FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1997
( ) 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 (IRS Employer
incorporation or organization) Identification No.)
Number One Tantalum Place, North Chicago, IL 60064
(Address of principal executive offices) (Zip Code)
(847) 689-4900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
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.
(X) Yes ( ) No
8,598,858
(Number of shares of $2.50 par value common stock outstanding
as of October 31, 1997)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1997 1996
ASSETS (Unaudited) *
Current Assets
Cash and cash equivalents (including securities
purchased under agreement to resell of
$7,391,000 in 1997 and $1,941,000 in 1996) $ 8,547,172 $ 3,588,290
Marketable securities 297,318 5,173,804
Accounts receivable - net 19,835,339 18,700,927
Inventories
Raw material and supplies 3,959,820 4,715,341
Work-in-process 14,609,335 13,461,036
Finished goods 7,002,714 6,423,995
25,571,869 24,600,372
Less reserve to state certain
inventories at LIFO cost 7,083,466 7,083,466
18,488,403 17,516,906
Other assets - current
Deferred income taxes 2,359,184 1,681,398
Other 1,698,626 1,370,062
Total current assets 51,226,042 48,031,387
Net Assets of Discontinued Operations 3,477,375 2,532,431
Property, Plant and Equipment
Land 1,421,641 1,421,641
Buildings 10,677,989 10,559,942
Machinery and equipment 51,093,283 49,561,052
63,192,913 61,542,635
Less accumulated depreciation 48,607,008 47,236,179
14,585,905 14,306,456
Other Assets
Marketable securities 4,995,261 4,989,159
Prepaid pension asset 7,593,107 7,697,238
Deferred income taxes - 30,277
Property held for sale 1,200,375 1,128,851
Goodwill 3,185,852 3,358,580
Other 42,087 53,063
17,016,682 17,257,168
Total Assets $86,306,004 $82,127,442
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 3
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET (Cont'd.)
September 30, December 31,
1997 1996
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 9,986,511 $ 9,913,437
Accrued liabilities 10,559,888 8,650,505
Accrued income taxes 379,748 590,093
Current maturities of long-term debt 334,994 335,522
Total current liabilities 21,261,141 19,489,557
Long-term Debt 1,643,818 1,779,057
Other Liabilities
Discontinued operations 3,500,000 3,500,000
Deferred income taxes 2,564,002 2,074,811
Total other liabilities 6,064,002 5,574,811
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 8,598,858 shares 21,497,145 21,497,145
Retained earnings 35,839,898 33,786,872
Total shareholders' equity 57,337,043 55,284,017
Total Liabilities and Shareholders' Equity $86,306,004 $82,127,442
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF INCOME Page 4
(UNAUDITED)
For the Three Months Ended
September 30, September 30,
1997 1996
Net sales $ 34,039,581 $ 30,807,845
Costs and expenses
Cost of products sold 31,108,688 25,464,472
Selling, general and administrative 4,191,015 3,628,099
35,299,703 29,092,571
Operating (loss) income (1,260,122) 1,715,274
Other income (expense)
Interest income on investments 183,058 201,375
Interest expense (21,912) (11,892)
Other (105,247) (37,785)
55,899 151,698
(Loss) Income before income taxes (1,204,223) 1,866,972
Income tax (benefit) provision (364,000) 753,000
Net (loss) income $ (840,223) $ 1,113,972
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Net (loss) income per share
(on average shares outstanding) ($0.10) $0.13
Dividends per common share $ - -
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF INCOME Page 5
(UNAUDITED)
For the Nine Months Ended
September 30, September 30,
1997 1996
Net sales $103,595,100 $ 90,384,753
Costs and expenses
Cost of products sold 87,992,339 74,792,678
Selling, general and administrative 12,358,452 10,747,264
100,350,791 85,539,942
Operating income 3,244,309 4,844,811
Other income (expense)
Interest income on investments 512,194 697,009
Interest expense (67,417) (13,938)
Other (122,060) ( 85,157)
322,717 597,914
Income before income taxes 3,567,026 5,442,725
Income tax provision 1,514,000 2,170,000
Net income $ 2,053,026 $ 3,272,725
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Net income per share
(on average shares outstanding) $0.24 $0.38
Dividends per common share $ - $ -
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS Page 6
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 2,053,026 $ 3,272,725
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 1,638,426 1,390,361
Net pension charge 104,131 11,607
Deferred income tax (credit) charge (158,318) 526,905
Gain on sale of marketable securities - (2,899)
Changes in assets and liabilities:
(Increase) in marketable securities (129,616) (131,057)
(Increase) in accounts receivable (685,718) (4,310,354)
(Increase) in inventories (136,997) (2,188,215)
(Increase) in other assets - current (318,872) (356,879)
Increase in accounts payable and accruals 933,912 824,244
(Decrease) in income taxes payable (210,345) (18,237)
Decrease (increase) in other assets 636,544 (22,000)
Net cash provided by (used in) operating
activities 3,726,173 (1,003,799)
Cash flows from investing activities:
Acquisitions (Schulz in 1997 and American
Sintered Technologies in 1996):
Accounts receivable (448,694) (820,490)
Inventory (834,500) (345,363)
Other assets - current (9,692) (42,077)
Property, plant and equipment (559,054) (3,884,000)
Goodwill - (3,454,540)
Accounts payable and accrued liabilities 360,091 667,761
Debt - 954,094
Total acquisitions (Schulz in 1997 and
American Sintered Technologies in 1996) (1,491,849) (6,924,615)
Additions to property, plant and equipment (1,188,893) (1,565,789)
Proceeds from sale of assets held for sale 2,800 597,255
Design and engineering for processing plant (944,944) (696,939)
Proceeds from disposition of marketable
securities 5,000,000 14,753,135
Investment in marketable securities - (9,100,000)
Net cash provided by (used in) investing
activities 1,377,114 (2,936,953)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS (Cont'd.) Page 7
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 1996
Increase (decrease) in
cash and cash equivalents
Cash flows from financing activities:
Proceeds from long-term debt 143,404 758,396
Payments of long-term debt (279,171) (108,599)
Principal payments for capital leases (8,638) (82,212)
Dividends paid - -
Net cash (used in) provided by
financing activities (144,405) 567,585
Net increase (decrease) in cash and cash
equivalents 4,958,882 (3,373,167)
Cash and cash equivalents at beginning of period 3,588,290 6,838,960
Cash and cash equivalents at September 30 $ 8,547,172 $ 3,465,793
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 8
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at September 30, 1997, the consolidated
statements of income for the three months and nine months ended September 30,
1997 and 1996, and the consolidated statements of cash flows for the nine months
ended September 30, 1997 and 1996, are unaudited, but include all adjustments
(consisting only of normal and recurring accruals) which the Company considers
necessary for fair presentation.
The accompanying consolidated financial statements do not include all
disclosures normally provided in annual financial statements and, therefore,
should be read in conjunction with the year-end financial statements.
The third quarter 1997 results included a charge to cost of sales of
$2,705,000, related primarily to the write-off of non-salable inventories at the
sand casting operation within the Metal Fabrications business segment. Third
quarter results also included a charge to selling expenses of $95,000 to
terminate sales agent contracts for development parts which will not be put into
production at the sand casting operation. Net of tax benefits, these charges
totaled $1,818,000 or $.21 per share.
The Company determines its securities to be "held-to-maturity" or "available-
for-sale" securities, depending upon the applicable security. Marketable
securities with a maturity date of one year or less at time of purchase are
classified as current, and over one year maturity date at time of purchase are
classified as non-current on the balance sheet.
Securities classified as held-to-maturity at September 30, 1997 represent a
U.S. Treasury Note with a maturity date of April 30, 1998. Amortized cost and
fair value of this security at September 30, 1997 is $4,995,000 and $4,988,000,
respectively.
The Company increased its line of credit in the first quarter of 1997 by adding
a $17 million revolving credit agreement, which expires in January, 2000, to
its existing lines of credit. The credit lines are currently being used for
letters of credit needed for funding assurance related to environmental issues
and insurance policies. Total unused lines of credit, including the revolving
credit agreement, were $13.2 million as of September 30, 1997.
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.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 128, Earnings Per Share, and
No. 129, Disclosure of Information about Capital Structure. Statement 128, which
is applicable to public companies only, simplifies the calculation of earnings
per share (EPS) and makes it comparable to international EPS standards.
Statement 129, which is applicable to all companies, consolidates the existing
guidance form several other pronouncements relating to an entity's capital
structure. The Statements are effective for financial statements for periods
ending after December 15, 1997, and are not expected to have an impact on the
Company's financial reporting.
FANSTEEL INC. Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Page 9
(UNAUDITED)
In June 1997, the FASB issued statements of Financial Accounting Standards No.
130, Reporting Comprehensive Income and No. 131, Disclosures about Segments of
an Enterprise and Related Information. Statement 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. Statement 131, which is applicable
to public companies only, changes the reporting requirements for segment
information in annual financial statements and also requires selected segment
information in interim reports to shareholders. The statements are effective for
financial statements for periods beginning after December 15, 1997. The Company
has not completed its analysis of the impact of the statements.
FANSTEEL INC. Form 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.) Page 10
(UNAUDITED)
Business Segment Information
The Company is engaged in the manufacture of specialty metal products, which
it classifies into two business segments: Industrial Tools and Metal
Fabrications. Net sales and operating income for the third quarter and nine
months ended September 30, 1997 and 1996 for each of the Company's business
segments are summarized below:
Third Quarter Nine Months
1997 1996 1997 1996
Net Sales:
Industrial Tools -
Sales $14,522,066 $13,459,358 $ 42,077,511 $41,949,307
Intersegment sales (823) - (823) (239)
14,521,243 13,459,358 42,076,688 41,949,068
Metal Fabrications -
Sales 19,520,041 17,352,973 61,577,584 48,454,721
Intersegment sales (1,703) (4,486) (59,172) (19,036)
19,518,338 17,348,487 61,518,412 48,435,685
$34,039,581 $30,807,845 $103,595,100 $90,384,753
Operating Income (Loss):
Industrial Tools $ 999,630 $ 794,420 $ 2,814,415 $ 2,413,518
Metal Fabrications (2,241,599) 935,290 475,516 2,472,778
Corporate (18,153) (14,436) (45,622) (41,485)
$(1,260,122) $ 1,715,274 $ 3,244,309 $ 4,844,811
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
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.
Quarter Ended September 30, 1997 Compared to Quarter Ended September 30, 1996
Net sales for the third quarter of 1997 totaled $34,040,000, an increase of
$3,232,000 or 10.5% from third quarter, 1996 net sales of $30,808,000.
Industrial Tools business segment net sales were $14,521,000 in the three
months ended September 30, 1997, compared to $13,459,000 for the same period in
1996, an increase of $1,062,000 or 7.9%. Within the tungsten carbide cutting
tools product line, rotary tool sales experienced a strong third quarter,
accounting for most of the increase in this segment. Penetration into foreign
and western United States markets, along with investment in additional machinery
and equipment in this product line, have had a positive impact. Improved
shipments of coal mining tools contributed to the current quarter increase.
These sales gains were partially offset by decreases in insert sales within the
cutting tool product line as well as slight declines in wear parts and
construction tools sales. Reduced customer demand and stiffer competition have
negatively impacted these product offerings.
Metal Fabrications business segment net sales for the third quarter of 1997
were $19,518,000 compared to $17,348,000 for the third quarter of 1996, an
increase of $2,170,000 or 12.5%. Powdered metal components, manufactured by
American Sintered Technologies, Inc. (AST), acquired on July 31, 1996, added
$2,387,000 to the 1997 third quarter sales compared to $1,536,000 for two months
in the third quarter of 1996. Shipments of forgings were up 31.1% from the third
quarter of 1996 due to the continued strength of the commercial aircraft market.
Investment casting revenues increased 29.3% over third quarter 1996 because of
greater demand from a wider customer base in markets such as military ordnance
and oil drilling. Wire formed product sales increased 9.5% from the same quarter
last year with the heavier demand coming from the outdoor products market. This
increase was due not only to good economic conditions, but also to supplying a
wider variety of parts to current customers. Net sales for aluminum and
magnesium sand castings decreased 11.9% in the current quarter compared to last
year due to significant rework required on parts which caused production
bottlenecks and hindered shipments. The production problems encountered in the
production of sand castings have resulted in non-salable inventory, which was
written-off in the third quarter of 1997.
Cost of goods sold for the third quarter of 1997 was $31,109,000, an increase
of $5,645,000 or 22.2% over third quarter, 1996 cost of sales of $25,464,000.
A large portion of the increase is attributable to a charge to cost of sales of
$2,705,000 in the third quarter of 1997, related primarily to the write-off of
non-salable inventories at the sand casting operation. The remaining increase in
cost of sales is due to higher production volume experienced by most of the
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
other operations and the addition of AST. Cost of goods sold as a percent of net
sales increased from 82.7% in the third quarter of 1996 to 91.4% in the current
quarter due primarily to the write-off of inventories in the sand casting
operation. Excluding the unusual charge at the sand casting operation, third
quarter, 1997 cost of goods sold as a percent of sales increased 0.7% to 83.4%.
Selling, general and administrative expenses for the three months ended
September 30, 1997 totaled $4,191,000 compared to $3,628,000 for the same period
of 1996, an increase of $563,000 or 15.5%. Variable expenses, most notably
commissions and the inclusion of expenses from AST, were primarily responsible
for the dollar increase. Included in this increase are expenses of $95,000 to
terminate sales agent contracts for development parts which will not be put into
production at the sand casting operation at this time. Excluding this unusual
charge, selling, general and administrative expenses increased 12.9% in the
third quarter, 1997 over the same period of last year. Selling, general and
administrative expenses as a percent of net sales increased from 11.8% for the
third quarter of 1996 to 12.3% for the third quarter of 1997. Excluding the
unusual charge, selling, general and administrative expenses as a percent of net
sales were 12.0% in the third quarter of 1997.
Other income for the quarter ended September 30, 1997 was $56,000 compared to
$152,000 for the quarter ended September 30, 1996. This decrease is
attributable to a decline in interest earned of $18,000, as there was less cash
available for investment, an increase in write-offs for bad debts, and a non-
recurring charge of $85,000 for a closed facility.
Net loss for the quarter ended September 30, 1997 was $840,000, or $.10 per
share, compared to net income of $1,114,000, or $.13 per share, for the same
quarter of last year, a decrease of $1,954,000 or $.23 per share. The third
quarter net loss included unusual charges, net of tax benefits, of $1,818,000 or
$.21 per share, related primarily to the write-off of non-salable inventories at
the sand casting operation. The unusual charge in the third quarter at the sand
casting operation has diminished the positive trends of the other operating
units. A restructuring of the sand casting operation management staff and
manufacturing processes employed in the developmental stages for production of
aircraft castings have occurred and are ongoing. Focus on production and
inventory control, cost control, and customer service levels has been
intensified in order to provide solutions to the production problems.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended September
30, 1996
Net sales for the nine months ended September 30, 1997 were $103,595,000
compared to $90,385,000 for the same period of 1996, an increase of $13,210,000
or 14.6%.
Net sales for the Industrial Tools business segment for year-to-date September
30, 1997 were $42,077,000, an increase of $128,000 or 0.3% from year-to-date
September 30, 1996 net sales of $41,949,000. Within the tungsten carbide
cutting tools product line, sales of rotary tools strengthened in the third
quarter after experiencing increased competition and vertical integration within
the customer base in the first six months of the year. This rebound, due
largely to increased production capacity from investment in machinery and
equipment, allowed this product line to surpass last year's sales for the first
time this year. Insert sales, also within the tungsten carbide cutting tools
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
product line, continue to decline compared to the prior year due to increased
competition and lower customer demand for standard products in the metal working
industry. The wear parts product line, also serving the metal working industry,
is down slightly over the first nine months of last year. Coal mining tool
shipments improved over last year due to increasing demand for high sulfur coal.
After two slow quarters in 1997, construction tool sales picked up the pace in
the third quarter, but fell short of last year's sales due partially to less
orders from foreign markets.
Metal Fabrications business segment net sales for the first nine months of
1997 were $61,518,000, an improvement of $13,082,000 or 27.0% over 1996 sales of
$48,436,000. Powdered metal components manufactured by AST, which was acquired
in July, 1996, added revenues of $7,665,000 for nine months of sales in the
current year versus $1,536,000 for two months of sales in 1996. Forgings product
line net sales increased $3 million due to a combination of a strong commercial
aircraft market and growth achieved from participation in new programs. Long-
term growth in the market is dependent on a steady demand for new aircraft and
spare parts. After a decline in the first three quarters of 1996, investment
castings sales are up $2 million in the first nine months of 1997 due to
increased demand in the military ordnance and oil drilling markets as well as
for engine components for the medium-duty truck market. Wire forming product
line net sales increased in the current year with growth in most markets served
due to a stable economy as well as supplying a wider variety of parts to current
customers. Net sales for sand castings increased 9.3% over last year based on
the strength of the aircraft industry. Poor production performance in this
operation in the third quarter of 1997 reduced the benefits from the strong
aircraft market.
Cost of goods sold for the nine months ended September 30, 1997 was
$87,992,000 compared to $74,793,000 for the same period of 1996, an increase of
$13,199,000 or 17.7%. Included in this increase is the third quarter, 1997
unusual charge of $2,705,000, due primarily to the write-off of non-salable
inventories at the sand casting operation. The remaining increase is attributed
to higher production volume experienced by most of the other operations and also
to the July, 1996 acquisition of AST. Cost of goods sold as a percent of net
sales at 84.9% was higher than the prior year's 82.7% due to the unusual charge
at the sand casting operation. Excluding the unusual charge, cost of goods sold
as a percent of sales for nine months decreased from 82.7% in 1996 to 82.3%.
Selling, general and administrative expenses were $12,358,000 for the first
nine months of 1997, an increase of $1,611,000 or 15.0% from the same period of
1996. Variable selling expenses, especially commissions, while increasing in
dollar amount, were offset by increased sales volume. Selling, general and
administrative expenses as a percent of net sales remained at 11.9% in the
current year, the same as in 1996.
Other income for the nine months ended September 30, 1997 was $323,000
compared to $598,000 for the same period of 1996, due primarily to a decrease in
investment income. Income earned on investments in the current year was
$512,000 compared to $697,000 in the prior year. The 1996 acquisition of AST
resulted in less cash being available for investment in 1997. An increase in bad
debt write-offs and a charge related to a closed facility also reduced other
income.
Net income for the first nine months of 1997 was $2,053,000 or $.24 per share,
compared to $3,273,000 or $.38 per share for the same period of 1996, a decrease
of $1,220,000 or $.14 per share. The results included unusual charges, net of
tax benefits, of $1,818,000 or $.21 per share, related
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
primarily to the write-off of non-salable inventories within the sand casting
operation. Net income as a percentage of sales decreased to 2.0% from 3.6% in
1996. The unusual charge in the third quarter at the sand casting operation has
diminished the positive trends of the other operating units. A restructuring of
the sand casting operation management staff and manufacturing processes employed
in the developmental stages for production of aircraft castings have occurred
and are ongoing. Focus on production and
inventory control, cost control, and customer service levels has been
intensified in order to provide solutions to the production problems.
Order backlog at September 30, 1997 was $52,119,000 compared to $43,361,000 at
September 30, 1996, an increase of $8,758,000 or 20.2%, with most of the
increase coming from the aircraft market within the Metal Fabrications business
segment. Backlog in the Industrial Tools business segment was $7,428,000 at
September 30, 1997, an increase of $892,000 or 13.6% from the September 30, 1996
backlog of $6,536,000. A strong third quarter for orders of tungsten carbide
rotary cutting tools was the primary reason for this increase. This product line
has experienced excellent growth over the past several years, enhanced by the
expansion into foreign markets during 1996 and increased production capacity in
1997. This increase was partially offset by a backlog decrease for cutting tool
inserts and blades, which have been faced with increasing competition. Mining
tools product line backlog increased for the first nine months of 1997, after a
depressed backlog in 1996 when several coal mines closed. Construction tools
backlog declined due in part to a decrease in foreign orders booked in the
current year. Metal Fabrications business segment backlog at September 30, 1997
was $44,691,000 compared to $36,825,000 on the same date of 1996, an increase of
$7,866,000 or 21.4%. Forgings product line backlog was up $5 million, a 27.8%
increase from last year, as orders from commercial aircraft manufacturers
continue to rise. Backlog of orders for sand castings and patterns increased
9.7% from September of 1996 primarily due to the strong aircraft market. Some
of the increase is also due to the decrease in shipments in the third quarter
due to the poor production performance at the sand casting operation. Wire
forming backlog is up 45.4% in the current year with growth coming from outdoor
products, agricultural equipment, and parts for vending machines. Investment
castings backlog is up 22.6% from the prior year as demand continues to be heavy
from the medium-duty truck, military ordnance and oil drilling industries.
Backlog of powdered metal components, added with the July, 1996 AST acquisition,
increased modestly over last year.
Outlook
The continued high level of activity in the commercial aircraft market,
combined with steady demand from other markets served such as automotive, lawn
and garden, metalworking, oil drilling and military ordnance, is key in
continuing operating profitability. Improvements in the Company's production
processes, new product development, and investment in capital equipment,
directed primarily at commercial markets, should increase opportunities for
growth. The Company is seeking increased share of current markets, as well as
new markets, through investment in operating units and acquisitions. The
Company has utilized, and is constantly seeking, funding assistance on favorable
terms from states and municipalities for expansion of production capabilities.
Cost control programs remain active in all operating plans throughout the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
Liquidity and Capital Resources
Cash and cash equivalents amounted to $8,547,000 at September 30, 1997, an
increase of $4,959,000 from December 31, 1996. Investing activities provided
$1,377,000. A $5,000,000 marketable security matured and was reinvested in
interest-bearing cash equivalents. On September 30, 1997, $1,500,000 was used to
purchase Schulz Products, Incorporated, a precision machining facility which
services the aerospace market. Investments in plant and equipment at operating
locations totaled $1,189,000, in accordance with management's program to expand
the operations of the Company. Design and engineering costs of $945,000 were
incurred for the processing plant being built for decommissioning purposes in
Muskogee, OK. Operations provided $3,726,000 with net income, depreciation and
amortization generating $2,053,000, $1,466,000 and $173,000 respectively.
Accounts receivable increased $686,000 as working capital needs were greater due
to higher sales and production volumes. Inventories increased $137,000 after the
write-off of non-salable inventories at the sand casting operation. Days
outstanding and inventory turns have remained consistent with prior periods.
In the fourth quarter of 1995, the Company announced the suspension of the
quarterly shareholder dividend for the purpose of conserving cash for capital
reinvestment, possible future acquisitions, and due to potential changes in
funding requirements for decommissioning at the Company's discontinued operation
in Muskogee, Oklahoma.
Cash, cash equivalents and marketable securities on hand have been sufficient
to date to meet the demands of increased working capital investments,
expenditures for machinery and equipment, environmental costs and other normal
operating requirements. However, in anticipation of Company programs to expand
current operations, possible future acquisitions, and reclamation and
decommissioning costs for the Muskogee, Oklahoma plant, the Company increased
its line of credit in the first quarter of 1997 by adding a $17 million
revolving credit agreement, which expires in January, 2000, to its existing
lines of credit. The credit lines are currently being used for letters of credit
needed for funding assurance related to environmental issues and insurance
policies. Total unused lines of credit, including the revolving credit
agreement, were $13.2 million as of September 30, 1997.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. In the first quarter of 1997, the final
reimbursements of $143,000 were received from the State of Mississippi Business
Finance Corporation for the development loans for expansion of one of the
Company's manufacturing facilities. All of the Company's debt is related to
development loans obtained from various states.
At September 30, 1997, the Company had $4,995,000 of non-current marketable
securities, classified as held-to-maturity, invested in a U.S. Treasury Note.
The non-current marketable securities had a fair value of $4,988,000 at
September 30, 1997, and mature April 30, 1998.
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning are required for the segment's
primary plant that processed certain ores which are subject to regulations
of several government agencies. The residues from these processed ores were
stored on-site. Remaining assets were written down to estimated realizable
value, and provisions were made for the estimated costs for decommissioning.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 16
At September 30, 1997, the Company had reserves of $3.9 million
forenvironmental clean-up costs for discontinued operations. The Company, in
association with outside consultants, has developed a decommissioning plan for
the site involved, and has submitted that plan and a related decommissioning
funding plan to the Nuclear Regulatory Commission ("NRC") as required by law.
Prior to decommissioning, the Company will construct and expects to operate for
approximately ten years a commercial plant to complete the processing of
residues currently contained in storage ponds at the site, which would
materially reduce the amount of radioactive materials to be disposed of during
decommissioning. The processing plant is intended to extract commercially
valuable materials such as tantalum, columbium, scandium, and other rare earth
and rare metal elements from the feedstock residues. Construction of the plant
was approved by the Board of Directors in July, 1997. The estimated cost of
construction is $12 million. Construction is expected to be completed within a
year, at which time residue processing is expected to start. In conjunction
with construction of the processing plant, the Company will modify the
wastewater treatment plant at the site and install a drainage system. A
required amendment to the Company's NRC license and revision to its permit under
the National Pollution Discharge Elimination System (NPDES) through the State of
Oklahoma Discharge Elimination System (OKDES) were issued in March, 1997.
The reserve for discontinued operations reflects management's belief that the
revenues from the extracted materials will at least equal the ultimate cost of
construction and costs of processing, including estimated costs for disposal of
waste generated by the process. There are a number of factors, however, that
could cause actual results to differ from management's current expectations.
Cost over-runs and/or start-up delays could occur in connection with plant
construction. The estimated costs of residue processing were developed by
Company personnel and independent consultants using third party evaluations
based on the pilot testing performed. Unforeseen production complications could
cause processing costs to increase from current estimates. The annual recovery
revenues are estimated to be in a range of $7,000,000 to $8,000,000. The
estimated value of materials to be extracted is based on analysis of samples
taken from the residues and a valuation of such materials using current market
prices discounted to reflect possible price decreases, including those which
could result from the increased quantities of certain of these materials made
available for sale. However, there can be no assurance as to the level of
demand for the extracted materials or the actual prices which may be obtained
for them, which could vary over time.
Decommissioning would be comprised of construction of an engineered on-site
cell for containment of contaminated soils; consolidation and stabilization of
the contaminated soils in the containment cell; and the performance of required
plant surveys and characterizations after residue processing ceases to determine
whether additional contaminated soils exist which may require remediation. In
October, 1995 the NRC advised the Company that a decommissioning funding plan
cost estimate based upon on-site disposal of most of the radioactive wastes,
which is essentially contaminated soils remaining after residue processing, was
appropriate to consider at that time. The NRC cautioned the Company, however,
that an on-site containment cell may require preparation of an Environmental
Impact Statement and that, in addition to the required NRC approval, local and
other federal agencies may have to be satisfied that the Company's plan is
sound. Such approval process can be expected to extend over a number of years.
Management believes that a decommissioning plan including on-site containment
will ultimately be acceptable to the appropriate regulatory authorities, based
on current NRC regulations and a provision of the Nuclear Waste Policy Act of
1982 requiring the Department of Energy to take title to certain "special sites"
ITEM 2. MANAGEMENT'S DISCUSSION A
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 17
which may include the Company's site; however, there is no assurance that a
planproviding for on-site containment will ultimately be approved.
Implementation of a decommissioning plan for the Company's site which includes
off-site disposal may not be financially feasible.
The NRC's 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. The NRC's October, 1995 letter requested the Company
to submit a decommissioning funding plan contemplating on-site containment and
stated that the cost of residue processing should be included in the Company's
cost estimate. In March, 1996 the Company submitted a revised decommissioning
plan and related decommissioning funding plan. The initial level of assurance
for decommissioning is $4,456,000 provided through letters of credit. The amount
does not include assurance for costs of construction or operation of the residue
processing facility. This initial level of assurance, however, may be changed
upon further review by the NRC. The Company's available cash and/or borrowing
capacity will be reduced by the amount of funding assurance as required at any
particular time. As the decommissioning plan is implemented, deposited funds
or the amount of any surety instruments may be reduced, provided the Company can
demonstrate the sufficiency of the remaining funds or surety to assure the
completion of decommissioning.
Expenditures for environmental reclamation and decommissioning at the Muskogee
site were $63,000 for the first nine months of 1997. In addition, the Company
expended $945,000 for design and engineering costs for the proposed processing
plant. Costs which are expected to be incurred within the next year are included
as plant shutdown costs in Accrued Liabilities. Costs expected to be incurred
after one year are reflected on the balance sheet in Discontinued Operations 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 September 30, 1997 are adequate to cover the costs of
environmental clean-up for discontinued operations and that the Company has the
ability to meet the NRC's decommissioning funding assurance requirements, as
long as on-site containment of radioactive wastes is ultimately acceptable to
the appropriate regulatory agencies.
The Company is involved in environmental remediation activities at sites in
which it has been named a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act or similar state
"superfund" laws and at certain of its own plants, in addition to the Muskogee
facility. Of the eleven additional known sites in which it is involved, the
Company's participation in at least five sites is de minimis, and at one other
site the Company is being vigorously defended by its insurance carriers. Of the
five remaining sites, three are located at Company facilities, as to which the
extent of contamination and required remediation has not yet been determined.
The Company has initiated an investigation of the environmental condition of all
the facilities it currently owns, which is expected to include soil and
groundwater testing, and which could indicate additional areas where remediation
may be required.
The remaining land and buildings of the Company's former Precision Sheet Metal
(PSM) operation within the Metal Fabrications business segment are carried as
Other Assets - Property held for sale at a cost of $1,200,000 at September 30,
1997. The cost of preparing the property for sale, principally environmental
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 18
clean-up, will be capitalized. Conditional approval has been granted by
theappropriate agency for implementation of the environmental clean-up work
plan. The initial stage of the work plan began in the second quarter of 1997.
Management believes that proceeds from the sale of the property will be adequate
to recover all costs, including expenditures to prepare the property for sale. A
significant decline in real estate values in Los Angeles and/or identification
of additional contamination on-site could require the reserves to be adjusted.
The Company's Escast operation, located in Addison, Illinois and included in
the Metal Fabrications business segment, has been named as a responsible party
for the clean-up costs of certain hazardous wastes located on-site. A cost
sharing agreement with the former owner of Escast is in place for any future
clean-up costs. The clean-up process has begun at the site under an Illinois
Environmental Protection Agency permit with total estimated costs of
approximately $1.1 million. The Company believes the established reserves are
adequate to cover its share of the clean-up costs based on the extent of
contamination now known and the former owner meeting its obligation.
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 cleanup, the varying costs of
alternative clean-up methods, the evolving nature of cleanup technologies and
government regulations, and the inability to determine the Company's share of
multi-party cleanups or the extent to which contribution will be available from
other parties. The Company has established reserves for environmental
remediation costs for the known sites 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 liability, after considering existing reserves, will not have
a material adverse effect on the consolidated financial position of the Company.
Form 10-Q
Page 19
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997.
Form 10-Q
Page 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fansteel Inc.
(Registrant)
Date - 11/12/97 /S/ William D. Jarosz
William D. Jarosz
Chairman, President and Chief Executive Officer
Date - 11/12/97 /S/ R. Michael McEntee
R. Michael McEntee
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of September 30, 1997 and the
related consolidated statement of operations for the nine months ended September
30, 1997 and is qualified in its entirety by reference to the Company's Form
10-Q filing for the period ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,547,172
<SECURITIES> 297,318
<RECEIVABLES> 20,115,779
<ALLOWANCES> 280,440
<INVENTORY> 18,488,403
<CURRENT-ASSETS> 51,226,042
<PP&E> 63,192,913
<DEPRECIATION> 48,607,008
<TOTAL-ASSETS> 86,306,004
<CURRENT-LIABILITIES> 21,261,141
<BONDS> 1,643,818
<COMMON> 21,497,145
0
0
<OTHER-SE> 35,839,898
<TOTAL-LIABILITY-AND-EQUITY> 86,306,004
<SALES> 103,595,100
<TOTAL-REVENUES> 103,595,100
<CGS> 87,992,339
<TOTAL-COSTS> 100,350,791
<OTHER-EXPENSES> (322,717)
<LOSS-PROVISION> 46,294
<INTEREST-EXPENSE> 67,417
<INCOME-PRETAX> 3,567,026
<INCOME-TAX> 1,514,000
<INCOME-CONTINUING> 2,053,026
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,053,026
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
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