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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, 2000
( ) 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 26, 2001 was $21,792,346.
8,698,858
(Number of shares of common stock outstanding as of February 26, 2001)
Part III incorporates information by reference from the Company's definitive
proxy statement for the annual meeting of shareholders to be held on April 25,
2001.
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) Fansteel Inc. was founded in 1907 as a New York corporation
and reincorporated under the laws of the State of Delaware in
1985.
Executive offices are located at One Tantalum Place, North
Chicago, IL 60064.
(b) Incorporated by reference from the Notes to Consolidated
Financial Statements pages 30 through 44.
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for
use in a variety of markets including metalworking;
automotive; energy (coal mining, oil and gas drilling);
military and commercial aerospace; agricultural and
construction machinery; lawn and garden equipment; medical
equipment; marine; 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, die parts, drilling
components, and other wear resistant parts. The principal
products of the Advanced Structures business segment include
titanium, nickel base aluminum 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 2000 1999 1998
Tungsten carbide
cutting tools Industrial Tools 26% 25% 26%
Nonferrous Advanced
forgings Structures 12 12 16
Investment Industrial Metal
castings Components 11 12 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 pilot production 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.
Material prices in 2000 were down when compared with 1999
prices. However, in the fourth quarter 2000 the Company began
to experience an increase in raw material prices, particularly
for tungsten carbide and titanium. It is unlikely that these
cost increases can be fully passed on to customers. 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) (vii) 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.
(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,
2000 1999
Industrial Tools $ 6,936 $ 5,681
Advanced Structures 31,721 33,213
Industrial Metal Components 9,697 10,918
$ 48,354 $ 49,812
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 89% of the backlog at December 31, 2000
will be shipped before the end of 2001.
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.
(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.
ITEM 1 - BUSINESS (Contd.)
(c) (1)(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 $194,000 to continuing operations in 2000
for costs related to compliance with government environmental
regulations. Capital expenditures resulting from government
regulations in 2000 included $66,000 at the California Drop
Forge facility in Los Angeles, CA for a low-temperature
oxidation system. During 2000, the Company paid $456,000 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.
The Company has also been notified that it is a potentially
responsible party at seven sites owned by third parties. The
Company's participation at four sites is de minimis, and at
the other three sites the Company is either being defended by
its insurance carriers or has meritorious defenses to
liability.
At December 31, 2000 and 1999, the Company had recorded
liabilities of $7.5 million and $7.8 million 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.
The Company discontinued its Metal Products business segment
in 1989. Environmental reclamation and decommissioning is
required for the segment's primary plant located in Muskogee,
Oklahoma that processed certain ores subject to regulations of
several government agencies. The residues from these processed
ores were
ITEM 1 - BUSINESS (Contd.)
(c) (1)(xii) 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 has constructed and expects to operate for at
least ten years a commercial plant to complete the processing
of residues currently contained in storage ponds at the site,
which would materially reduce the amount of radioactive
materials to be disposed of during decommissioning. The
processing plant is designed to extract commercially valuable
materials such as tantalum, scandium and other rare earth and
rare metal elements from the feedstock residues. Pilot
production processing began in late 1999. Production problems
have been encountered and processing at anticipated production
levels has not yet been tested.
The Company, in association with outside consultants,
developed a decommissioning plan for the Muskogee site
including construction of an engineered on-site cell for
containment of contaminated soils that lie beneath and
surround the storage ponds; 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. The proceeding was
terminated in January 2001 upon joint motion of the Company,
NRC, and the Oklahoma Attorney General. The Company requested
that the NRC postpone its review of the plan dealing with
on-site containment while it investigates the possibility of
off-site disposal of the contaminated soils.
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
would be expected to extend over a number of years. Management
believes that a decommissioning plan including on-site
containment would ultimately be acceptable to the appropriate
regulatory authorities, and would be approved, based on
current NRC regulations or provisions of the Nuclear Waste
Policy Act of 1982. However, there can be no assurance that a
plan providing
ITEM 1 - BUSINESS (Contd.)
(c) (1)(xii) for on-site containment would ultimately receive approval.
Based on recent decreases in the cost of off-site disposal,
the Company currently is exploring the possibility of off-site
disposal of some or all of the contaminated soils as an
alternative to on-site containment. There can be no assurance
that off-site disposal would be a cost-effective alternative,
particularly considering the lengthy period required to
complete processing of the residues and the limited number of
licensed disposal sites. The implementation of a
decommissioning plan for the Company's site that includes
off-site disposal of contaminated soils and residues 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. In addition, any
proposal to include off-site disposal in the decommissioning
plan could change the amount of financial assurance. 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.
Due to the problems during pilot production at the processing
plant, the project has experienced delays and increased costs.
Full production is not anticipated until late 2001. For the
year ended December 31, 2000, $6,123,000 was spent for
engineering, equipment, and pilot testing.
The Muskogee processing operation was planned and is expected
to be operated as the most economical and feasible way of
reclaiming and decommissioning the site. It is being accounted
for as an environmental reclamation and decommissioning
activity. The Company estimates on a periodic basis the
revenues that will be generated from the estimated amounts of
rare earth and rare metals that will be extracted and sold
over the life of the operation, and the total operating costs,
including plant construction costs, over the life of the
operation, and provides for any estimated excess of such total
costs over total revenues. The estimated value of materials to
be extracted is based on analyses of samples taken from the
residues and a valuation of such materials using current
market prices. Market prices for some of the materials have
fluctuated significantly during plant construction. There can
be no assurance as to the
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) level of demand for the extracted materials or the actual
prices which may be obtained for them, which could vary over
time. The Company continues to estimate that aggregate
revenues for the sale of materials to be extracted in the
processing operation at the site will approximate total
operating costs, including depreciation, related to residue
processing over the processing period. The Company is
continuing to evaluate the economics of the production
facility as additional information about production capacity
and product quality becomes available.
During 2000, the Company paid $635,000 for discontinued
operations for environmental remediation and decommissioning
for which liabilities had been established in previous years.
At December 31, 2000 and 1999, the Company had recorded
liabilities of $9.1 million and $9.7 million for discontinued
operations, including the estimated net costs of reclaiming
and decommissioning the site during and after the processing
of 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 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 1,371 persons as of December 31, 2000.
(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 0 48,000
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 75% 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 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 2000.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the executive officers of the Company:
Years of Service
In
Position with the Company and With Present
Name Age Principal Occupation Fansteel Position
Gary L. 56 Director; Chairman of the Board, 2 2
Tessitore President and Chief Executive
Officer (a)
R. Michael 47 Vice President and Chief 21 10
McEntee Financial Officer
Michael J. 48 Vice President, General Counsel 15 14
Mocniak and Secretary
(a) Mr. Tessitore has been Chairman of the Board, President and Chief Executive
Officer of the Company since January 26, 1999. From May 1997 until July 1998, he
was President of Claricom, Inc., a privately held telecommunications supplier.
From April 1995 until December 1996, he served as President and Chief Executive
Officer and Director of Yale International, Inc., an industrial products and
food processing firm.
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 26,
2001 was 646. This number includes record holders and
individual participants in security position listings.
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
2000:
First Quarter $ 4 1/16 $ 3 3/16 $ -
Second Quarter 4 3/8 3 1/8 -
Third Quarter 4 7/16 3 1/2 -
Fourth Quarter 4 3/8 2 1/4 -
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 -
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, 2000 are as follows:
Years Ended December 31,
(thousands of dollars
except per share
data) 2000 1999 1998 1997 1996
Operating Results
Net Sales $152,215 $144,394 $153,797 $140,194 $120,834
Income (Loss) from
Continuing
Operations 5,924 3,916 5,406 (2,508) 4,277
Loss from Discon-
tinued Operations - - - (5,856) -
Net Income (Loss) 5,924 3,916 5,406 (8,364) 4,277
Per Weighted Average
Common Shares
Outstanding: (a)
Income (loss)
from continuing
operations .69 .46 .63 (.29) .50
Loss from
discontinued
operations - - - (.68) -
Net income (loss) .69 .46 .63 (.97) .50
Cash dividends - - - - -
Shareholders'
equity 7.25 6.56 5.53 5.46 6.43
Financial Position
Working capital $ 24,729 $ 21,553 $ 27,589 $ 35,126 $ 28,542
Net property, plant
and equipment 20,079 20,318 20,456 14,665 14,306
Total assets 112,488 98,438 88,717 88,832 82,127
Long-term debt 3,646 2,271 2,507 1,600 1,779
Shareholders' equity 62,528 56,417 47,547 46,920 55,284
Other Data
Weighted average
common shares
outstanding 8,629,914 8,598,858 8,598,858 8,598,858 8,598,858
Number of
shareholders (b) 659 727 772 826 812
Number of employees 1,371 1,222 1,283 1,127 1,031
(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 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 - 2000 Compared to 1999
Fansteel Inc.'s net sales for 2000 were $152,215,000 compared with
$144,394,000 in 1999, an increase of $7,821,000, or 5.4%. Increased sales of
tungsten carbide cutting tools to the metalworking industry and sand castings to
the aircraft market accounted for the majority of the improvement.
Operating income for Fansteel in 2000 was $8,869,000 compared with $5,854,000
in 1999, an increase of $3,015,000, or 51.5%. The increase in income was due to
higher sales, lower material costs, and improved manufacturing efficiencies
including lower scrap and rework costs.
Other income for the Company was $117,000 in 2000 compared with other expenses
of $222,000 in 1999. Results in 2000 included a non-recurring gain of $220,000
from the sale of unused land and equipment and recoveries of bad debts of
$235,000. Partially offsetting these increases were higher interest on debt and
less interest on marketable securities.
The Company's net income of $5,924,000 for 2000 represents a 51.3% increase
from 1999 net income of $3,916,000. Net income per share was $.69 in 2000
compared with $.46 in 1999. Results in 1999 included a one-time charge related
to management changes that decreased earnings by $.04 per share.
The Industrial Tools business segment reported net sales of $59,243,000 for
2000, an increase of $4,218,000, or 7.7%, over 1999 sales of $55,025,000. Sales
of tungsten carbide cutting tools to the metalworking market, which benefited
from improved sales representation and service, accounted for the majority of
growth in this business segment. Sales of wear parts increased over the prior
year based on the strength of the downhole domestic oil drilling market and
improved market share for die blanks and bushing wear parts. Despite the fourth
quarter 2000 slowdown in road construction that resulted from poor weather in
the southern United States, construction tool sales for the year posted gains
over 1999. Coal mining tool sales in 2000 declined, as this market has not yet
recovered from the depressed coal production levels in the second half of 1999.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
Operating income for the Industrial Tools business segment in 2000 was
$4,510,000, or 7.6% of sales, compared with operating income in 1999 of
$3,909,000, or 7.1% of sales. The increase of $601,000, or 15.4%, was the result
of the higher sales volume and lower material costs. Material costs did begin to
rise in the fourth quarter 2000 compared to earlier quarters of 2000.
Business segment sales for the Advanced Structures group were $51,596,000, an
improvement of $4,190,000, or 8.8%, over net sales of $47,406,000 in 1999. The
improvement was primarily the result of increased sales of aluminum and
magnesium castings to the aircraft and helicopter markets and sales of magnesium
castings to the oil drilling industry. Sales of machined aircraft parts to the
aircraft industry have increased over the prior year due to the strong aerospace
market. Sales of forgings to the aircraft industry have declined mainly due to
the low order rate in 1999 for this business.
Advanced Structures operating income improved to $2,819,000 (5.5% of net
sales) for 2000 compared with $268,000 (0.6% of net sales) for 1999. Operating
income improved in 2000 primarily as a result of increased sales volume and
production throughput at the sand castings facility. Better equipment
utilization and lower material costs at the forging and machining operations
also improved operating income.
Net sales for the Industrial Metal Components business segment for 2000 were
$41,376,000, a decrease of 1.4% compared with sales of $41,963,000 for the prior
year. Lower demand from the marine and the medium-duty truck industries for
investment castings, particularly in the fourth quarter of 2000, negatively
impacted this business segment. Sales of wire formed products for vending
machines and plumbing products also decreased from 1999. Despite the softening
of sales to the lawn and garden, heavy-duty truck, and recreational vehicle
markets in the last half of the year, powdered metal components posted gains
over the prior year based on the strength of first quarter 2000 sales.
Industrial Metal Components operating income for 2000 was $1,591,000, a
decrease of $625,000 compared with $2,216,000 in 1999. As a percentage of net
sales, operating income for 2000 was 3.8% compared with 5.3% in 1999. The lower
operating income was due to lower sales volume and operating inefficiencies
resulting from lower production volume in the fourth quarter 2000.
At December 31, 2000 the Company's order backlog was $48,354,000, a 2.9%
decrease from the December 31, 1999 order backlog of $49,812,000. The Industrial
Tools backlog increased, as orders for tungsten carbide cutting tools were
strong. While the Advanced Structures backlog declined, orders from the aircraft
industry improved substantially in the last half of 2000. Industrial Metal
Components backlog also declined as orders slowed for investment castings for
the medium-duty truck and marine industries and for wire formed products for
vending machines, plumbing components, and lawn and garden products.
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 (Cont'd)
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 1998 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 slowed from 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 increased 61.3%
over 1998 due to increased road construction and repairs, which resulted in
strong demand for the new pyramid-tipped construction tool and the addition of
new road construction customers. Coal mining tool sales 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 1998. 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
new orders from 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 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 and the new
boiler not being operational until the third quarter of 1999,
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
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 1998. 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.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Outlook
A number of the Company's key markets, such as automotive and truck, marine,
lawn and garden, and hardware, experienced a softening in the fourth quarter
2000 that is anticipated to continue at least through the first half of 2001.
The Company is also beginning to experience raw material price increases for
selected high-use materials such as tungsten carbide and titanium and it is
unlikely that these cost increases can be fully passed on to customers. Despite
these economic conditions, we anticipate modest growth in 2001 in many of our
businesses. Markets, such as aircraft, road construction, and energy, are
expected to remain strong. Improvements in Fansteel's performance will come from
increasing our level of business with new and existing customers through better
service and greater capabilities, improving operating efficiencies and improving
the management of working capital.
Significant efforts will continue in 2001 to start residue processing at the
Muskogee facility, which is part of discontinued operations. Discontinued
operations are expected to generate negative cash flow in 2001, as full
production is not anticipated until late in 2001. Uncertainties, such as
start-up delays, higher than anticipated operating expenses, and changes to end
product prices could have additional negative cash flow impacts in 2001. The
Company is continuing to evaluate the economics of this production facility as
additional information becomes available.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
Liquidity and Capital Resources
Cash and cash equivalents were $20,000 at December 31, 2000 compared with
$17,000 at December 31, 1999. Working capital requirements increased by
$3,176,000 in 2000 related to higher volume and year-end raw material inventory
purchases at favorable prices. In accordance with management's program to expand
the operations of the Company, investments of $2,227,000 were made in capital
equipment. Engineering, equipment, and pilot testing costs of $6,123,000 were
incurred for the processing plant to be used 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.
The Company's line of credit was increased to $33 million on May 20, 1999. As
of December 31, 2000, $1.6 million was borrowed from the lines of credit and
$7.8 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 its line of credit during 2001 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, other than the
$1.6 million from the revolving line of credit, is related to development loans
obtained from various states. In October 2000, the Company received a $125,000
development loan from the State of Iowa with an interest rate of 6.0% for the
modernization of the sand casting facility.
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 located in Muskogee, Oklahoma that processed certain ores 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 has constructed and
expects to operate for at least ten years a commercial plant to complete the
processing of residues currently contained in storage ponds at the site, which
would materially reduce the amount of radioactive materials to be disposed of
during decommissioning. The processing plant is designed to extract commercially
valuable materials such as tantalum, scandium, and other rare earth and rare
metal elements from the feedstock residues. Pilot production processing began in
late 1999. Production problems have been encountered and processing at
anticipated production levels has not yet been tested.
The Company, in association with outside consultants, developed a
decommissioning plan for the Muskogee site including construction of an
engineered on-site cell for containment of contaminated soils that lie beneath
and surround the storage ponds; consolidation and stabilization of the
contaminated soils in the containment cell; and the performance of required
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
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. The proceeding was terminated in
January 2001 upon joint motion of the Company, NRC, and the Oklahoma Attorney
General. The Company requested that the NRC postpone its review of the plan
dealing with on-site containment while it investigates the possibility of
off-site disposal of the contaminated soils.
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 would be
expected to extend over a number of years. Management believes that a
decommissioning plan including on-site containment would ultimately be
acceptable to the appropriate regulatory authorities, and would be approved,
based on current NRC regulations or provisions of the Nuclear Waste Policy Act
of 1982. However, there can be no assurance that a plan providing for on-site
containment would ultimately receive approval. Based on recent decreases in the
cost of off-site disposal, the Company currently is exploring the possibility of
off-site disposal of some or all of the contaminated soils as an alternative to
on-site containment. There can be no assurance that off-site disposal would be a
cost-effective alternative, particularly considering the lengthy period required
to complete processing of the residues and the limited number of licensed
disposal sites. The implementation of a decommissioning plan for the Company's
site that includes off-site disposal of contaminated soils and residues 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. In addition, any proposal to include off-site
disposal in the decommissioning plan could change the amount of financial
assurance. 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
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
reduced, provided the Company can demonstrate the sufficiency of the remaining
funds or surety to assure the completion of decommissioning.
Due to the problems during pilot production at the processing plant, the
project has experienced delays and increased costs. Full production is not
anticipated until late 2001. For the year ended December 31, 2000, $6,123,000
was spent for engineering, equipment, and pilot testing.
The Muskogee processing operation was planned and is expected to be operated
as the most economical and feasible way of reclaiming and decommissioning the
site. It is being accounted for as an environmental reclamation and
decommissioning activity. The Company estimates on a periodic basis the revenues
that will be generated from the estimated amounts of rare earth and rare metals
that will be extracted and sold over the life of the operation, and the total
operating costs, including plant construction costs, over the life of the
operation, and provides for any estimated excess of such total costs over total
revenues. The estimated value of materials to be extracted is based on analyses
of samples taken from the residues and a valuation of such materials using
current market prices. Market prices for some of the materials have fluctuated
significantly during plant construction. There can be no assurance as to the
level of demand for the extracted materials or the actual prices that may be
obtained for them, which could vary over time. The Company continues to estimate
that aggregate revenues for the sale of materials to be extracted in the
processing operation at the site will approximate total operating costs,
including depreciation, related to residue processing over the processing
period. The Company is continuing to evaluate the economics of the production
facility as additional information about production capacity and product quality
becomes available.
At December 31, 2000 and 1999, the Company had recorded liabilities of $9.1
million and $9.7 million for discontinued operations, including the estimated
net costs of reclaiming and decommissioning the site during and after the
processing of 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.
Expenditures for environmental reclamation and decommissioning for
discontinued operations were $635,000, $100,000, and $1,009,000 in 2000, 1999,
and 1998, respectively. Costs 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, 2000 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.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Cont'd)
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 seven sites owned by third parties. The Company's participation at four sites
is de minimis, and at the other three sites the Company is either being defended
by its insurance carriers or has meritorious defenses to liability.
At December 31, 2000 and 1999, the Company had recorded liabilities of $7.5
million and $7.8 million 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.
ITEM 7a- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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,
2000 and December 31, 1999 consisted of the following:
Interest Rate Sensitivity at December 31, 2000
Long-Term Debt Including Current Portion
(thousands of dollars except percentages)
Fixed Variable
Average Average
Cash Interest Cash Interest
Flow Rate Flow Rate
2001 $ 167 4.44% $ 100 5.17%
2002 140 4.78% 1,700 6.03%
2003 121 4.75% 100 5.09%
2004 117 4.93% 100 5.12%
2005 116 5.08% 100 5.20%
Thereafter 627 5.11% 525 5.20%
Total $1,288 4.93% $2,625 5.73%
Fair Market Value $1,246 $2,625
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
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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, 2000 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fansteel Inc. at
December 31, 2000 and 1999, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
2000 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 18, 2001
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31,
2000 1999 1998
Net Sales $152,214,699 $144,394,456 $153,796,547
Cost and Expenses
Cost of products sold 123,128,455 119,817,193 127,595,846
Selling, general and 20,217,701 18,723,565 17,881,015
administrative 143,346,156 138,540,758 145,476,861
Operating Income 8,868,543 5,853,698 8,319,686
Other Income (Expense)
Interest income on investments - 14,935 438,276
Interest expense (137,334) (108,703) (102,393)
Other 254,250 (128,401) (17,212)
116,916 (222,169) 318,671
Income Before Income Taxes 8,985,459 5,631,529 8,638,357
Income Tax Provision 3,061,000 1,716,000 3,232,000
Net Income $ 5,924,459 $ 3,915,529 $ 5,406,357
Net Income Per Weighted Average
Common Shares Outstanding (a) $.69 $.46 $.63
(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,
2000 1999
ASSETS
Current Assets
Cash and cash equivalents $ 19,793 $ 16,516
Accounts receivable, less allowance of
$298,000 in 2000 and $299,000 in 1999 23,118,698 18,885,942
Inventories
Raw material and supplies 4,811,195 4,396,715
Work-in-process 18,789,057 16,096,014
Finished goods 7,868,894 7,350,692
31,469,146 27,843,421
Less:
Reserve to state certain inventories at
LIFO cost 6,674,530 6,896,999
Total inventories 24,794,616 20,946,422
Other assets - current
Deferred income taxes 1,768,470 2,339,890
Other 998,776 1,030,489
Total Current Assets 50,700,353 43,219,259
Net Assets of Discontinued Operations 30,198,580 24,075,586
Property, Plant and Equipment
Land 1,872,631 1,911,631
Buildings 13,046,957 13,046,957
Machinery and equipment 59,659,748 57,602,970
74,579,336 72,561,558
Less accumulated depreciation 54,500,736 52,243,537
Net Property, Plant and Equipment 20,078,600 20,318,021
Other Assets
Prepaid pension asset 9,007,480 8,087,825
Goodwill, net of accumulated amortization
of$1,017,000 in 2000 and $787,000 in 1999 2,437,364 2,667,668
Other 65,551 69,825
Total Other Assets 11,510,395 10,825,318
$112,487,928 $98,438,184
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31,
2000 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,759,578 $ 9,415,399
Accrued liabilities 11,103,324 11,756,110
Income taxes 841,449 229,311
Current maturities of long-term debt 267,325 265,915
Total Current Liabilities 25,971,676 21,666,735
Long-term Debt 3,646,149 2,270,831
Other Liabilities
Environmental remediation 15,151,000 15,337,000
Deferred income taxes 5,191,013 2,746,682
Total Other Liabilities 20,342,013 18,083,682
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 21,747,145 21,747,145
Capital in excess of par value 316,000 316,000
Unamortized cost of restricted stock awards (202,470) (392,136)
Retained earnings 40,669,620 34,745,161
Other comprehensive income
Foreign currency translation (2,205) 766
Total other comprehensive income (2,205) 766
Total Shareholders' Equity 62,528,090 56,416,936
$112,487,928 $98,438,184
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,
2000 1999 1998
Cash Flows From Operating
Activities
Net income $ 5,924,459 $ 3,915,529 $ 5,406,357
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,576,988 2,482,012 2,257,476
Amortization of restricted
stock awards 189,666 173,864 -
Net pension (credit) (919,655) (424,150) (170,463)
Deferred income tax charge 3,015,751 1,101,096 1,228,638
Gain from disposals of
property, plant and equipment (220,352) (9,481) (143,798)
Changes in assets and
liabilities:
Decrease in marketable
securities - - 41,196
(Increase) decrease in
accounts receivable (4,232,756) 3,262,515 (365,585)
(Increase) decrease in
inventories (3,848,194) 1,495,095 (2,977,800)
Decrease in other assets -
current 31,713 295,003 250,841
Increase (decrease)in
accounts payable and
accrued liabilities 3,502,422 (1,054,921) (2,759,902)
Increase (decrease) in income
taxes payable 612,138 (478,461) 206,027
Decrease (increase) in other
assets 4,274 14,974 (43,078)
Net cash provided by
operating activities 6,636,454 10,773,075 2,929,909
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31,
2000 1999 1998
Cash Flows From Investing
Activities
Payments for acquisitions $ - $ - $(3,779,307)
Proceeds from disposition of
marketable securities - - 5,000,000
Proceeds from sale of assets
held for sale - - 2,442,221
Proceeds from sale of property,
plant and equipment 339,654 16,000 266,537
Capital expenditures (2,226,565) (2,120,626) (4,161,663)
Increase in net assets of
discontinued operations-
design, engineering and
equipment for processing
plant (6,122,994) (10,407,190) (9,594,954)
Net cash used in investing
activities (8,009,905) (12,511,816) (9,827,166)
Cash Flows From Financing
Activities
Payments on long-term debt (348,272) (306,578) (334,137)
Proceeds from long-term debt 1,725,000 30,000 1,225,000
Net cash provided by (used
in) financing activities 1,376,728 (276,578) 890,863
Net Increase (Decrease) in Cash
and Cash Equivalents 3,277 (2,015,319) (6,006,394)
Cash And Cash Equivalents at
Beginning of Year 16,516 2,031,835 8,038,229
Cash And Cash Equivalents at End
of Year $ 19,793 $ 16,516 $ 2,031,835
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Capital Unamor- Accumulated
in tized Cost Other
Excess of Restric Compre-
For the Years Ended Common of Par -ted Stock Retained hensive
December 31, Stock Value Awards Earnings Income Total
1998
Balance at January 1 $21,497,145 $ - $ - $25,423,275 $ - $46,920,420
Net income 5,406,357 5,406,357
Other comprehensive income
Minimum pension liability
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 liability
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
2000
Net income 5,924,459 5,924,459
Other comprehensive income
Foreign currency trans-
lation adjustment (2,971) (2,971)
Comprehensive income 5,921,488
Amortization of restricted
stock 189,666 189,666
Balance at December 31 $21,747,145 $316,000 $(202,470) $40,669,620 $ (2,205) $62,528,090
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
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, 2000 and 1999, the
Company had not purchased any investments with a maturity of three months or
less.
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 87% and 85% of inventories at current cost at December 31, 2000
and 1999, 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 $2,437,000 at December 31, 2000, from the acquisition of American
Sintered Technologies, Inc. on July 31, 1996, represents the excess 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 2000, 1999 and
1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
The Company periodically reviews long lived assets to determine if there are
indicators of impairment. When indicators of impairment are present, the Company
evaluates the carrying value of the assets in relation to the operating
performance and future undiscounted cash flows for the underlying assets. The
Company adjusts the net book value of the underlying assets if the sum of the
expected future cash flows is less than book value.
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.
The Company classifies distribution costs, including shipping and handling
costs, in cost of sales.
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 transactions 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 was
amended in June 2000, by Statement No. 138, "Accounting for Certain Hedging
Activities." The Company will adopt Statement No. 133, as amended, effective
January 1, 2001. 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 2000 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 (Cont'd)
The following table sets forth the computation of basic and diluted earnings
per share:
2000 1999 1998
Numerator:
Net income $ 5,924,459 $ 3,915,529 $ 5,406,357
Denominator:
Denominator for basic
earnings per share -
weighted-average shares 8,629,914 8,598,858 8,598,858
Effect of dilutive securities
Employee stock options 263 - -
Employee restricted stock - 10,672 -
Dilutive potential common
shares 8,630,177 8,609,530 8,598,858
Basic earnings per share $.69 $.46 $.63
Diluted earnings per share $.69 $.46 $.63
Options to purchase shares of common stock were outstanding during 2000 and
1999 (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, 2000 and 1999 include the following:
2000 1999
Payroll and related costs $ 4,621,102 $ 4,033,931
Taxes, other than income 230,382 393,002
Profit sharing 952,911 845,958
Insurance 2,125,046 2,634,858
Environmental 1,865,329 2,764,366
Professional fees 358,906 423,383
Other 949,648 660,612
$ 11,103,324 $ 11,756,110
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 located in Muskogee, Oklahoma that processed certain ores 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 has constructed and
expects to operate for at least ten years a commercial plant to complete the
processing of residues currently contained in storage ponds at the site, which
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
would materially reduce the amount of radioactive materials to be disposed of
during decommissioning. The processing plant is designed to extract commercially
valuable materials such as tantalum, scandium and other rare earth and rare
metal elements from the feedstock residues. Pilot production processing began in
late 1999. Production problems have been encountered and processing at
anticipated production levels has not yet been tested.
The Company, in association with outside consultants, developed a
decommissioning plan for the Muskogee site including construction of an
engineered on-site cell for containment of contaminated soils that lie beneath
and surround the storage ponds; 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. The proceeding was terminated in
January 2001 upon joint motion of the Company, NRC, and the Oklahoma Attorney
General. The Company requested that the NRC postpone its review of the plan
dealing with on-site containment while it investigates the possibility of
off-site disposal of the contaminated soils.
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 would be
expected to extend over a number of years. Management believes that a
decommissioning plan including on-site containment would ultimately be
acceptable to the appropriate regulatory authorities, and would be approved,
based on current NRC regulations or provisions of the Nuclear Waste Policy Act
of 1982. However, there can be no assurance that a plan providing for on-site
containment would ultimately receive approval. Based on recent decreases in the
cost of off-site disposal, the Company currently is exploring the possibility of
off-site disposal of some or all of the contaminated soils as an alternative to
on-site containment. There can be no assurance that off-site disposal would be a
cost-effective alternative, particularly considering the lengthy period required
to complete processing of the residues and the limited number of licensed
disposal sites. The implementation of a decommissioning plan for the Company's
site that includes off-site disposal of contaminated soils and residues 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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. In addition, any proposal to include
off-site disposal in the decommissioning plan could change the amount of
financial assurance. 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.
Due to the problems during pilot production at the processing plant, the
project has experienced delays and increased costs. Full production is not
anticipated until late 2001. For the year ended December 31, 2000, $6,123,000
was spent for engineering, equipment, and pilot testing.
The net assets of discontinued operations, substantially all of which relate to
the Muskogee residue processing operation, at December 31, 2000 and 1999 include
the following (in thousands of dollars):
2000 1999
Land $ 107 $ 107
Building 6,155 6,155
Machinery & equipment 13,707 13,650
19,969 19,912
Less accumulated depreciation 4,805 4,805
Net fixed assets 15,164 15,107
Design and engineering costs
for processing plant 15,035 8,969
$ 30,199 $ 24,076
The Muskogee processing operation was planned and is expected to be
operated as the most economical and feasible way of reclaiming and
decommissioning the site. It is being accounted for as an environmental
reclamation and decommissioning activity. The Company estimates on a periodic
basis the revenues that will be generated from the estimated amounts of rare
earth and rare metals that will be extracted and sold over the life of the
operation, and the total operating costs, including plant construction costs,
over the life of the operation, and provides for any estimated excess of such
total costs over total revenues. The estimated value of materials to be
extracted is based on analyses of samples taken from the residues and a
valuation of such materials using current market prices. Market prices for some
of the materials have fluctuated significantly during plant construction. 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
Company continues to estimate that aggregate revenues for the sale of materials
to be extracted in the processing operation at the site will approximate total
operating costs, including depreciation, related to residue processing over the
processing period. The Company is continuing to evaluate the economics of the
production facility as additional information about production capacity and
product quality becomes available.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
At December 31, 2000 and 1999, the Company had recorded liabilities of $9.1
million and $9.7 million for discontinued operations, including the estimated
net costs of reclaiming and decommissioning the site during and after the
processing of 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.
Expenditures for environmental reclamation and decommissioning for
discontinued operations were $635,000, $100,000, and $1,009,000 in 2000, 1999,
and 1998, respectively. Costs 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, 2000 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.
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 seven sites owned by third parties. The Company's participation at four sites
is de minimis, and at the other three sites the Company is either being defended
by its insurance carriers or has meritorious defenses to liability.
At December 31, 2000 and 1999, the Company had recorded liabilities of $7.5
million and $7.8 million 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 (Cont'd)
5. Debt
Long-term debt at December 31, 2000 and 1999 consisted of the following:
2000 1999
Revolving line of credit through
Northern Trust with a weighted
average rate of interest of 7.27% $ 1,600,000 $ -
Mississippi Business Finance
Corporation 5.487% Note, due 2011 895,000 950,000
Loans from various Pennsylvania
Economic Agencies with interest rates
ranging from 2.0% to 5.0%, due from
2001 to 2010 1,270,817 1,496,424
Loans from various Iowa Economic
Agencies with interest rates ranging
from 0.0% to 6.0%, due 2004 to 2005 147,657 90,322
3,913,474 2,536,746
Less current maturities 267,325 265,915
Total long-term debt $ 3,646,149 $ 2,270,831
The above loans are collateralized by machinery and equipment with a net book
value of $1,018,000.
The aggregate maturities for long-term debt for the five years after December
31, 2000 are $267,000, $240,000, $221,000, $217,000, and $216,000, respectively.
Interest paid on debt for the years ended December 31, 2000, 1999 and 1998
amounted to $137,000, $109,000, and $107,000, respectively.
The fair value of the Company's debt at December 31, 2000 and 1999 was
$3,871,000 and $2,478,000, 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, 2001. As
of December 31, 2000, $1.6 million was borrowed from the lines of credit and
$7.8 million was being used for letters of credit needed for funding assurance
related to environmental issues, self-insurance policies and development loans.
The interest rate on the line of credit is based on the Federal fund rate, which
was 5.41 at December 31, 2000, plus 75 basis points.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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.
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, 2000 and 1999 are as follows:
2000 1999
Deferred tax assets - current:
Environmental costs $ 233,918 $ 463,869
Self-insurance accruals 498,307 734,480
Vacation accruals 397,702 381,222
State income taxes 256,596 350,081
Other 381,947 410,238
$ 1,768,470 $ 2,339,890
Deferred tax assets (liabilities) -
non-current:
Environmental costs $ 726,865 $ 1,959,991
Pensions (2,721,752) (2,010,015)
Tax depreciation in excess of book
depreciation (1,075,413) (726,176)
Other 177,312 160,107
(2,892,988) (616,093)
State income tax net operating loss
carryforwards 267,189 321,832
State income taxes (563,574) (139,421)
(296,385) 182,411
Valuation allowances (2,001,640) (2,313,000)
$ (5,191,013) $ (2,746,682)
At December 31, 2000 and 1999, the Company had potential state income tax
benefits from net operating loss carryforwards that expire in various years
through 2012. Valuation allowances include $192,140 and $233,500 at December 31,
2000 and 1999 for net operating loss carryforwards not anticipated to be
realized before expiration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
Details of the provision (benefit) for income taxes in the consolidated
statement of operations are as follows:
2000 1999 1998
Current taxes:
Federal $ 178,000 $ 549,000 $ 1,662,000
Foreign 57,000 50,000 -
State (41,000) 106,000 341,000
194,000 705,000 2,003,000
Deferred income tax
charge (credit):
Federal 2,755,000 1,234,000 1,196,000
State 531,000 269,000 33,000
Valuation allowances (419,000) (492,000) -
2,867,000 1,011,000 1,229,000
Total $ 3,061,000 $ 1,716,000 $ 3,232,000
The deferred income tax charge in 2000, 1999, and 1998 resulted primarily from
payments for certain environmental costs accrued in prior years, from tax
depreciation exceeding book depreciation, and from timing of the deductions for
certain employee fringe benefits.
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:
2000 1999 1998
Income tax provision at
statutory rate $ 3,055,000 $ 1,915,000 $ 2,937,000
Add:
State income taxes, net of
federal income tax provision 323,000 248,000 338,000
Change in valuation
allowances (353,000) (457,000) (91,000)
Other, net 36,000 10,000 48,000
Total income tax provision $ 3,061,000 $ 1,716,000 $ 3,232,000
Income taxes paid for each of the three years in the period ended December 31,
2000 amounted to $214,000, $1,364,000, and $2,267,000, respectively. Income tax
refunds in the three year period ended December 31, 2000 amounted to $840,000,
$318,000 and $469,000, respectively.
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 $1,367,000, $1,141,000, and
$600,000 in 2000, 1999, and 1998, respectively.
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
liabilities. In 2000 and 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. In
1998, a minimum pension liability adjustment of $4,778,714, net of tax benefit,
was recorded as a reduction to shareholders' equity.
The net pension expense (credit) in 2000 and 1999 is comprised of:
2000 1999
Change in benefit obligation:
Benefit obligation at beginning of year $ 42,473,473 $ 41,818,431
Service cost 430,391 426,403
Interest cost 3,126,988 2,957,183
Amendments - 97,887
Actuarial loss 477,808 792,206
Benefits paid (3,703,463) (3,618,637)
Benefit obligation at end of the year 42,805,197 42,473,473
Change in plan assets:
Fair market value of plan assets at
beginning of year 44,031,238 40,532,893
Actual return on plan assets 1,592,772 6,003,359
Employer contribution 1,409,827 1,113,623
Benefits paid (3,703,463) (3,618,637)
Fair value of plan assets at end of year 43,330,374 44,031,238
Funded status 525,177 1,557,765
Unrecognized actuarial loss 7,698,233 5,708,005
Unrecognized transition asset (19,288) (27,000)
Unrecognized prior service cost 663,765 793,420
Net amount recognized $ 8,867,887 $ 8,032,190
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ 9,007,480 $ 8,087,825
Accrued benefit liability (139,593) (55,635)
Net amount recognized $ 8,867,887 $ 8,032,190
2000 1999
Weighted-average assumptions of December 31
Discount rate 7.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.50% 3.50%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
2000 1999
Components of net periodic benefit cost:
Service cost $ 430,391 $ 426,403
Interest cost 3,126,988 2,957,183
Expected return on plan assets (3,450,155) (3,155,113)
Amortization of prior service cost 129,655 123,192
Amortization of transition asset (7,712) (57,163)
Recognized actuarial loss 308,093 427,903
Net periodic benefit cost $ 537,260 $ 722,405
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 79%
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 2000, 1999, and 1998 were $1,465,000, $1,305,000, and
$1,519,000, 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, 2000, 1999 and 1998 were $40,000, $40,000, and
$49,000, 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, machined components, and
aluminum and magnesium sand castings.
Industrial Metal Components:
Special wire products, powdered metal components, and investment castings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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,
2000, 1999 and 1998 is as follows:
2000 1999 1998
NET SALES:
INDUSTRIAL TOOLS
Sales $ 59,245,635 $ 55,034,771 $ 58,442,892
Intersegment sales (3,035) (9,344) (5,582)
59,242,600 55,025,427 58,437,310
ADVANCED STRUCTURES
Sales 51,595,938 47,405,656 54,512,070
Intersegment sales - - -
51,595,938 47,405,656 54,512,070
INDUSTRIAL METAL COMPONENTS
Sales 41,409,772 42,011,710 40,860,593
Intersegment sales (33,611) (48,337) (13,426)
41,376,161 41,963,373 40,847,167
TOTAL NET SALES $152,214,699 $144,394,456 $153,796,547
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 4,509,591 $ 3,908,676 $ 3,895,736
ADVANCED STRUCTURES 2,818,910 267,632 2,639,782
INDUSTRIAL METAL
COMPONENTS 1,590,619 2,216,056 1,840,208
CORPORATE (50,577) (538,666) (56,040)
TOTAL OPERATING INCOME
(LOSS) $ 8,868,543 $ 5,853,698 $ 8,319,686
Intersegment sales are accounted for at prices equivalent to the competitive
market prices for similar products.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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 2000 1999 1998
Tungsten carbide
cutting tools Industrial Tools 26% 25% 26%
Nonferrous forgings Advanced Structures 12% 12% 16%
Investment castings Industrial Metal 11% 12% 10%
Components
The identifiable assets, depreciation and capital expenditures for the years
ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998
Identifiable assets:
Industrial Tools $ 21,652,966 $19,678,862 $21,853,599
Advanced Structures 28,252,994 23,121,801 25,560,655
Industrial Metal Components 19,829,932 19,020,071 20,429,505
Corporate/Discontinued 42,752,036 36,617,450 20,873,613
Total assets $112,487,928 $98,438,184 $88,717,372
Depreciation and amortization:
Industrial Tools $ 662,782 $ 686,365 $ 674,904
Advanced Structures 744,749 669,985 623,556
Industrial Metal Components 1,169,457 1,125,662 959,016
Corporate/Discontinued - - -
Total depreciation and
amortization $ 2,576,988 $ 2,482,012 $ 2,257,476
Capital expenditures:
Industrial Tools $ 421,563 $ 315,450 $ 1,866,258
Advanced Structures 890,240 1,143,943 1,239,232
Industrial Metal Components 914,762 661,233 4,835,480
Corporate/Discontinued - - -
Total capital expenditures $ 2,226,565 $ 2,120,626 $ 7,940,970
Capital expenditures for the Industrial Metal Components segment include
$3,779,000 for the acquisition of Fansteel de Mexico in 1998.
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, 2000
were $682,000, including $436,000 in 2001, $157,000 in 2002, $47,000 in 2003,
$26,000 in 2004, and $16,000 in 2005 and thereafter. Rental expense was
$1,121,000 in 2000, $1,589,000 in 1999, and $1,455,000 in 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
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 $3,779,000. 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 (Intercast) Inc. subsidiary, which is in
the Industrial Metal Components business segment.
11. Stock-Based Compensation
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 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, 2000, 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
Granted 76,500 3.61
Forfeited (53,233) 6.94
Outstanding at December 31, 2000 468,867 6.08
Options Exercisable at:
December 31, 1998 - -
December 31, 1999 34,367 9.19
December 31, 2000 107,333 6.68
December 31, 2001 130,166 6.14
December 31, 2002 99,167 5.19
December 31, 2003 97,834 5.18
The weighted average remaining contractual life of the options exercisable at
December 31, 2000 is 7.8 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont'd)
The fair value of the Company stock options estimated on the date of grant
using the Black Scholes option-pricing model was $2.08, $2.49 and $3.90 for
2000, 1999 and 1998, respectively, with the following assumptions:
2000 1999 1998
Expected life in years 8 8 8
Interest rate 6.56% 5.71% 5.71%
Volatility 40.40% 24.40% 24.40%
Dividend Yield 0.00% 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 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 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 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 123, the Company's net earnings and earnings
per share would have been reduced to pro forma amounts indicated below:
2000 1999 1998
Net Earnings
As Reported $5,924,459 $3,915,529 $5,406,357
Pro Forma 5,713,338 3,721,950 5,329,072
Net Earnings Per Share
As Reported $.69 $.46 $.63
Pro Forma .66 .43 .62
Pro forma diluted income per common share has not been presented for 2000,
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 was $5.66. Compensation expense for restricted
stock was $189,666 and $173,864 in 2000 and 1999, respectively.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except per
share data) Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2000
Net sales $ 39,498 $ 38,555 $ 38,972 $ 35,190
Gross profit 7,630 7,418 7,666 6,372
Net income 1,712 1,614 1,609 989
Net income per weighted average
common shares outstanding (a) .20 .19 .19 .11
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
(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 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 executive officers is
included in Part I page 11.
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 25, 2001.
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 25, 2001.
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 25, 2001.
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 25, 2001.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
Form 10-K
(a)(1) Index to Consolidated Financial Statements: Page
Report of Independent Auditors. 23
Consolidated Statement of Income for each of the
three years in the period ended December 31, 2000. 24
Consolidated Balance Sheet at December 31, 2000 and
1999. 25-26
Consolidated Statement of Cash Flows for each of the
three years in the period ended December 31, 2000. 27-28
Consolidated Statement of Shareholders' Equity for
each of the three years in the period ended December
31, 2000. 29
Notes to Consolidated Financial Statements. 30-44
Summary of Quarterly Results of Operations for the
years ended December 31, 2000 and 1999. 45
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule for each
of the three years ended December 31, 2000:
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 4 - Instruments defining the rights of
security holders, including indentures
Exhibit 10 - Material contracts (management
contract, compensation plans or
arrangements)
Exhibit 21 - 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, 2000.
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 12/31/00 $ 299,166 $ 4,855 $ 5,832 $ 298,189
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
(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: 03/15/01 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
Director; Chairman of the
Board, President and
/s/Gary L. Tessitore Chief Executive Officer 03/15/01
Gary L. Tessitore
Vice President and Chief
/s/R. Michael McEntee Financial Officer 03/15/01
R. Michael McEntee
/s/Edward P. Evans Director 03/22/01
Edward P. Evans
/s/R. S. Evans Director 03/17/01
R. S. Evans
/s/Thomas M. Evans, Jr. Director 03/20/01
Thomas M. Evans, Jr.
/s/Peter J. Kalis Director 03/18/01
Peter J. Kalis
/s/Jack S. Petrik Director 03/16/01
Jack S. Petrik
/s/Donald C. Roof Director 03/20/01
Donald C. Roof
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 amended 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.