2000
Gary L. Tessitore Board, President and
Chief Executive Officer
/s/ R. Michael McEntee Vice President and Chief 03/14/2000
R. Michael McEntee Financial Officer
/s/ Edward P. Evans Director 03/20/2000
Edward P. Evans
/s/ R. S. Evans Director 03/28/2000
R. S. Evans
/s/ Thomas M. Evans, Jr. Director 03/17/2000
Thomas M. Evans, Jr.
/s/ Peter J. Kalis Director 03/16/2000
Peter J. Kalis
/s/ Jack S. Petrik Director 03/16/2000
Jack S. Petrik
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated by reference:
Exhibit Prior Filing or Sequential
No. Page Number Herein
3.1 Certificate of Incorporation Company's Form 10-K filed
March 31, 1993 (*)
3.2 By-Laws Annex II to the Company's
annual proxy statement
dated March 15, 1985,
File No. 1-8676 (*)
4 $30,000,000 Revolving Credit Company's Form 10-Q filed
Agreement among Fansteel Inc. August 13, 1999 (*)
and Northern Trust Company as
of May 20, 1999 and Form of
Note.
10a Fansteel Inc. 1998 Long-Term Exhibit A of the Company's
Incentive Plan, as ammended annual proxy statement
effective January 26, 1999. dated April 19, 1999,
File No. 1-8676 (*)
10b Change in Control Agreement Company's Form 10-Q filed May
between the Company and Gary 17, 1999 (*)
L. Tessitore dated as of April
19, 1999.
10c Change in Control Agreement Company's Form 10-Q filed May
among the Company and the 17, 1999 (*)
individuals listed on the
signature page thereto dated
as of April 19, 1999.
10d Employment Offer Letter Company's Form 10-Q filed May
between the Company and Gary 17, 1999 (*)
L. Tessitore dated as of
January 26, 1999.
21 Subsidiaries of the Registrant 51
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
The subsidiaries of Fansteel Inc. and their state or country of incorporation
are as follows:
State or Country
Name of Subsidiary of Incorporation
Custom Technologies Corporation Delaware
Wellman Dynamics (1) Delaware
Escast, Inc. (1) Illinois
Washington Manufacturing (1) Delaware
Fansteel Holdings Incorporated Delaware
Fansteel Sales Corporation, Inc. Barbados
Phoenix Aerospace Corp. Delaware
American Sintered Technologies, Inc. Delaware
Fansteel Schulz Products, Inc. Delaware
Fansteel de Mexico S. de R.L. de C.V.(2) Mexico
(1) These entities are wholly-owned subsidiaries of Custom Technologies
Corporation.
(2) This entity is a wholly-owned subsidiary of Escast, Inc. and Fansteel
Holdings, Inc.