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, 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 (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 27, 1998 was $32,568,227.
8,598,858
(Number of shares of common stock outstanding as of February 27, 1998)
Part III incorporates information by reference from the Company's definitive
proxy statement for the annual meeting of shareholders to be held on May 20,
1998.
The total number of pages in this Form 10-K is 51 with the exhibit index
being on page 52.
PART I
ITEM 1 - BUSINESS
(a) On September 30, 1997, the Company acquired all the assets and
certain liabilities of Schulz Products, Inc. (Schulz) for the
cash price of $1,865,986. The nature of the business of Schulz
is the machining of aircraft components. While Schulz will
operate from a separate facility, the operating management has
been combined with our forging operation which also serves the
aircraft/aerospace market.
On July 31, 1996, the Company acquired all of the assets and
certain liabilities of American Sintered Technologies, Inc.
(AST) for the cash price of $6,937,000. In addition to the
cash paid, the Company assumed $954,000 of various
Pennsylvania Economic Agencies loans. The nature of the
business of AST is the manufacture of ferrous and non-ferrous
powdered metal components serving the automotive, lawn and
garden, plumbing, hardware, and electrical hardware
industries. The acquisition was accounted for as a purchase
and is included in the Company's Metal Fabrications business
segment.
The Precision Sheet Metal (PSM) plant in Los Angeles,
California completed the phase-out of all operations during
1993. Identifiable assets of PSM included $1,250,000 for
property and plant held for sale which are carried in Other
Non-Current Assets at December 31, 1997.
(b) Incorporated by reference from the Notes to Consolidated
Financial Statements pages 32 through 46.
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for
use in the metalworking; automotive; energy (coal mining, oil
and gas drilling); military and commercial aircraft, aerospace
and weapon systems; agricultural machinery; lawn and garden
equipment; and plumbing and electrical hardware industries.
The principal products of the Industrial Tools business
segment include tungsten carbide cutting tools, milling tools,
toolholding devices, mining tools and accessories,
construction tools, and wear resistant parts. The principal
products of the Metal Fabrications business segment include
titanium, nickel base and alloy steel forgings; high integrity
aluminum and magnesium sand mold castings; machined forgings
and castings; 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 the Industrial Tools and Metal
Fabrications business segments, distributors, manufacturers'
representatives and agents account for the majority of sales.
ITEM 1 - BUSINESS (Contd.)
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 1997 1996 1995
Tungsten carbide
cutting tools Industrial Tools 27% 30% 31%
Non-ferrous
forgings Metal Fabrications 15 12 11
Investment
castings Metal Fabrications 10 9 12
(c)(1)(ii) At this time, there are no new products in production or in
the development stage at continuing operations that require
investment of a material amount of the Company's assets.
However, the Company is involved in substantial investment in
design, engineering, equipment and start-up of a reclamation
processing plant as discussed in Note 4 to the Consolidated
Financial Statements contained in Item 8 hereof.
(iii) The most important raw materials used by the Company are
tungsten carbide powder, cobalt, titanium, magnesium,
aluminum, iron, bronze, copper, stainless steel, and alloy
steel. Prices of some of these raw materials have been
volatile in recent years, and changes in raw material prices
have had an impact on the Company's dollar sales volume.
Several of the raw materials used, including cobalt, are
purchased principally from foreign sources, many of them
located in developing countries, and availability can be
affected by political developments and trade restrictions,
both domestic and foreign. The Company believes that the
sources and availability of these materials are adequate for
present needs, although spot shortages of certain raw
materials may occur from time to time.
(iv) The Company owns a number of patents which relate to a wide
range of products and processes and is licensed under certain
patents. The Company does not consider any of its patents or
group of patents to be material to either of its business
segments taken as a whole.
(v) None of the operations of any business segment are seasonal.
(vi) Working capital requirements for both business segments are
substantial, but the Company's investment in working capital
is fairly typical of the specialty metals manufacturing
industry.
(vii) The Company serves a wide variety of industries. No one
individual customer accounts for a significant portion of the
Company's overall business.
ITEM 1 - BUSINESS (Contd.)
Substantial sales for those operating units within the Metal
Fabrications 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.
(c)(1)(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,
1997 1996
Industrial Tools $ 7,880 $ 6,317
Metal Fabrications 49,400 38,379
$ 57,280 $ 44,696
In the Industrial Tools segment, virtually all backlog is
shipped in less than 12 months, generally within 3 months. In
the Metal Fabrications segment, shipments are typically made
between 1 and 24 months after an order is received. The
Company believes that approximately 96% of the backlog at
December 31, 1997 will be shipped before the end of 1998.
Because of the substantial size of some orders received by the
Company - particularly orders for products sold by the Metal
Fabrications 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 Metal Fabrications 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.
(c)(1)(xi) The development of new products and processes and the
improvement of existing products and processes is conducted by
each operating unit.
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xi) 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 $225,000 to continuing operations in 1997
for costs related to compliance with government environmental
regulations. Capital expenditures in 1997 included $105,000 at
the Wellman Dynamics facility in Creston, Iowa for a water
collection system, and $65,000 at the American Sintered
Technologies facility in Emporium, Pennsylvania for a dust
collector and water cooling tower.
During 1997, the Company charged $150,000 for continuing
operations against liabilities for environmental remediation
established in previous years. In addition to the two sites
included in the discontinued operations, the Company has a
total of eight 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 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 $1,250,000 at December 31,
1997. The cost of preparing the property for sale, principally
environmental clean-up, will be capitalized. Management
believes that proceeds from the sale of the property will be
adequate to recover its costs, including costs of preparing
the property for sale. The Company believes the liabilities
established for other costs associated with the close-down of
PSM are adequate to cover such costs. A significant decline in
real estate values in Los Angeles and/or identification of
additional contamination on-site could require the liabilities
to be adjusted.
The Company has also been notified that it is a potentially
responsible party at five sites owned by third parties. The
Company's participation at three sites is de minimis, and at
two of the other sites the Company is being defended by its
insurance carriers.
The Company has accrued for estimated environmental
investigatory and noncapital remediation costs based upon an
evaluation of currently available facts with respect to each
individual site, including the results of environmental
studies and testing conducted in 1997, and considering
existing technology, presently enacted laws and regulations,
and prior
ITEM 1 - BUSINESS (Contd.)
experience in remediation of contaminated sites. An additional
provision of $6,900,000 was recorded in 1997 for the estimated
potential exposure for such costs expected to be incurred in
the future. Actual costs to be incurred in future periods at
identified sites may vary from the estimates, given the
inherent uncertainties in evaluating environmental exposures.
Future information and developments will require the Company
to continually reassess the expected impact of these
environmental matters. The Company does not expect that any
sums it may have to pay in connection with these environmental
liabilities would have a materially adverse effect on its
consolidated financial position.
The Company discontinued its Metal Products business segment
in 1989. Environmental reclamation and decommissioning is
required for the segment's primary plant that processed
certain ores 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. 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
operate for approximately ten years a commercial plant to
complete the processing of residues currently contained in
storage ponds at the site, which will materially reduce the
amount of radioactive materials to be disposed of during
decommissioning. In conjunction with construction of the
processing plant, the Company will modify the wastewater
treatment plant at the site and install a drainage system.
Decommissioning would include 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.
The Company has received an amendment to its current NRC
license and a revision to its current wastewater discharge
permit to allow for the construction and operation of the
processing plant. Construction has begun on the processing
plant which, when completed, will extract commercially
valuable materials such as tantalum, columbium, scandium and
other rare earth and rare metal elements from the feedstock
residues. The estimated cost of construction is approximately
$12 million. Residue processing is expected to start in the
fourth quarter of 1998.
During 1997, the Company charged $318,000 for discontinued
operations against liabilities for environmental remediation
and decommissioning established in previous years. In
addition, the Company expended $1,541,000 for design,
engineering costs, and equipment for the processing plant.
ITEM 1 - BUSINESS (Contd.)
At December 31, 1997 and 1996, the Company had recorded
liabilities of $10.8 million and $3.9 million, respectively,
for discontinued operations including the estimated net costs
of reclaiming and decommissioning the site during and after
the approximate ten years of processing the residues described
above. An additional provision for discontinued operations of
$7,100,000 was recorded in 1997 to increase the established
liabilities for the estimated cost of additional studies which
may be required by regulatory agencies, higher start-up costs,
and potentially greater disposal costs after completion of the
residue processing period, as well as, for cost estimates
related to probable future environmental remediation at a
second site which had been part of the Metal Products business
segment. The second site is regulated under the Resource
Conservation and Recovery Act and, as a result of alleged
migration of contaminants from this second site, the Company
also has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning
the first site during the residue processing period include
estimated annual revenues of approximately $8 million per year
over the ten year processing period and estimated annual
operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated
value of materials to be extracted is based on analysis of
samples taken from the residues and a valuation of such
materials using current market prices discounted to reflect
possible price decreases, including those which 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. 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.
In October 1995 the NRC advised the Company that a
decommissioning funding plan cost estimate based upon on-site
disposal of most of the radioactive wastes at the site was
appropriate to consider. The NRC cautioned the Company,
however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the
required NRC approval, local and other federal agencies may
have to be satisfied that the Company's disposal plan is
sound. 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 and proposed 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" which may
include the Company's site; however, there is no assurance
that a plan providing for
ITEM 1 - BUSINESS (Contd.)
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 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 NRC October 1995 letter requested
that 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.
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 1,127 persons as of December 31, 1997.
(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 28,000 0 28,000
Tools
Latrobe, Pennsylvania Industrial 37,000 0 37,000
Tools
Lexington, Kentucky Industrial 98,000 1,900 99,900
Tools
Los Angeles, California Metal 48,000 5,000 53,000
Fabrications
San Gabriel, California Metal 0 9,000 9,000
Fabrications
Sarasota, Florida Metal 6,000 0 6,000
Fabrications
Addison, Illinois Metal 0 46,000 46,000
Fabrications
Creston, Iowa Metal 293,000 0 293,000
Fabrications
Washington, Iowa Metal 86,000 0 86,000
Fabrications
Emporium, Pennsylvania Metal 44,000 0 44,000
Fabrications
ITEM 2 - PROPERTIES (Contd.)
All plants are well-maintained and in good operating order.
The plants have sufficient capacity to meet present market
requirements. All of the properties described above are fully
utilized on a 1 or 2 shift basis, except the Lexington
facility, which is operating at approximately 90% utilization.
The Company owns properties in North Chicago, Illinois and
Muskogee, Oklahoma associated with operations discontinued in
prior years. These properties are included as part of Net
Assets of Discontinued Operations. The Company's PSM facility
in Los Angeles, California completed the phase out of all
operations in 1993. The remaining property and plant has been
reclassified as property held for sale as part of Other Non-
Current Assets.
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 1997.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the principal executive officers and directors of the
Company:
Years of Service
In
Position with the Company and With Present
Name Age Principal Occupation Fansteel Position
William D. 45 Director; Chairman of the Board, 5 3
Jarosz President and Chief Executive
Officer
Edward P. 56 Director; Personal Investments 1 1
Evans
Betty B. 74 Director; Director of HBD 14 14
Evans Industries, Inc.
Robert S. 53 Director; Chairman and Chief 6 6
Evans Executive Officer, Crane Co.;
Chairman and Chief Executive
Officer, Medusa Corp.
Thomas M. 60 Director; Personal Investments 12 12
Evans, Jr.
Peter J. 48 Director; Kirkpatrick and 2 2
Kalis Lockhart, LLP (Attorneys);
Chairman of the Management
Committee
R. Michael 44 Vice President and Chief 18 7
McEntee Financial Officer
Michael J. 45 Vice President, General Counsel 12 11
Mocniak and Secretary
Jack S. 68 Director; Vice President and 13 13
Petrik Director (Retired), Turner
Broadcasting System, Inc.
Additional information as to Directors of the Company is herein incorporated
by reference to the information under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement for the annual meeting
of shareholders on May 20, 1998.
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 27,
1998 were 811.
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
1997:
First Quarter $7 1/8 $6 1/8 $ -
Second Quarter 8 1/2 6 5/8 -
Third Quarter 10 3/16 7 5/16 -
Fourth Quarter 11 8 1/8 -
1996:
First Quarter $8 1/4 $5 5/8 $ -
Second Quarter 7 5 3/4 -
Third Quarter 7 5 3/4 -
Fourth Quarter 7 1/8 6 1/8 -
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, 1997 are as follows:
Years Ended December 31,
(thousands of dollars
except per share 1997 1996 1995 1994 1993
data)
Operating Results
Net Sales $140,194 $120,834 $ 102,598 $ 89,287 $ 89,387
Income (Loss) from
Continuing
Operations (2,508) 4,277 3,333 3,609 2,516
(Loss) from Discon-
tinued Operations (5,856) - - - (1,676)
Net Income (Loss) (8,364) 4,277 3,333 3,609 906
Per Share of Common
Stock:
Income (Loss) from
Continuing
Operations (.29) .50 .39 .42 .29
(Loss) from
Discontinued
Operations (.68) - - - (.19)
Net Income (Loss) (.97) .50 .39 .42 .11
Cash Dividends - - .30 .40 .40
Shareholders'
Equity 5.46 6.43 5.93 5.83 5.82
Financial Position
Working capital $ 35,126 $ 28,542 $ 21,862 $ 21,101 $ 36,321
Net property, plant
and equipment 14,665 14,306 10,220 9,364 9,661
Total assets 88,832 82,127 74,530 72,881 73,291
Long-term debt 1,600 1,779 298 - -
Shareholders'
equity 46,920 55,284 51,023 50,172 50,083
Other Data
Common shares
outstanding 8,598,858 8,598,858 8,598,858 8,598,858 8,598,858
Number of
shareholders 826 812 891 1,055 1,094
Number of employees 1,127 1,031 911 867 799
Number of shareholders consists of the approximate shareholders of record
which include nominees and street name accounts.
ITEM 6 - SELECTED FINANCIAL DATA
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except
per share data) Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1997
Net sales $ 33,714 $ 35,841 $ 34,040 $ 36,599
Gross profit 6,027 6,645 2,931 5,914
Income (Loss) from
Continuing Operations 1,335 1,558 (840) (4,561)
Net income (loss) 1,335 1,558 (840) (10,417)
Income (Loss) per common
share from Continuing
Operations .16 .18 (.10) (.53)
Net income (loss) per
common share .16 .18 (.10) (1.21)
1996
Net sales $ 28,939 $ 30,638 $ 30,808 $ 30,449
Gross profit 4,905 5,344 5,343 5,251
Net income 1,000 1,159 1,114 1,004
Net income per common share .12 .13 .13 .12
The fourth quarter, 1997 loss from continuing operations included a charge,
net of tax benefit, for environmental remediation of $5,589,000 or $.65 per
share. The fourth quarter, 1997 net loss included a charge for additional
environmental remediation of $5,856,000 or $.68 per share for discontinued
operations.
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.
Results of Operations - 1997 Compared to 1996
Net sales for the year ended December 31, 1997 were $140,194,000, an
increase of $19,360,000 or 16.0% from 1996 net sales of $120,834,000.
Industrial Tools business segment net sales were $56,291,000 in 1997
compared to $54,068,000 in 1996, an increase of $2,223,000 or 4.1%. Within
the tungsten carbide cutting tools product line, sales of rotary tools
strengthened in the last half of the year after experiencing increased
competition from other manufacturers and vertical integration within the
customer base in the first six months of the year. This rebound was due
largely to increased production capacity which improved our ability to meet
customer delivery demands and increase stock availability. Continued
investment in machinery and equipment, as well as plant expansion,
facilitated a significant increase in production capacity. Insert sales, also
within the tungsten carbide cutting tools product line, declined compared to
the prior year due to lower customer demand for our standard products in the
metal working industry. Wear parts sales, also serving the metal working
industry, were up slightly over last year. Coal mining tool shipments
improved over last year, especially in the last six months, due to increasing
demand for high sulfur coal. After improved sales in 1996, construction tools
declined in the current year as sales to foreign markets were lower and
penetration into domestic markets showed little progress.
Metal Fabrications business segment net sales for 1997 were $83,903,000
compared to $66,766,000 for 1996, an increase of $17,137,000 or 25.7%.
Powdered metal components manufactured by AST, which was acquired in July,
1996, added revenues of $10,326,000 for twelve months of sales in the current
year versus $3,737,000 for five months of sales in 1996. Net sales increased
$5.0 million in the forgings product line due to the strong commercial
aircraft market. Investment castings sales grew by $2.6 million in 1997 due
to increased demand in the military ordnance and oil drilling markets as well
as continued strong demand for engine components for the medium-duty truck
market. Wire forming product line net sales increased in the current year by
$1.8 million due to a stable economy as well as to supplying a greater
variety of parts to current customers. Net sales for sand castings increased
slightly over 1996. While the market for aircraft parts and components
continued strong throughout 1997, manufacturing performance problems
developed that substantially increased operating cost at the sand casting
facility.
Cost of goods sold for the year ended December 31, 1997 was $118,677,000
compared to $99,991,000 for 1996, an increase of $18,686,000 or 18.7%.
Included in this increase is the third quarter, 1997 unusual charge, which
was due primarily to the write-off of non-salable inventories of $2,705,000,
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 and September, 1997 acquisition of Schulz
Products, Inc. (Schulz). Cost of goods sold as a percent of net sales at
84.7% was higher than the prior year's 82.8% due to the unusual charge at the
sand casting operation. Excluding the unusual charge, cost of goods sold as a
percent of sales was 82.7%, a slight decrease compared to 1996.
Selling, general and administrative expenses were $16,508,000 for 1997, an
increase of $2,007,000 or 13.8% from the same period of 1996. Variable
selling expenses, most notably commissions, increased in dollar amount, but
were offset by increased sales volume. Selling, general and administrative
expenses as a percent of net sales decreased to 11.8% in the current year
versus 12.0% in 1996.
Environmental remediation charges for continuing operations were $6,900,000
for 1997. The Company accrued for certain environmental investigatory and
noncapital remediation costs after completing initial environmental studies
at all sites owned by the Company and testing soil and groundwater at
selected sites as indicated by the environmental studies. The environmental
studies were undertaken after implementing a new comprehensive environmental
policy and hiring staff to support these efforts in 1997.
Operating loss for the year ended December 31, 1997 was $1,892,000 compared
to operating income of $6,342,000 in 1996, a decrease of $8,234,000. The
significant factors in this decrease are the fourth quarter, 1997 provision
of $6,900,000 for environmental remediation and the third quarter, 1997
unusual charge of $2,800,000 relating primarily to the write-off of non-
salable inventories at the sand casting operation. Excluding the
environmental remediation provision and the unusual charge, operating income
as a percentage of net sales was 5.6% in 1997 compared to 5.3% in 1996.
Industrial Tools business segment operating income for 1997 was $3,860,000,
an increase of $808,000 from the prior year. Increased sales volume in 1997
had a beneficial effect on operating income in this segment. Metal
Fabrications business segment operating income for 1997 was $1,217,000, a
decrease of $2,134,000 from 1996, which was related to the unusual charge at
the sand casting operation.
Other income for the year ended December 31, 1997 was $261,000 compared to
$711,000 for the same period of 1996. Income earned on investments was
$681,000, which was $183,000 less than the prior year. The July, 1996
acquisition of AST and the September, 1997 acquisition of Schulz resulted in
less cash being available for investment in 1997. A $246,000 increase in bad
debt expense over last year and an $85,000 charge related to a closed
facility also reduced other income.
Loss from continuing operations for the year ended December 31, 1997 was
$2,508,000 or $.29 per share, compared to income from continuing operations
of $4,277,000 or $.50 per share in 1996. The 1997 results included
environmental remediation charges, net of tax benefits, of $5,589,000 or $.65
per share and unusual charges, net of tax benefits, of $1,818,000 or $.21 per
share, related primarily to the write-off of non-salable inventories within
the sand casting operation. The unusual charge in the third quarter at the
sand casting operation diminished the positive trends of the other operating
units. A reorganization of the sand casting operation management staff and
restructuring of manufacturing processes employed in the developmental stages
for production of aircraft castings have been implemented and refinements 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.
Loss from discontinued operations of $5,856,000 or $.68 per share in 1997
represents an additional provision of $7,100,000, less tax benefit of
$1,244,000, to increase the established liabilities for the estimated cost of
environmental remediation and decommissioning at Metal Products business
segment sites. The additional estimated costs include additional studies
which may be required by regulatory agencies, higher start-up costs, and
potentially greater disposal costs after completion of the residue processing
period at the primary site, as well as, probable future environmental
remediation 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.
Net loss for the year ended December 31, 1997 was $8,364,000 or $.97 per
share, compared to net income of $4,277,000 or $.50 per share for the year
ended December 31, 1996. The fourth quarter, 1997 provisions for
environmental remediation cost estimates in 1997 at continuing and
discontinued operations, net of tax benefits, of $11,445,000 or $1.33 per
share and the third quarter, 1997 unusual charges, net of tax benefits, of
$1,818,000 or $.21 per share, related to write-off of non-salable inventory
at the sand casting operation resulted in the significant change in 1997 from
1996.
Order backlog at December 31, 1997 was $57,280,000 compared to $44,696,000
at December 31, 1996, an increase of $12,584,000 or 28.2%. Backlog in the
Industrial Tools business segment was $7,880,000 at December 31, 1997, an
increase of $1,563,000 or 24.7% from the December 31, 1996 backlog of
$6,317,000. Nearly all of this increase is attributed to orders of tungsten
carbide rotary cutting tools, which has experienced excellent growth over the
past several years. This product line has been enhanced by increased
production capacity in 1997. A backlog decrease for cutting tool inserts and
blades, which have encountered increasing competition, slightly reduced the
overall increase in the cutting tool product line. The wear parts product
line was down from the prior year due to reduced demand from the metalworking
industry. The mining tools backlog increased in the current year after a
depressed backlog in 1996 due to several coal mine closings. Construction
tools backlog declined as orders were soft in the last quarter of the year.
Metal Fabrications business segment backlog at December 31, 1997 was
$49,400,000 compared to $38,379,000 on the same date of 1996, an increase of
$11,021,000 or 28.7%. The forgings backlog increased $3.6 million as orders
from commercial aircraft manufacturers continue to rise. Backlog of orders
for sand castings and patterns increased $3.5 million from 1996 also due to
the strong aircraft market. Delayed shipments, due to the poor production
performance at the sand casting operation, caused some of the increase in the
backlog. Wire forming backlog increased $1.0 million in the current year,
with growth coming from lawn and garden equipment, agricultural equipment,
and vending machines. Investment castings backlog is up 9.1% 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 18.9% over the prior
year. Schulz Products, Inc., added $2.3 million for machined products to the
backlog at December 31, 1997.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Results of Operations - 1996 Compared to 1995
Net sales for the year ended December 31, 1996 were $120,834,000, an
increase of $18,236,000 or 18% over 1995 net sales of $102,598,000. The sales
growth was due to improvements in many of the markets served with the most
significant increases in the aircraft industry.
Industrial Tools business segment net sales for 1996 were $54,068,000
compared to $50,069,000 for 1995, an increase of $3,999,000 or 8%. Sales of
tungsten carbide cutting tools product line increased primarily due to growth
in the metalworking markets. The strategic locations of warehouses, along
with quality parts, enabled the Company to service its customers' growing
demands. Stiff price competition had a negative effect on standard product
sales within the tungsten carbide cutting tool line. Efforts were
concentrated on supplying parts specialized to customers' requirements. After
a sluggish year in 1995, the construction tools product line experienced an
increase in 1996 due to product improvement and new marketing strategies,
including increased consignment of product to customers. Mining tools product
line registered a moderate decline in 1996 as several mines closed due to
reduced demand for high sulfur coal. The wear parts product line was down
slightly from 1995, with gains in die related parts offset by lower sales in
nozzles and compacts used extensively for oil drilling.
Metal Fabrications business segment net sales for the year ended December 31,
1996 were $66,766,000, an increase of $14,237,000 or 27% over 1995 net sales
of $52,529,000. Powdered metal components, manufactured by American Sintered
Technologies, Inc. (AST), acquired on July 31, 1996, added $3,737,000 in
1996. The operations serving aircraft manufacturers benefited from a steadily
improving market. Forgings product line revenues were significantly ahead of
the 1995 pace due to a combination of price increases and parts for new
programs. Sale price increases were initiated in 1996 to offset raw material
price increases. New programs were attained through aggressive pursuit of
business within core markets, including commercial aircraft components for
Boeing and McDonnell Douglas, and structural parts for the F-22 military
aircraft. Forgings sold to the medical field also improved as customers
gained market share on a global basis. Additional forging sales were realized
with a greater utilization of material such as steel, aluminum, and nickel-
based metals, whereas product shipped in 1995 was concentrated more in the
use of titanium. Sand casting product lines increased over 1995 due to an
improved aircraft market. Marketing and sales efforts, specifically adding
sales agents to promote wider coverage of territories, along with an emphasis
on commercial programs, had a positive effect. Patterns for sand castings
showed a significant increase as several new programs were secured. These new
programs include aircraft structural components, helicopter parts, and
aircraft engines. Sales of wire formed products were up in 1996, largely in
lawn and garden equipment and vending machine parts. This increase in 1996
was due to the growth in most markets served as well as penetration into new
applications. Sales of investment castings decreased in 1996 as customers
implemented tighter inventory controls, and price competition caused the loss
early in 1996 of several contracts in the firearms, construction, and
automotive industries. However, sales were definitely in an upward trend
over the last four months of 1996, as some previously terminated contracts
were reactivated.
Cost of products sold for the year ended December 31, 1996 was $99,991,000,
compared to $84,952,000 for the same period of 1995, which was an increase of
$15,039,000 or 18%. Cost of sales as a percent of net sales for the year
ended December 31, 1996 was 82.8%, the same percentage as 1995. Material,
labor, and overhead components of 1996 costs decreased in relation to net
sales due to greater production volumes and some price increases. However,
these favorable changes were partially offset by a greater amount of tooling,
patterns, and die costs, which were primarily related to the development of
new parts in the Metal Fabrications segment. Cost of products sold for 1995
included an unusual workers' compensation expense of $250,000. Cost of sales
as a percent of net sales before unusual items was 82.6% for 1995.
Selling, general and administrative expenses for the year ended December
31, 1996 were $14,501,000, an increase of $1,290,000 or 9.8% from 1995
expenses of $13,211,000. This increase related mostly to variable expenses,
such as commissions, which grew with the larger sales volume. Selling,
general and administrative expenses as a percent of net sales for 1996
decreased to 12.0% compared to 12.9% for 1995.
Operating income for the year ended December 31, 1996 was $6,342,000
compared to $4,435,000 in 1995, an increase of $1,907,000 or 43%. Operating
income as a percent of net sales for 1996 was 5.3% compared to 4.3% for 1995.
Industrial Tool business segment operating income for 1996 was $3,052,000, a
decrease of $57,000 from the prior year. While sales volume improved in this
segment, it was offset by some higher material costs which could not be
passed on to customers due to competitive pricing pressures. Metal
Fabrications business segment operating income for 1996 was $3,352,000, an
increase of $1,982,000 from 1995 results. The higher 1996 sales volume
improved production efficiencies, which were partially offset by increased
tooling costs.
Other income for the year ended December 31, 1996 was $711,000, a decrease
of $368,000 from 1995 other income of $1,079,000. Interest earned,
principally on marketable securities, for 1996 was $877,000, a decrease of
$352,000 from 1995. This decrease in interest was due mainly to the use of
marketable securities for the cash purchase of AST.
Net income for the year ended December 31, 1996 was $4,277,000 or $.50 per
share, compared to $3,333,000 or $.39 per share for the year ended December
31, 1995.
Backlog of orders at December 31, 1996 was $44,696,000, compared to
$31,908,000 at December 31, 1995, an increase of $12,788,000 or 40% with most
of the increase coming from the aircraft industry within the Metal
Fabrications segment. The backlog for the Industrial Tools business segment
was $6,317,000 at December 31, 1996, an increase of $120,000 from 1995. The
majority of the change was within the tungsten carbide cutting tool product
line. Cutting tools used by the automotive and aerospace industries showed
the most improvement. Mining tools product line backlog decreased as the
reduced demand for high sulfur coal caused several coal mines to close. The
construction tools product line backlog decreased partially due to a slowdown
in foreign orders. The wear parts product line backlog for 1996 remained the
same as 1995. Metal Fabrications business segment backlog at December 31,
1996 was $38,379,000, an increase of $12,668,000 from December 31, 1995.
Backlog for powdered metal components product line, related to the AST
acquisition in 1996, added $1,366,000 to the backlog. The forgings product
line backlog nearly doubled, adding $9,671,000 over 1995. Orders for several
new commercial and military programs were received in 1996. Backlog in this
product line has also been increased by customers placing orders farther in
advance due to long lead times for raw material supply. Product lines
utilizing the sand casting process added $1,231,000 to the December 31, 1996
backlog, with an increased backlog for sand patterns indicating continued
demand for new sand castings. Wire forming experienced an increase in
backlog at year end in comparison to December 31, 1995 with growth in most
industries served and expansion into components used in vending machines.
Investment castings product line backlog started off slow in 1996 with the
fourth quarter improving enough to bring the year end backlog in line with
1995.
Outlook
A 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.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $8,038,000 at December 31, 1997, an
increase of $4,450,000 from December 31, 1996. Proceeds of $5,000,000 from a
matured marketable security were reinvested in interest-bearing cash
equivalents. On September 30, 1997, $1,866,000 was used to purchase Schulz
Products, Incorporated (Schulz), a precision machining facility which
services the aerospace market. Investments in plant and equipment at
operating locations totaled $1,728,000, in accordance with management's
program to expand the operations of the Company. Design, engineering, and
equipment costs of $1,541,000 were incurred for the processing plant being
built for reclamation and decommissioning purposes in Muskogee, OK.
Operations provided $4,782,000 of cash. The net loss and deferred income
tax credit used $8,364,000 and $2,286,000, respectively, which included non-
cash deductions of $14,000,000 for environmental remediation and deferred tax
benefits of $2,555,000. Depreciation and amortization provided $1,926,000 and
$230,000, respectively. Accounts receivable and accounts payable increased
$2,434,000 and $2,750,000, respectively, as working capital needs were
greater due to higher sales and production volumes. Inventories increased
$974,000 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 December 31, 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 December 31, 1997, the Company had $4,997,000 of current marketable
securities, classified as held-to-maturity, invested in a U.S. Treasury Note.
The current marketable securities had a fair value of $4,992,000 at December
31, 1997, and mature April 30, 1998.
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores 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.
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 operate for
approximately ten years a commercial plant to complete the processing of
residues currently contained in storage ponds at the site, which will
materially reduce the amount of radioactive materials to be disposed of
during decommissioning. In conjunction with construction of the processing
plant, the Company will modify the wastewater treatment plant at the site and
install a drainage system. Decommissioning would include 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.
The Company has received an amendment to its current NRC license and a
revision to its current wastewater discharge permit to allow for the
construction and operation of the processing plant. Construction has begun on
the processing plant which, when completed, will extract commercially
valuable materials such as tantalum, columbium, scandium and other rare earth
and rare metal elements from the feedstock residues. The estimated cost of
construction is approximately $12 million. Residue processing is expected to
start in the first quarter of 1999.
At December 31, 1997 and 1996, the Company had recorded liabilities of
$10.8 million and $3.9 million, respectively, for discontinued operations
including the estimated net costs of reclaiming and decommissioning the site
during and after approximately ten years of processing the residues described
above. An additional provision for discontinued operations of $7,100,000 was
recorded in 1997 to increase the established liabilities for the estimated
cost of additional studies which may be required by regulatory agencies,
higher start-up costs, and potentially greater disposal costs after
completion of the residue processing period, as well as for cost estimates
related to probable future environmental remediation at a second site which
had been part of the Metal Products business segment. The second site is
regulated under the Resource Conservation and Recovery Act and, as a result
of alleged migration of contaminants from this second site, the Company also
has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately
the same amount, related to residue processing. The estimated value of
materials to be extracted is based on analysis of samples taken from the
residues and a valuation of such materials using current market prices
discounted to reflect possible price decreases, including those which 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. 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.
In October 1995 the NRC advised the Company that a decommissioning funding
plan cost estimate based upon on-site disposal of most of the radioactive
wastes at the site was appropriate to consider. The NRC cautioned the
Company, however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the required NRC
approval, local and other federal agencies may have to be satisfied that the
Company's disposal plan is sound. 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 and proposed 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" which may
include the Company's site; however, there is no assurance that a plan
providing for on-site containment will ultimately be approved.
Implementation of a decommissioning plan for the Company's site which
includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost
for decommissioning and to assure in advance that adequate funds will be
available to cover those costs. NRC regulations identify a number of
acceptable methods for assuring funds for decommissioning, including surety
instruments such as letters of credit, cash deposits and combinations
thereof. The NRC October 1995 letter requested that the Company 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.
In addition to the two sites included in the discontinued operations, the
Company has a total of eight 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 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 $1,250,000 at
December 31, 1997. The cost of preparing the property for sale, principally
environmental clean-up, will be capitalized. Management believes that
proceeds from the sale of the property will be adequate to recover its costs,
including costs of preparing the property for sale. The Company believes the
liabilities established for other costs associated with the close-down of PSM
are adequate to cover such costs. A significant decline in real estate
values in Los Angeles and/or identification of additional contamination on-
site could require the liabilities to be adjusted.
The Company has also been notified that it is a potentially responsible party
at five sites owned by third parties. The Company's participation at three
sites is de minimis, and at two other sites the Company is being defended by
its insurance carriers.
The Company has accrued for estimated environmental investigatory and
noncapital remediation costs based upon an evaluation of currently available
facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. An additional provision of $6,900,000 was
recorded in 1997 for the estimated potential exposure for such costs expected
to be incurred in the future. Actual costs to be incurred in future periods
at identified sites may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Future information and
developments will require the Company to continually reassess the expected
impact of these environmental matters. The Company does not expect that any
sums it may have to pay in connection with these environmental liabilities
would have a materially adverse effect on its consolidated financial
position.
Impact of Year 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $1 million, which includes
$690,000 for leasing new software and upgrades to existing computer
equipment, most of which would have been done through normal operations of
the information systems.
The project is estimated to be completed not later than March 31, 1999,
which is prior to any anticipated impact on its operating systems. The
Company believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue will not pose significant operational
problems for its computer systems. However, if such modifications and
conversions are not made or are not completed in a timely manner, the Year
2000 Issue could have a material impact on the operations of the Company.
The Company has initiated formal communications with all of its significant
suppliers and large customers to determine the extent to which the Company's
interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. There is no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and would not have an adverse effect on the Company's
systems.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, and similar
uncertainties.
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, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Fansteel Inc. at December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted
accounting principles. 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
Chicago, Illinois
March 10, 1998
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
1997 1996 1995
Net Sales $140,194,075 $120,833,831 $102,597,754
Cost and Expenses
Cost of products sold 118,677,180 99,990,541 84,951,756
Selling, general and
administrative 16,508,472 14,500,746 13,210,850
Environmental remediation 6,900,000 - -
142,085,652 114,491,287 98,162,606
Operating Income (Loss) (1,891,577) 6,342,544 4,435,148
Other Income (Expense)
Interest income on investments 681,157 864,569 1,215,883
Interest expense (88,780) (34,409) (3,521)
Other (331,397) (119,276) (133,579)
260,980 710,884 1,078,783
Income (Loss) from Continuing
Operations Before Income Taxes (1,630,597) 7,053,428 5,513,931
Income Tax Provision 877,000 2,776,000 2,181,000
Income (Loss) from Continuing
Operations (2,507,597) 4,277,428 3,332,931
(Loss)from Discontinued
Operations (5,856,000) - -
Net Income (Loss) $ (8,363,597) $ 4,277,428 $ 3,332,931
Income (Loss) Per Common Share
Continuing operations $(.29) $.50 $.39
Discontinued operations $(.68) $ - $ -
Net Income (loss) $(.97) $.50 $.39
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET
At December 31,
1997 1996
ASSETS
Current Assets
Cash and cash equivalents $ 8,038,229 $ 3,588,290
Marketable securities 5,041,196 5,173,804
Accounts receivable, less allowance of
$280,000 in 1997 and $276,000 in 1996 21,782,872 18,700,927
Inventories
Raw material and supplies 3,815,376 4,715,341
Work-in-process 15,306,393 13,461,036
Finished goods 7,273,625 6,423,995
26,395,394 24,600,372
Less:
Reserve to state certain inventories at
LIFO cost 6,931,677 7,083,466
Total inventories 19,463,717 17,516,906
Other assets - current
Deferred income taxes 2,279,162 1,681,398
Other 1,576,333 1,370,062
Total Current Assets 58,181,509 48,031,387
Net Assets of Discontinued Operations 4,073,442 2,532,431
Property, Plant and Equipment
Land 1,421,641 1,421,641
Buildings 10,802,718 10,559,942
Machinery and equipment 51,293,733 49,561,052
63,518,092 61,542,635
Less accumulated depreciation 48,853,529 47,236,179
Net Property, Plant and Equipment 14,664,563 14,306,456
Other Assets
Marketable securities - 4,989,159
Prepaid pension asset 7,493,212 7,697,238
Deferred income taxes - 30,277
Property held for sale 1,249,692 1,128,851
Goodwill 3,128,276 3,358,580
Other 41,721 53,063
Total Other Assets 11,912,901 17,257,168
$ 88,832,415 $ 82,127,442
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 10,678,303 $ 9,913,437
Accrued liabilities 11,553,266 8,650,505
Income taxes 501,745 590,093
Current maturities of long-term debt 322,499 335,522
Total Current Liabilities 23,055,813 19,489,557
Long-term Debt 1,599,962 1,779,057
Other Liabilities
Discontinued operations and environmental
remediation 16,900,000 3,500,000
Deferred income taxes 356,220 2,074,811
Total Other Liabilities 17,256,220 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 25,423,275 33,786,872
Total Shareholders' Equity 46,920,420 55,284,017
$ 88,832,415 $ 82,127,442
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,
1997 1996 1995
Cash Flows From Operating
Activities
Net income (loss) $ (8,363,597) $ 4,277,428 $ 3,332,931
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,155,974 1,933,166 1,998,557
Provision for environmental
remediation & discontinued
operations 14,000,000 - -
Net pension charge 204,026 12,570 232,933
Deferred income tax (credit)
charge (2,286,078) 667,702 887,580
Gain from disposals of
property, plant and equipment - - (7,750)
Gain on sale of marketable
securities - (2,899) -
Change in assets and
liabilities:
Decrease (increase) in
marketable securities 121,767 (147,702) (289,093)
(Increase) in accounts
receivable (2,433,940) (3,557,360) (1,257,235)
(Increase) in inventories (974,196) (2,664,065) (1,734,758)
(Increase) in other
assets - current (193,753) (325,909) (52,597)
Increase (decrease) in
accounts payable and accrued
liabilities 2,750,059 (309,505) (520,087)
(Decrease) increase in income
taxes payable (88,348) (104,154) 636,766
(Increase) decrease in other
assets (109,499) (22,000) 160,171
Net cash provided by (used
in) operating activities 4,782,415 (242,728) 3,387,418
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31,
1997 1996 1995
Cash Flows From Investing
Activities
Payment for acquisitions (1,865,986) (6,937,409) -
Investment in marketable
securities - (9,100,000) (5,280,031)
Proceeds from disposition of
marketable securities 5,000,000 14,753,135 5,280,031
Proceeds from sale of assets
held for sale - 597,255 -
Proceeds from sale of property,
plant and equipment 2,800 - 7,750
Capital expenditures (1,727,523) (2,039,452) (2,854,855)
Increase in net assets of
discontinued operations-
design, engineering and
equipment for processing
plant (1,541,011) (968,424) (821,954)
Net cash (used in)
investing activities (131,720) (3,694,895) (3,669,059)
Cash Flows From Financing
Activities
Payments on long-term debt (335,522) (171,224) (17,197)
Proceeds from long-term debt 143,404 956,596 392,310
Principal payments for capital
leases (8,638) (98,419) (103,885)
Dividends paid - - (2,579,658)
Net cash (used in) provided
by financing activities (200,756) 686,953 (2,308,430)
Net Increase (decrease) In Cash
And Cash Equivalents 4,449,939 (3,250,670) (2,590,071)
Cash And Cash Equivalents At
Beginning Of Year 3,588,290 6,838,960 9,429,031
Cash And Cash Equivalents At End
Of Year $ 8,038,229 $ 3,588,290 $ 6,838,960
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Unrealized
Years Ended Common Retained (Loss) on
December 31, Stock Earnings Securities Total
1995
Balance at January 1 $ 21,497,145 $ 28,756,171 $ (81,525) $ 50,171,791
Net income - 3,332,931 - 3,332,931
Unrealized gain
on securities - - 97,923 97,923
Dividends ($.30 per
share) - (2,579,658) - (2,579,658)
Balance at
December 31 21,497,145 29,509,444 16,398 51,022,987
1996
Net income - 4,277,428 - 4,277,428
Unrealized (loss)
on securities - - (16,398) (16,398)
Dividends ($.00 per
share) - - - -
Balance at
December 31 21,497,145 33,786,872 - 55,284,017
1997
Net (loss) - (8,363,597) - (8,363,597)
Dividends ($.00 per
share) - - - -
Balance at
December 31 $ 21,497,145 $ 25,423,275 $ - $ 46,920,420
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The consolidated financial statements include the accounts of Fansteel Inc.
and its subsidiaries (the "Company").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents. On December 31, 1997 and 1996, the
Company had purchased $6,750,000 and $1,900,000, respectively, of securities
through banks under agreements to resell on January 2, 1998 and January 2,
1997, respectively. Due to the short-term nature of the agreements, the
Company did not take possession of the securities which were instead held in
the Company's safekeeping accounts at the banks.
All investments with a maturity greater than three months are accounted for
under Financial Accounting Standards Board (FASB) Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company determines the appropriate classification at time of purchase.
Securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at cost, adjusted for amortization of premiums
and discounts to maturity. Marketable securities not classified as held-to-
maturity are classified as available-for-sale. Available-for-sale securities
are carried at fair value, which is based on quoted prices. Unrealized gains
and losses, net of tax, are reported as a separate component of shareholders'
equity. The cost of securities available-for-sale is adjusted for
amortization of premiums and discounts to maturity. Interest and
amortization of premiums and discounts for all securities are included in
interest income. Realized gains and losses are included in other income.
Cost of securities sold is determined on a specific identification basis.
Inventories are valued at the lower of cost, determined principally on the
"last-in, first-out" (LIFO) basis, or market. Costs include direct material,
labor and applicable manufacturing overhead. Inventories valued using the
LIFO method comprised 89% and 92% of inventories at current cost at December
31, 1997 and 1996, respectively.
Acquisitions of properties and additions to existing facilities and equipment
are recorded at cost. Accelerated depreciation is the principal method used
for both financial reporting and income tax purposes on additions 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. This change in accounting method resulted in
depreciation expense being $416,000 less in 1996 than it would have been if
the prior method had been used. This change increased net income by $250,000
or $.03 per share for 1996. Accelerated depreciation is still the method used
for income tax purposes.
Goodwill of $3,128,000 at December 31, 1997, 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 1997 and $96,000 in 1996.
Revenue from sales of products is generally recognized upon shipment to
customers. Revenue from sales of tooling, patterns and dies is generally
recognized upon acceptance by the customer.
Income tax expense is based on reported earnings before income taxes.
Deferred income taxes reflect the temporary difference between assets and
liabilities recognized for financial reporting and such amounts recognized
for tax purposes which requires recognition of deferred tax liabilities and
assets. Deferred tax liabilities and assets are determined based on the
differences between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recognized if
it is anticipated that some or all of a deferred tax asset may not be
realized.
Earnings per share are computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding. In
March 1997, the FASB issued SFAS No. 128, "Earnings per Share." Adoption of
this new standard has no impact on the Company.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for
years beginning after December 15, 1997. Statement 131 establishes standards
for the way the public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
reports. It also established standards for related disclosures about
products and services, geographic areas, and major customers. Since
Statement 131 is effective for years beginning after December 15, 1997, the
Company will adopt the new requirements retroactively in 1998. The Company
has not determined, if any, the impact on its disclosures.
Certain reclassifications have been made to prior years' financial statements
to conform with the 1997 presentation.
2. Marketable Securities
At December 31, 1997, the Company held investments in marketable securities
which were classified as held-to-maturity. Securities classified as held-to-
maturity at December 31, 1997 consisted of a security with a maturity date
within one year, and are classified as Marketable Securities as a part of
Current Assets. This security is stated at amortized cost plus accrued
interest.
The held-to-maturity securities at December 31, 1997 include the following:
Amortized Fair
Cost Value
U.S. Treasury Note, face value of
$5,000,000, interest at 5.125%, due
April 30, 1998 $ 4,997,318 $ 4,992,188
Accrued interest 43,878
Net Book Value - Held-to-Maturity
Securities: 5,041,196
At December 31, 1996, all the Company's investments in marketable securities
were classified as held-to-maturity. These securities included both a
security due within one year and a security with a maturity date beyond one
year. The security with a maturity date within one year was classified as
Marketable Securities as a part of Current Assets and was stated at amortized
cost plus accrued interest. The security with a maturity date beyond one
year was included in Other Non-Current Assets and was stated at amortized
cost.
The held-to-maturity securities at December 31, 1996 included the following:
Amortized Fair
Cost Value
Marketable Securities - Current:
U.S. Treasury Note, face value of
$5,000,000, interest at 6.250%, due
January 31, 1997 $ 5,000,000 $ 5,001,563
Accrued interest 173,804
5,173,804
Marketable Securities - Non-Current:
U.S. Treasury Note, face value of
$5,000,000, interest at 5.125%, due
April 30, 1998 4,989,159 $ 4,948,438
Net Book Value - Held-to-Maturity
Securities: $ 10,162,963
The calculation of gross unrealized (loss) for the years ended December 31,
1997 and 1996 is as follows:
Gross
Fair Value Cost Unrealized
Gain (Loss)
1997:
Held-to-maturity securities:
U.S. Treasury Note, face
value of $5,000,000,
interest at 5.125%, due
April 30, 1998 $ 4,992,188 $ 4,997,318 $ (5,130)
Gross Unrealized (Loss) $ (5,130)
1996:
Held-to-maturity securities:
U.S. Treasury Note, face
value of $5,000,000,
interest at 5.125%, due
April 30, 1998 $ 4,948,438 $ 4,989,159 $ (40,721)
U.S. Treasury Note, face
value of $5,000,000,
interest at 6.250%, due
January 31, 1997 5,001,563 5,000,000 1,563
Gross Unrealized (Loss) $ (39,158)
Net unrealized gains (losses) on held-to-maturity securities have not been
recognized in the accompanying consolidated financial statements.
Net realized gains on marketable securities for the year ended December
31,1996 were $2,899. There were no realized gains or losses for the years
ended December 31, 1997 or 1995.
3. Accrued Liabilities
Accrued liabilities at December 31, 1997 and 1996 include the following:
1997 1996
Payroll and related costs $ 3,832,133 $ 3,159,997
Taxes, other than income 288,574 217,544
Profit sharing 1,040,804 770,873
Insurance 2,990,037 2,421,667
Plant shutdown and environmental 1,718,595 1,589,268
Professional Fees 536,161 160,094
Other 1,146,962 331,062
$ 11,553,266 $ 8,650,505
4. Discontinued Operations, Contingent Liabilities, and Other Liabilities
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores 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.
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 operate for
approximately ten years a commercial plant to complete the processing of
residues currently contained in storage ponds at the site, which will
materially reduce the amount of radioactive materials to be disposed of
during decommissioning. In conjunction with construction of the processing
plant, the Company will modify the wastewater treatment plant at the site and
install a drainage system. Decommissioning would include 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.
The Company has received an amendment to its current NRC license and a
revision to its current wastewater discharge permit to allow for the
construction and operation of the processing plant. Construction has begun on
the processing plant which, when completed, will extract commercially
valuable materials such as tantalum, columbium, scandium and other rare
earth and rare metal elements from the feedstock residues. The estimated cost
of construction is approximately $12 million. Residue processing is expected
to start in the first quarter of 1999.
At December 31, 1997 and 1996, the Company had recorded liabilities of
$10.8 million and $3.9 million, respectively, for discontinued operations
including the estimated net costs of reclaiming and decommissioning the site
during and after the approximate ten years of processing the residues
described above. An additional provision for discontinued operations of
$7,100,000 was recorded in 1997 to increase the established liabilities for
the estimated cost of additional studies which may be required by regulatory
agencies, higher start-up costs, and potentially greater disposal costs after
completion of the residue processing period, as well as, for cost estimates
related to probable future environmental remediation at a second site which
had been part of the Metal Products business segment. The second site is
regulated under the Resource Conservation and Recovery Act and, as a result
of alleged migration of contaminants from this second site, the Company also
has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA)
at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately
the same amount, related to residue processing. The estimated value of
materials to be extracted is based on analysis of samples taken from the
residues and a valuation of such materials using current market prices
discounted to reflect possible price decreases, including those which 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. 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.
In October 1995 the NRC advised the Company that a decommissioning funding
plan cost estimate based upon on-site disposal of most of the radioactive
wastes at the site was appropriate to consider. The NRC cautioned the
Company, however, that on-site disposal may require preparation of an
Environmental Impact Statement and that, in addition to the required NRC
approval, local and other federal agencies may have to be satisfied that the
Company's disposal plan is sound. 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 and proposed 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" which may
include the Company's site; however, there is no assurance that a plan
providing for on-site containment will ultimately be approved.
Implementation of a decommissioning plan for the Company's site which
includes off-site disposal may not be financially feasible.
The NRC decommissioning regulations require licensees to estimate the cost
for decommissioning and to assure in advance that adequate funds will be
available to cover those costs. NRC regulations identify a number of
acceptable methods for assuring funds for decommissioning, including surety
instruments such as letters of credit, cash deposits and combinations
thereof. The NRC October 1995 letter requested that 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 for
discontinued operations were $1,859,000, $1,516,000 and $1,061,000 in 1997,
1996, and 1995, respectively. 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 and 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, 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 decommissioning funding assurance requirements.
The net assets of discontinued operations at December 31, 1997 and 1996
include the following (in thousands of dollars):
1997 1996
Land $ 110 $ 110
Building 5,292 5,218
Machinery & Equipment 750 -
6,152 5,328
Less accumulated depreciation 4,805 4,805
Net fixed assets 1,347 523
Design and engineering costs
for processing plant 2,726 2,009
$ 4,073 $ 2,532
In addition to the two sites included in the discontinued operations, the
Company has a total of eight 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 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 $1,250,000 at
December 31, 1997. The cost of preparing the property for sale, principally
environmental clean-up, will be capitalized. Management believes that
proceeds from the sale of the property will be adequate to recover its costs,
including costs of preparing the property for sale. The Company believes the
liabilities established for other costs associated with the close-down of PSM
are adequate to cover such costs. A significant decline in real estate
values in Los Angeles and/or identification of additional contamination on-
site could require the liabilities to be adjusted.
The Company has also been notified that it is a potentially responsible party
at five sites owned by third parties. The Company's participation at three
sites is de minimis, and at two of the other sites the Company is being
defended by its insurance carriers.
The Company has accrued for estimated environmental investigatory and
noncapital remediation costs based upon an evaluation of currently available
facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. An additional provision of $6,900,000 was
recorded in 1997 for the estimated potential exposure for such costs expected
to be incurred in the future. Actual costs to be incurred in future periods
at identified sites may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. Future information and
developments will require the Company to continually reassess the expected
impact of these environmental matters. The Company does not expect that any
sums it may have to pay in connection with these environmental liabilities
would have a materially adverse effect on its consolidated financial
position.
5. Debt
Long-term debt at December 31, 1997 and 1996 consisted of the following:
1997 1996
Mississippi Business Finance
Corporation 5.487% Note, due 2011 $ 1,055,000 $ 956,596
Loans from various Pennsylvania
Economic Agencies with interest rates
ranging from 2.0% to 5.0%, due from
1998 to 2009 647,729 860,076
Loans from various Iowa Economic
Agencies with interest rates ranging
from 2.0% to 5.0%, due from 1998 to
2009 219,732 297,907
1,922,461 2,114,579
Less current maturities 322,499 335,522
Total long-term debt $ 1,599,962 $ 1,779,057
The above loans are collateralized by machinery and equipment with a net book
value of $2,061,000.
The aggregate maturities for long-term debt for the five years after December
31, 1997 are $322,000, $283,000, $241,000, $112,000, and $81,000,
respectively.
Interest paid on debt for the years ended December 31, 1997, 1996 and 1995
amounted to $89,000, $17,000, and $4,000, respectively.
The fair value of the Company's debt at December 31, 1997 and 1996 was
$1,779,000 and $2,189,000, 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.
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.
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1997 and 1996 are as follows:
1997 1996
Deferred tax assets - current:
Plant shutdown, idle facilities and
environmental costs $ 431,677 $ 154,316
Self insurance accruals 781,246 648,718
Vacation accruals 371,767 395,352
State income taxes 350,780 291,582
Other 343,692 191,430
$ 2,279,162 $ 1,681,398
Deferred tax assets (liabilities) -
non-current:
Plant shutdown, idle facilities and
environmental costs $ 4,536,752 $ 438,344
Pension credits (2,374,928) (2,414,493)
Tax depreciation in excess of book
depreciation (388,444) (131,046)
Other 102,164 32,384
1,875,544 (2,074,811)
State income tax net operating loss
carryforwards net of valuation
allowance 81,091 520,633
State income taxes 169,145 (490,356)
250,236 30,277
Valuation Allowance (2,482,000) -
$ (356,220) $ (2,044,534)
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.
At December 31, 1997 and 1996, the Company had potential state income tax
benefits of $703,000 and $926,000, respectively, from net operating loss
carryforwards that expire in various years through 2011. For financial
reporting purposes, valuation allowances of $622,000 and $405,000 at December
31, 1997 and 1996, respectively, were recognized for net operating loss
carryforwards not anticipated to be realized before expiration. State income
tax benefits of $255,000 expired unused after returns were filed for the year
ended December 31, 1996, which were offset by $223,000 of valuation
allowance.
Details of the provision (benefit) for income taxes in the consolidated
statements of operations are as follows:
1997 1996 1995
Current taxes
Federal $ 1,378,000 $ 1,767,000 $ 908,000
State and other 541,000 341,000 385,000
1,919,000 2,108,000 1,293,000
Deferred income tax
charge (credit)
Federal (4,489,000) 524,000 856,000
State (753,000) 144,000 32,000
Valuation allowances 2,956,000 - -
(2,286,000) 668,000 888,000
Total $ (367,000) $ 2,776,000 $ 2,181,000
Allocated to discontinued
operations (1,244,000) - -
Continuing Operations $ 877,000 $ 2,776,000 $ 2,181,000
The deferred income tax credit in 1997 resulted primarily from provisions for
environmental costs accrued for continuing and discontinued operations
reduced by the valuation allowances established in 1997.
The deferred tax charge in 1996 resulted primarily from payments for certain
plant shutdown, idle facilities and environmental costs accrued in prior
years and from the net effect of timing of the deduction of certain employee
fringe benefits.
The deferred income tax charge in 1995 results primarily from payments for
certain plant shutdown, idle facilities and environmental costs accrued in
prior years.
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:
1997 1996 1995
Income tax provision at
statutory rate $(2,968,000) $ 2,398,000 $ 1,875,000
Add:
State income taxes, net of
federal income tax provision (395,000) 320,000 275,000
Change in valuation
allowances 2,956,000 - -
Other, net 40,000 58,000 31,000
Total income tax provision $ (367,000) $ 2,776,000 $ 2,181,000
Income taxes paid for each of the three years in the period ended December
31, 1997 amounted to $2,161,000, $2,189,000, and $1,147,000, respectively.
Income tax refunds received during the three years in the period ended
December 31, 1997 amounted to $262,000, $30,000, and $427,000, respectively.
7. Retirement Plans
The Company has several non-contributory defined benefit plans covering
approximately 27% 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 $80,964,
$22,380, and $63,113 in 1997, 1996 and 1995, respectively.
The net pension expense (credit) in 1997, 1996 and 1995 is comprised of:
1997 1996 1995
Service cost $ 393,000 $ 485,000 $ 368,000
Interest cost on projected
benefit obligations 3,049,000 3,058,000 3,181,000
Actual return on Plan assets (2,999,000) (1,750,000) (6,021,000)
Net amortization and
deferral (209,000) (1,587,000) 2,660,000
Net pension expense (credit) $ 234,000 $ 206,000 $ 188,000
The plans' funded status and amounts recognized in the balance sheet at
December 31 are as follows:
1997 1996
Actuarial present value of benefit
obligations
Vested $ 38,602,023 $ 38,581,143
Non-vested 454,764 572,069
Total accumulated benefit obligations $ 39,056,787 $ 39,153,212
Projected benefit obligations for services
rendered to date $ 41,057,007 $ 41,417,209
Plan assets at fair value, primarily U.S.
Government securities and publicly traded
stocks and bonds 40,112,613 40,136,249
Plan assets less than projected
benefit obligations (944,394) (1,280,960)
Effect of change in assumptions,
net gains and losses 9,144,013 10,365,078
Unrecognized net excess plan assets
at January 1, 1986 being recognized
over approximately 15 years (706,407) (1,386,880)
Prepaid pension asset $ 7,493,212 $ 7,697,238
The assumptions used in determining the actuarial present value of projected
benefit obligations were as follows:
1997 1996 1995
Discount rate 7.50% 7.75% 7.50%
Rate of increase in future
compensation levels 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 8.00% 8.00% 8.00%
The Company has several defined contribution plans covering approximately 89%
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 1997, 1996 and 1995 were $1,494,000, $1,235,000, and
$869,000, 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, 1997, 1996 and 1995 were
$40,000, $37,000, and $37,000, respectively.
8. Business Segments
The Company is a specialty metals manufacturer. For financial reporting
purposes, the Company classifies its products into the following two business
segments:
Industrial Tools:
Tungsten carbide cutting tools, milling tools, toolholding devices, mining
tools and accessories, construction tools, wear parts and related industrial
parts.
Metal Fabrications:
Titanium, nickel base and high alloy steel forgings; aluminum and magnesium
sand castings; powdered metal components; special wire products and
investment castings.
Financial information concerning the Company's segments for the years ended
December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
NET SALES:
INDUSTRIAL TOOLS -
Sales $ 56,292,542 $ 54,068,214 $ 50,068,802
Intersegment sales (1,133) (239) (95)
56,291,409 54,067,975 50,068,707
METAL FABRICATIONS -
Sales 83,971,767 66,784,892 52,551,291
Intersegment sales (69,101) (19,036) (22,244)
83,902,666 66,765,856 52,529,047
$140,194,075 $120,833,831 $102,597,754
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 3,860,150 $ 3,052,446 $ 3,109,433
METAL FABRICATIONS 1,217,477 3,351,717 1,370,067
CORPORATE (6,969,204) (61,619) (44,352)
$ (1,891,577) $ 6,342,544 $ 4,435,148
Intersegment sales are accounted for at prices equivalent to the competitive
market prices for similar products.
The operating loss at Corporate in 1997 includes a provision for
environmental remediation of $6,900,000 of which $3,076,000 relates to
Industrial Tools facilities and $3,824,000 relates to Metal Fabrications
facilities.
The percentages of net sales for classes of similar products which exceeded
ten percent of the Company's consolidated net sales, for the period
indicated, are set forth below:
Percentage of
Consolidated Net Sales
Products Business Segments 1997 1996 1995
Tungsten carbide
cutting tools Industrial Tools 27% 30% 31%
Nonferrous forgings Metal Fabrications 15% 12% 11%
Investment castings Metal Fabrications 10% 9% 12%
The identifiable assets, depreciation and amortization, and capital
expenditures for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
Identifiable assets
Industrial Tools $19,854,696 $17,383,706 $15,895,229
Metal Fabrications 39,739,799 36,727,565 23,553,746
Corporate/Discontinued 29,237,920 28,016,171 35,080,878
Total assets $88,832,415 $82,127,442 $74,529,853
Depreciation and amortization
Industrial Tools $ 684,961 $ 773,130 $ 778,260
Metal Fabrications 1,471,013 1,160,036 1,220,297
Corporate/Discontinued - - -
Total depreciation and
amortization $ 2,155,974 $ 1,933,166 $ 1,998,557
Capital expenditures
Industrial Tools $ 890,465 $ 1,553,372 $ 1,062,578
Metal Fabrications 1,396,112 4,370,080 1,792,277
Corporate/Discontinued - - -
Total capital expenditures $ 2,286,577 $ 5,923,452 $ 2,854,855
Capital expenditures for the Metal Fabrications segment include $559,000 from
the acquisition of Schulz Products, Inc. in 1997 and $3,884,000 from the
acquisition of American Sintered Technologies, Inc. in 1996.
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 noncancelable leases at December 31, 1997
were $1,096,000, including $550,000 in 1998, $445,000 in 1999, $83,000 in
2000, $18,000 in 2001, and $0 in 2002 and thereafter. Rental expense was
$1,224,000 in 1997, $1,174,000 in 1996, and $1,094,000 in 1995.
10. Acquisition
On September 30, 1997, the Company acquired all the assets and certain
liabilities of Schulz Products, Inc. (Schulz) for the cash price of
$1,865,986. The nature of the business of Schulz is the machining of aircraft
components.
On July 31, 1996, the Company acquired all of the assets and certain
liabilities of American Sintered Technologies, Inc. (AST) for the cash price
of $6,937,000. In addition to the cash paid, the Company assumed $954,000 of
various Pennsylvania Economic Agencies loans. The nature of the business of
AST is the manufacture of ferrous and non-ferrous powdered metal components
serving the automotive, lawn and garden, plumbing, hardware, and electrical
hardware industries.
Both acquisitions were accounted for as a purchase and are included in the
Company's Metal Fabrications business segment. The Company's results would
not be materially different if these acquisitions were made at the beginning
of the year. The fair value of assets purchased and liabilities assumed for
Schulz in 1997 and AST in 1996 are shown below:
1997 1996
Accounts Receivable $ 648,005 $ 837,938
Inventory 972,615 337,534
Other assets - current 12,518 42,077
Property, plant and equipment 559,054 3,884,000
Goodwill - 3,454,540
Accounts payable and accrued liabilities (326,206) (664,586)
Debt - (954,094)
Net cash paid $ 1,865,986 $ 6,937,409
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive
officers is included in Part I page 11.
Additional information concerning the Company's directors is
incorporated by reference to information under the caption
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on May 20, 1998.
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 May 20, 1998.
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 May 20, 1998.
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 May 20, 1998.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a)(1) Index to Consolidated Financial Statements:
Form 10-K
Page
Summary of Quarterly Results of Operations
for the years ended December 31, 1997 and
1996. 14
Report of Independent Auditors. 25
Consolidated Statement of Operations for each
of the three years in the period ended
December 31, 1997. 26
Consolidated Balance Sheet at December 31,
1997 and 1996. 27-28
Consolidated Statement of Cash Flows for each
of the three years in the period ended
December 31, 1997. 29-30
Consolidated Statement of Shareholders'
Equity for each of the three years in the
period ended December 31, 1997. 31
Notes to Consolidated Financial Statements. 32-46
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule
for each of the three years ended
December 31, 1997:
II. Valuation and qualifying accounts 49
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 10a - Incentive Compensation Plan
Exhibit 10b - Change in Control Agreement
Exhibit 22 - Subsidiaries of the Registrant
All other exhibits are omitted since the required information is not
present or is not present in amounts sufficient to require submission.
(b) No reports have been filed on Form 8-K during the last quarter
of the year ended December 31, 1997.
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 12/31/97 $ 276,440 $ 234,463 $ 230,463 $ 280,440
Year ended 12/31/96 $ 276,440 $ (11,665) $ (11,665) $ 276,440
Year ended 12/31/95 $ 276,440 $ 16,022 $ 16,022 $ 276,440
(1) Accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FANSTEEL INC.
Registrant
Date: 3/27/98 By: \s\ William D. Jarosz
William D. Jarosz, 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\ William D. Jarosz Chief Executive Officer March 27, 1998
William D. Jarosz
Vice President and Chief
\s\ R. Michael McEntee Financial Officer March 27, 1998
R. Michael McEntee
Director
Betty B. Evans
\s\ Edward P. Evans Director March 27, 1998
Edward P. Evans
\s\ Robert S. Evans Director March 27, 1998
Robert S. Evans
\s\ Thomas M. Evans, Jr. Director March 27, 1998
Thomas M. Evans, Jr.
\s\ Peter J. Kalis Director March 27, 1998
Peter J. Kalis
\s\ Jack S. Petrik Director March 27, 1998
Jack S. Petrik
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with
an asterisk (*), are incorporated by reference:
Exhibit Prior Filing or Sequential
No. Page Number Herein
3.1 Certificate of Incorporation Company's Form 10-K filed
March 31, 1993 (*)
3.2 By-Laws Annex II to the Company's
annual proxy statement
dated March 15, 1985,
File No. 1-8676 (*)
10a Incentive Compensation Plan Company's Form 10-K filed
March 26, 1997 (*)
10b Change in Control Agreement Company's Form 10-K filed
March 26, 1997 (*)
22 Subsidiaries of the Registrant 52
EXHIBIT 22 - 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
(1) These entities are wholly-owned subsidiaries of Custom Technologies
Corporation.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of December 31, 1997 and the
related consolidated statement of operations for the twelve months ended
December 31, 1997 and is qualified in its entirety by reference to the Company's
Form 10-K filing for the period ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,038,229
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<RECEIVABLES> 22,063,312
<ALLOWANCES> 280,440
<INVENTORY> 19,463,717
<CURRENT-ASSETS> 58,181,509
<PP&E> 63,518,092
<DEPRECIATION> 48,853,529
<TOTAL-ASSETS> 88,832,415
<CURRENT-LIABILITIES> 23,055,813
<BONDS> 1,599,962
<COMMON> 21,497,145
0
0
<OTHER-SE> 25,423,275
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<SALES> 140,194,075
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<INCOME-CONTINUING> (2,507,597)
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