FORM 10Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended September 30, 1998
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number: 1-8676
FANSTEEL INC.
(Exact name of registrant as specified in its charter)
Delaware 36-1058780
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Number One Tantalum Place, North Chicago, IL 60064
(Address of principal executive offices) (Zip Code)
(847) 689-4900
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
(X) Yes ( ) No
8,598,858
(Number of shares of $2.50 par value common stock outstanding
as of September 30, 1998)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1998 1997
ASSETS (Unaudited) *
Current Assets
Cash and cash equivalents (including
securities purchased under agreement
to resell of $3,960,065 in 1998
and $6,750,000 in 1997) $ 4,527,623 $ 8,038,229
Marketable securities - 5,041,196
Accounts receivable - net 22,625,214 21,782,872
Inventories
Raw material and supplies 5,210,476 3,815,376
Work-in-process 15,901,410 15,306,393
Finished goods 8,464,303 7,273,625
29,576,189 26,395,394
Less reserve to state certain
inventories at LIFO cost 6,931,677 6,931,677
Total inventories 22,644,512 19,463,717
Other assets - current
Deferred income taxes 2,264,118 2,279,162
Other 1,221,669 1,576,333
Total current assets 53,283,136 58,181,509
Net Assets of Discontinued Operations 10,447,866 4,073,442
Property, Plant and Equipment
Land 1,990,938 1,421,641
Buildings 12,815,934 10,802,718
Machinery and equipment 54,943,073 51,293,733
69,749,945 63,518,092
Less accumulated depreciation 50,000,287 48,853,529
Net Property, Plant and Equipment 19,749,658 14,664,563
Other Assets
Prepaid pension asset 7,735,946 7,493,212
Property held for sale 1,460,598 1,249,692
Goodwill 2,955,548 3,128,276
Other 85,930 41,721
Total Other Assets 12,238,022 11,912,901
Total Assets $95,718,682 $88,832,415
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 3
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET (Contd.)
September 30, December 31,
1998 1997
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $12,838,737 $10,678,303
Accrued liabilities 11,024,200 11,553,266
Accrued income taxes 302,658 501,745
Current maturities of long-term debt 406,805 322,499
Total current liabilities 24,572,400 23,055,813
Long-term Debt 2,455,286 1,599,962
Other Liabilities
Discontinued operations and environmental
remediation 16,300,000 16,900,000
Deferred income taxes 1,297,260 356,220
Total other liabilities 17,597,260 17,256,220
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 29,597,679 25,423,275
Foreign currency translation adjustment (1,088) -
Total Shareholder's Equity 51,093,736 46,920,420
Total Liabilities and Shareholders' Equity $95,718,682 $88,832,415
* - Derived from audited financial statements
(See Notes to Consolidated Financial Statements)
FANSTEEL INC. Form 10-Q
CONSOLIDATED STATEMENT OF INCOME Page 4
(UNAUDITED)
For the Three Months Ended
September 30, September 30,
1998 1997
Net sales $ 36,746,257 $ 34,039,581
Costs and expenses
Cost of products sold 31,074,206 31,108,688
Selling, general and administrative 4,387,661 4,191,015
35,461,867 35,299,703
Operating income (loss) 1,284,390 (1,260,122)
Other income (expense)
Interest income on investments 113,101 183,058
Interest expense (29,876) (21,912)
Other (33,996) (105,247)
49,229 55,899
Income (loss) before income taxes 1,333,619 (1,204,223)
Income tax provision (benefit) 509,000 (364,000)
Net income (loss) $ 824,619 $ (840,223)
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Basic and diluted net income (loss) per
share $0.10 ($0.10)
Dividends per common share $ - $ -
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 5
FANSTEEL INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
For the Nine Months Ended
September 30, September 30,
1998 1997
Net sales $116,179,452 $103,595,100
Costs and expenses
Cost of products sold 96,439,293 87,992,339
Selling, general and administrative 13,440,039 12,358,452
109,879,332 100,350,791
Operating income 6,300,120 3,244,309
Other income (expense)
Interest income on investments 405,247 512,194
Interest expense (73,120) (67,417)
Other 30,157 (122,060)
362,284 322,717
Income before income taxes 6,662,404 3,567,026
Income tax provision 2,488,000 1,514,000
Net income $ 4,174,404 $ 2,053,026
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Basic and diluted net income per share $0.49 $0.24
Dividends per common share $ - $ -
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 6
FANSTEEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 4,174,404 $ 2,053,026
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,715,517 1,638,426
Net pension (credit) charge (242,734) 104,131
Deferred income tax charge (credit) 956,084 (158,318)
Gain from disposals of property, plant,
and equipment (135,062) -
Changes in assets and liabilities:
Decrease (increase) in marketable 41,196 (129,616)
securities
(Increase) in accounts receivable (842,342) (685,718)
(Increase) in inventories (3,181,883) (136,997)
Decrease (increase) in other assets-
current 354,664 (318,872)
Increase in accounts payable & accruals 1,031,368 933,912
(Decrease) in income taxes payable (199,087) (210,345)
(Increase) decrease in other assets (255,115) 636,544
Net cash provided by operating activities 3,417,010 3,726,173
Cash flows from investing activities:
Payments for acquisitions (Fansteel de
Mexico in 1998 and Schulz Products in
1997):
Accounts receivable - (448,694)
Inventory - (834,500)
Other assets - current - (9,692)
Property, plant and equipment (3,779,307) (559,054)
Accounts payable and accrued liabilities - 360,091
Total acquisitions (3,779,307) (1,491,849)
Additions to property, plant and equipment (2,960,053) (1,188,893)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (6,374,424) (944,944)
Proceeds from disposition of marketable
securities - current 5,000,000 5,000,000
Proceeds from sale of property, plant and
equipment 246,538 2,800
Net cash (used in) provided by investing
activities (7,867,246) 1,377,114
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 7
FANSTEEL INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
Increase (decrease) in
cash and cash equivalents
Cash flows from financing activities:
Proceeds from long-term debt $ 1,225,000 $ 143,404
Payments of long-term debt (285,370) (279,171)
Principal payments for capital leases - (8,638)
Net cash provided by (used in) financing
activities 939,630 (144,405)
Net (decrease) increase in cash and cash
equivalents (3,510,606) 4,958,882
Cash and cash equivalents at beginning of
period 8,038,229 3,588,290
Cash and cash equivalents at September 30 $ 4,527,623 $ 8,547,172
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 8
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at September 30, 1998, and the consolidated
statements of income for the three months and nine months ended September 30,
1998 and 1997, and the consolidated statements of cash flows for the nine months
ended September 30, 1998 and 1997, are unaudited, but include all adjustments
(consisting only of normal and recurring accruals) which the Company considers
necessary for fair presentation.
The accompanying consolidated financial statements do not include all
disclosures normally provided in annual financial statements and, therefore,
should be read in conjunction with the year-end financial statements.
The Company determines its securities to be "held-to-maturity" or "available-
for-sale" securities, depending upon the applicable security. Marketable
securities with a maturity date of one year or less are classified as current,
and over one year maturity date are classified as non-current on the balance
sheet. As of September 30, 1998, the Company had no marketable securities.
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,
insurance policies, and development loans. Total unused lines of credit,
including the revolving credit agreement, were $12.1 million as of September 30,
1998.
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.
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Statement 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, adoption of this Statement has no impact on net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on available-for-sale
securities and foreign currency translation adjustments, which prior to adoption
were reported separately in shareholders' equity, to be included in other
comprehensive income. For the three months and nine months ended September 30,
1998 total comprehensive income was $1,088 less than net income due to foreign
currency translation losses. For the three months and nine months ended
September 30, 1997 total comprehensive income was equal to net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, which
changes the reporting requirements for segment information in annual financial
statements and also requires selected segment information in interim reports to
shareholders. The statement is effective for financial statements for years
beginning after December 15, 1997. The Company has not determined the impact,
if any, on its statements.
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 9
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
(UNAUDITED)
Business Segment Information
The Company is engaged in the manufacture of specialty metal products, which
it classifies into two business segments: Industrial Tools and Metal
Fabrications. Net sales and operating income for the third quarter and nine
months ended September 30, 1998 and 1997 for each of the Company's business
segments are summarized below:
Third Quarter Nine Months
1998 1997 1998 1997
Net Sales:
Industrial Tools
Sales $14,503,674 $14,522,066 $ 44,959,462 $ 42,077,511
Intersegment sales (525) (823) (5,332) (823)
14,503,149 14,521,243 44,954,130 42,076,688
Metal Fabrications
Sales 22,243,764 19,520,041 71,238,748 61,577,584
Intersegment sales (656) (1,703) (13,426) (59,172)
22,243,108 19,518,338 71,225,322 61,518,412
$36,746,257 $34,039,581 $116,179,452 $103,595,100
Operating Income:
Industrial Tools $ 870,940 $ 999,630 $ 2,973,532 $ 2,814,415
Metal Fabrications 423,085 (2,241,599) 3,363,453 475,516
Corporate (9,635) (18,153) (36,865) (45,622)
$ 1,284,390 $(1,260,122) $ 6,300,120 $ 3,244,309
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "prospects", "estimated", "should", "may" or the negative thereof or
other variations thereon or comparable terminology indicating the Company's
expectations or beliefs concerning future events. The Company cautions that such
statements are qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, a number of
which are identified in the discussion which follows. Other factors could also
cause actual results to differ materially from expected results included in
these statements.
Quarter Ended September 30, 1998 Compared to Quarter Ended September 30, 1997
Net sales for the quarter ended September 30, 1998 of $36,746,000 increased
$2,706,000, or 7.9%, from the third quarter, 1997 net sales of $34,040,000.
Industrial Tools business segment net sales of $14,503,000 for the third
quarter of 1998 remained nearly unchanged from third quarter, 1997 net sales of
$14,521,000. The tungsten carbide cutting tools product line declined in the
third quarter of 1998 compared to the third quarter of 1997, as gains made in
rotary tool sales did not offset the declines in Tantung products, turning tools
and milling tools. Improvements in rotary tools sales over the prior year third
quarter were partially the result of expanded production capacity. Sales of
Tantung products, turning tools, and milling tools were impacted by a general
slowdown in the domestic markets served. Insert sales, also classified within
the tungsten carbide cutting tools line, remained unchanged from the prior year
third quarter. Sales of wear parts declined in the third quarter of 1998
compared to the third quarter of 1997, primarily due to a slowdown in the oil
drilling and die markets. Third quarter sales for coal mining tools were at the
highest quarterly sales level of the last two years, as order activity has been
strong from the Midwestern mines. After achieving the same mark in the second
quarter of 1998, third quarter construction tool sales posted its highest
quarterly sales in the last two years. The improvement in construction tool
sales is attributable to the addition of new tool designs, the efforts of an
increased marketing staff, a higher level of investment into conventional
marketing strategies, and increased spending on road construction and repair
programs across the country.
Metal Fabrications business segment net sales for the quarter ended September
30, 1998 were $22,243,000, an increase of $2,725,000, or 14.0%, from third
quarter, 1997 net sales of $19,518,000. Sales of machined aircraft parts, which
were added to the Company's product offerings with the September 30, 1997
acquisition of Schulz Products Inc., contributed over a quarter of the total
increase. Based on the strength of the commercial aircraft market, forging sales
increased 10.6% and sand casting product sales increased 16.3% over the third
quarter of 1997. Increased demand from a more diversified customer base
positively impacted sales of wire formed products, offsetting some of the
typical decline associated with third quarter slowdowns from the lawn and garden
market. Third quarter 1998 sales of investment castings were at the highest
quarterly level of the past two years, due largely to increased demand in the
medium-duty truck market. Sales of powdered metal components increased compared
to the third quarter of 1997, due to higher activity from the lawn and garden
industry.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
The Company's operating income for the third quarter ended September 30, 1998
was $1,284,000 compared to an operating loss of $1,260,000 for the same period
of the prior year. The third quarter, 1997 operating loss included unusual
charges of $2,800,000, related primarily to the write-off of non-salable
inventories at the sand casting operation.
Industrial Tools business segment operating income for the third quarter of
1998 was $871,000 compared to $1,000,000 for the same period of 1997, a decrease
of $129,000, or 12.9%. As a percentage of net sales, operating income for this
business segment was 6.0% for the third quarter of 1998 compared to 6.9% for the
same period of the prior year. Negatively impacting operating income were
increased selling expenses, labor costs, and manufacturing overhead, of which a
substantial portion was related to current expansions at the Latrobe, PA and the
Gulfport, MS facilities. These expansions are targeted for completion in the
latter part of the fourth quarter.
Operating income for the Metal Fabrications business segment for the third
quarter of 1998 was $423,000, compared to an operating loss of $2,242,000 for
the same period of 1997. Results for the third quarter of 1997 included unusual
charges of $2,800,000, related primarily to the write-off of non-salable
inventories at the sand casting operation. The sand casting operation incurred
high scrap costs in the third quarter of 1998, although these scrap costs were
improved when compared to the third quarter of 1997. Increased efforts to reduce
scrap have been initiated and will be closely monitored. Despite the higher
sales volume, operating income suffered from production inefficiencies at two of
the Company's manufacturing facilities. At the forging facility, production
flows were hindered by the inability of the current steam delivery system to
meet increased capacity requirements. The upgrading and replacement of the
current system with a new one began in the second quarter of 1998 with
completion targeted for the third quarter. Revised environmental requirements,
however, delayed installation of the new system, with full implementation now
expected in the first quarter of 1999. In addition, operating income at the
forging facility was negatively impacted by higher material costs. The Company's
investment casting facility also experienced production inefficiencies as a
result of capacity constraints. To provide capacity relief, the Company
purchased a 69,000 square foot investment casting facility in Reynosa, Mexico on
August 27, 1998. The new plant, Fansteel de Mexico, will produce investment
castings in conjunction with the Company's existing facility. Operating income
in the third quarter of 1998 was negatively impacted by start-up costs which
will continue through year-end when production is expected to begin at the new
facility.
Other income for the third quarter of 1998 was $49,000, a decrease of $7,000
from third quarter, 1997 other income of $56,000. Non-recurring losses
decreased $51,000, as third quarter 1997 results included a non-recurring charge
of $85,000 for a closed facility, and bad debts decreased $31,000. Interest
earned on marketable securities decreased $70,000 from the third quarter of 1997
as less cash was available for investment since the September 30, 1997
acquisition of Schulz Products and the start-up of the construction phase for
the environmental reclamation and decommissioning at the discontinued operation
in Muskogee, Oklahoma.
Net income for the quarter ended September 30, 1998 was $825,000, or $.10 per
share, compared to a net loss of $840,000, or $.10 per share, for the same
period of 1997. The net loss in the third quarter of 1997 included unusual
charges, net of tax benefits, of $1,818,000 or $.21 per share, related primarily
to the write-off of non-salable inventories at the sand casting operation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended September
30, 1997
Net sales for the first nine months of 1998 were $116,179,000 compared to
$103,595,000 for the same period in 1997, an increase of $12,584,000, or 12.1%.
Net sales for the Industrial Tools business segment for the nine months ended
September 30, 1998 were $44,954,000, an increase of $2,877,000, or 6.8%, from
net sales of $42,077,000 for the same period of 1997. Increased shipments of
rotary tools, classified within the tungsten carbide cutting tools product line,
were the primary reason for the improvement in this business segment. Production
capacity increases from 1997 equipment investments have allowed for the
improvement in sales over the prior year. Insert sales, also classified within
the cutting tool product line, showed improvement as customers placed higher
emphasis on special orders. Compared to the first nine months of 1997, coal
mining tool sales improved as order activity for existing tool designs increased
from the mines in the Midwest. Shipments of wear parts declined in the first
nine months of 1998 compared to 1997 primarily due to a slowdown in the oil
drilling and die markets. Construction tool sales posted its highest quarterly
sales of the last two years in the second and third quarters of 1998, resulting
in gains over the prior year. The improvement in construction tool sales is
attributable to the addition of new tool designs, the efforts of an increased
marketing staff, a higher level of investment into conventional marketing
strategies, and increased spending on road construction and repair programs
across the country.
Metal Fabrications business segment net sales for the first nine months of
1998 were $71,225,000 compared to $61,518,000 for the same period of the prior
year, an increase of $9,707,000, or 15.8%. Machined aircraft components,
produced by Schulz Products Inc. which was acquired September 30, 1997, were
responsible for nearly a third of this increase. Sales of forgings for the nine
months ended September 30, 1998 improved by 18.9% from the same period of the
prior year due to the continued strength of the commercial aircraft market.
Sales of magnesium and aluminum sand casting products, sold primarily to the
commercial aircraft market, increased 7.6% over the prior year. Wire formed
products reported its strongest quarters ever in the first and second quarters
of 1998, resulting in an 11.8% increase over the same period of the prior year.
Demand for wire formed products was especially strong in the lawn and garden
equipment industry. Investment casting revenues improved over the prior year on
the strength of its second and third quarter sales which were impacted by the
increased demand for engine components used in the medium-duty truck industry.
Sales of powdered metal components increased 2.3% compared to the first nine
months of 1997, partially as a result of increased production capacity from 1997
capital investments.
The Company's operating income of $6,300,000 for the nine months ended
September 30, 1998 increased by $3,056,000 from operating income of $3,244,000
for the first nine months of 1997. Nine months operating income in 1997 included
unusual charges of $2,800,000, related primarily to the write-off of non-salable
inventories at the sand casting operation.
Industrial Tools business segment operating income for the first nine months
of 1998 was $2,974,000, compared to $2,814,000 for the same period of 1997, an
increase of $160,000, or 5.7%. As a percentage of net sales, operating income
was 6.6% for the first nine months of 1998 compared to 6.7% in the same period
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
of the prior year. As a percentage of net sales, operating income was positively
impacted by lower material and outside processing costs. This was offset by
higher labor and overhead costs which are partially the result of capacity
constraints and the related on going facility expansions at Latrobe, PA and
Gulfport, MS. Compared to the first nine months of 1997, selling, general and
administrative expenses increased as a percentage of sales due to a higher level
of investment into conventional marketing strategies.
Metal Fabrications business segment operating income for the period ended
September 30, 1998 was $3,363,000, compared to $475,000 for the same period of
1997, an increase of $2,888,000. Nine month results for 1997 included third
quarter unusual charges of $2,800,000, related primarily to the write-off of
non-salable inventories at the sand casting operation. As a percentage of net
sales, operating income was 4.7% for the nine months ended September 30, 1998.
Operating income was negatively impacted by second and third quarter production
inefficiencies at both the forging and investment casting facilities and by
start-up costs associated with the August, 1998 acquisition of Fansteel de
Mexico, although these costs are expected to be minimized once the upgraded
steam delivery system and Mexico facility are in full operation. Controlling
high scrap costs at the sand casting operation is a high priority in improving
profitability at this facility.
Other income for the first nine months of 1998 was $362,000, an increase of
$39,000 from other income of $323,000 for the same period of the prior year.
Nonrecurring gains increased $188,000, $127,000 of which was from the sale of
excess, unused land and $85,000 of which was for a non-recurring charge in 1997
for a closed facility. Interest earned on marketable securities decreased
$107,000, as less cash was available for investment since the September 30, 1997
acquisition of Schulz Products and the start-up of the construction phase for
the environmental reclamation and decommissioning at the discontinued operation
in Muskogee, Oklahoma.
Net income for the nine months ended September 30, 1998 was $4,174,000, or
$.49 per share, compared to $2,053,000, or $.24 per share, for the same period
of 1997. Net income in 1997 included third quarter unusual charges, net of tax
benefits, of $1,818,000, or $.21 per share, related primarily to the write-off
of non-salable inventories at the sand casting operation.
Order backlog at September 30, 1998 was $58,163,000 compared to $52,119,000 at
September 30, 1997, an increase of $6,044,000, or 11.6%, with most of the
increase coming from the aircraft market within the Metal Fabrications business
segment. Schulz Products, acquired on September 30, 1997 and classified under
Metal Fabrications, contributed $1,683,000 to the backlog for machined aircraft
components. Industrial Tools business segment backlog of $4,891,000 at September
30, 1998 decreased by $2,537,000, or 34.2%, compared to September 30, 1997
backlog of $7,428,000. The decrease in the backlog for rotary tools, classified
within the tungsten carbide cutting tool product line, was responsible for a
large portion of the segment decline as these product sales suffered from market
down-turns, particularly in Asia. Wear parts backlog decreased as a result of a
slowdown in business, particularly in the oil industry where drilling compacts
are used, as the price of oil continues to remain low. While coal mining tools
backlog decreased from September 30, 1997 and the construction tools backlog was
unchanged from the same period, the change in the backlog is not a key indicator
of business as the majority of sales for these two product lines are from
finished stock. Metal Fabrications business segment backlog at September 30,
1998 was $53,272,000, an increase of $8,581,000, or 19.2%, from September 30,
1997. The forgings and sand casting products backlogs increased $1,376,000 and
$3,766,000, respectively, from
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
September 30, 1997 based on the strength of the aerospace market. Orders
received for investment castings were strong during the second quarter,
resulting in an increase in the ending backlog at September 30, 1998 compared to
the same period of the prior year. Backlog for wire formed products improved as
order activity increased in 1998 and the typical slowing of the lawn and garden
market did have as significant of an impact as in the prior year. The powdered
metal components backlog increased from September 30, 1997, as order activity
improved in the second and third quarters of 1998.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
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, and military ordnance, is key in continuing operating
profitability. The strong commercial aircraft market is expected to continue for
the near term based on the numerous orders received to date for forgings and
sand castings. Long-term prospects will depend on a steady build rate of new
aircraft and sales of spare parts for the planes now being built. 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 current operating units
and acquisitions. Start-up costs associated with the acquisition of Fansteel de
Mexico are expected to continue until production of revenues begins in the
fourth quarter of 1998 or the first quarter of 1999. 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 $4,528,000 at September 30, 1998, a
decrease of $3,510,000 from December 31, 1997. Investing activities used
$7,867,000. In accordance with management's program to expand the operations of
the Company, $3,779,000 was used for the acquisition of Fansteel de Mexico and
$2,960,000 was used for plant and equipment investments at operating facilities.
Design, engineering, and equipment costs of $6,374,000 were incurred for the
processing plant being built for reclamation and decommissioning purposes in
Muskogee, Oklahoma. A $5,000,000 marketable security matured and was reinvested
in interest-bearing cash equivalents. Proceeds from the sale of property,
plant, and equipment, primarily from unused land, provided $247,000. Operations
provided $3,417,000 with net income, depreciation and amortization generating
$4,174,000, $1,543,000 and $173,000, respectively. Working capital needs were
greater due to higher sales and production volumes resulting in increases in
accounts receivable of $842,000 and in inventory of $3,181,000. Days outstanding
and inventory turns have remained consistent with prior periods. Cash flows from
financing activities provided $940,000, with $1,225,000 received from the State
of Pennsylvania for low-interest development loans for expansion at the
Company's two Pennsylvania facilities. Debt payments for the nine months ended
September 30, 1998 were $285,000.
In the fourth quarter of 1995, the Company announced the suspension of the
quarterly shareholder dividend for the purpose of conserving cash for capital
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
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, insurance
policies, and development loans. Total unused lines of credit, including the
revolving credit agreement, were $12.1 million as of September 30, 1998.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. All of the Company's debt is related to
development loans obtained from various states. In February 1998, the Company
received a $125,000 development loan with an interest rate of 5.00% from the
State of Pennsylvania for the expansion of the powdered metal components
facility. In April 1998, the Company closed on a development loan of $1,100,000
with an interest rate of 5.75% from the State of Pennsylvania to fund expansion
of an Industrial Tools facility. As of September 30, 1998 all funds related to
this loan had been received.
On April 30, 1998 the Company's marketable securities, classified as held-to-
maturity and invested in a U.S. Treasury Note, matured. Proceeds from this
security were $5,000,000, which were reinvested in interest-bearing cash
equivalents.
Environmental Remediation and Discontinued Operations
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 16
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 late in
the first quarter of 1999.
At September 30, 1998 and 1997, the Company had recorded liabilities of $10
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
the fourth quarter of 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 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 17
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 $1,461,000 at September 30,
1998. The cost of preparing the property for sale, principally environmental
clean-up, has been capitalized as incurred. On October 23, 1998, this property
was sold. Management believes that the proceeds from this sale will be adequate
to recover its costs, including costs of preparing the property for sale and the
liabilities established for other costs associated with the close-down of PSM.
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 non-
capital 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 the
fourth quarter of 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 18
Impact of Year 2000
Many existing information technology ("IT") products and systems and non-IT
products and systems containing embedded processor technology were originally
programmed to represent any date by using six digits (e.g., 12/31/99), as
opposed to eight digits (e.g., 12/31/1999). Accordingly, such products and
systems may experience miscalculations, malfunctions, or disruptions when
attempting to process information containing dates that fall after December 31,
1999 or other dates, such as September 9, 1999 (9/9/99), a date traditionally
used by computer programmers as a default. These potential problems are
collectively referred to as the "Year 2000" problem. The following comments
summarize the Company's overall approach and status with respect to Year 2000
issues.
The Company has been engaged in an ongoing, comprehensive project to assess and
remediate the impact on its computer systems and programs of the Year 2000
problem. The assessment process began in late 1996 with the inventory of all
potentially affected hardware and software, along with a determination as to
whether or not they may be impacted by the Year 2000. This assessment has been
completed. All software developed in-house has been reviewed and necessary
modifications or replacements are in process with final testing to be completed
by the end of 1998. The Company has identified software supplied by outside
vendors which is not Year 2000 compliant. With respect to the critical
applications, the Company has acquired the most recent releases or purchased
replacement software which is Year 2000 compliant. Implementation and testing
of new releases and new software is scheduled to be completed by mid-1999. Non-
critical applications are being reviewed on an on-going basis with revision or
replacement being made as needed.
The Company began an assessment in 1998 of non-IT products and systems which
may contain embedded processor technology which will not recognize the year 2000
properly. This assessment is approximately 90% complete with completion
targeted for the first quarter of 1999. No significant issues have been
identified with non-IT products and systems.
The total Year 2000 costs are estimated at approximately $1.2 million, which
includes new hardware, new software and upgrades to existing computer equipment,
as well as, training for these new systems. Leases have been obtained as
operating leases for a majority of the new information technology which have
either a three or four year term, most of which would have been done through
normal operations of the information systems. Approximately 20% of the total
expenditures were made in 1997 with an additional 15% made in the first nine
months of 1998.
The Company initiated communications using questionnaires with key suppliers
and customers in 1998 to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 problems. Key suppliers have been determined based upon the amount of
business and the importance to the Company of the material or services. The
initial contacts were with financial institutions which provide banking and
employee benefit services. All of those financial institutions have responded
by identifying their plans to become year 2000 compliant and now provide
periodic reports on their progress. Other key suppliers and customers have
also been contacted using questionnaires. This process will be ongoing
throughout 1999 with responses reviewed, updates obtained and new key suppliers
and customers identified. To date, no negative responses have been received,
but there is no guarantee that systems of other companies on which the
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 19
Company's systems rely will be timely converted and would not have a material
adverse effect on the Company's systems.
The Year 2000 project is estimated to be completed by June 30, 1999, which is
prior to any anticipated impact on its IT and non-IT products and 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 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.
At this time, the Company is unable to determine its most reasonably likely
worst case scenarios as a result of the Year 2000 issue. The Company continues
to analyze possible scenarios as part of the Year 2000 project and will develop
and modify its contingency plans as more information becomes available. The
Company expects to address contingency planning activities throughout 1999.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 project 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 codes, and the level of compliance by key suppliers and
customers.
Form 10-Q
Page 20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
Form 10-Q
Page 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fansteel Inc.
(Registrant)
Date - 11/13/98 /s/ William D. Jarosz
William D. Jarosz
Chairman, President, and Chief Executive Officer
Date - 11/13/98 /s/R. Michael McEntee R.
Michael McEntee
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of September 30, 1998 and the
related consoldiated statement of income for the nine months ended September 30,
1998 and is qualified in its entirety by reference to the Company's Form 10Q
filing for the period ended September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,527,623
<SECURITIES> 0
<RECEIVABLES> 22,947,906
<ALLOWANCES> 322,692
<INVENTORY> 22,644,512
<CURRENT-ASSETS> 53,283,136
<PP&E> 69,749,945
<DEPRECIATION> 50,000,287
<TOTAL-ASSETS> 95,718,682
<CURRENT-LIABILITIES> 24,572,400
<BONDS> 2,455,286
0
0
<COMMON> 21,497,145
<OTHER-SE> 29,596,591
<TOTAL-LIABILITY-AND-EQUITY> 95,718,682
<SALES> 116,179,452
<TOTAL-REVENUES> 116,179,452
<CGS> 96,439,293
<TOTAL-COSTS> 109,879,332
<OTHER-EXPENSES> (362,284)
<LOSS-PROVISION> 13,288
<INTEREST-EXPENSE> 73,120
<INCOME-PRETAX> 6,662,404
<INCOME-TAX> 2,488,000
<INCOME-CONTINUING> 4,174,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,174,404
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
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