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 June 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 June 30, 1998)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 2
FANSTEEL INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
1998 1997
ASSETS (Unaudited) *
Current Assets
Cash and cash equivalents (including
securities purchased under agreement
to resell of $9,993,000 in 1998
and $6,750,000 in 1997) $11,778,467 $ 8,038,229
Marketable securities - 5,041,196
Accounts receivable - net 21,582,945 21,782,872
Inventories
Raw material and supplies 4,166,698 3,815,376
Work-in-process 16,295,547 15,306,393
Finished goods 8,323,984 7,273,625
28,786,229 26,395,394
Less reserve to state certain
inventories at LIFO cost 6,931,677 6,931,677
Total inventories 21,854,552 19,463,717
Other assets - current
Deferred income taxes 2,269,133 2,279,162
Other 1,469,777 1,576,333
Total current assets 58,954,874 58,181,509
Net Assets of Discontinued Operations 6,702,165 4,073,442
Property, Plant and Equipment
Land 1,311,631 1,421,641
Buildings 11,128,139 10,802,718
Machinery and equipment 52,240,736 51,293,733
64,680,506 63,518,092
Less accumulated depreciation 49,538,412 48,853,529
Net Property, Plant and Equipment 15,142,094 14,664,563
Other Assets
Prepaid pension asset 7,827,723 7,493,212
Property held for sale 1,417,652 1,249,692
Goodwill 3,013,124 3,128,276
Other 56,341 41,721
Total Other Assets 12,314,840 11,912,901
Total Assets $93,113,973 $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.)
June 30, December 31,
1998 1997
(Unaudited) *
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $11,020,236 $10,678,303
Accrued liabilities 11,292,647 11,553,266
Accrued income taxes 688,711 501,745
Current maturities of long-term debt 420,688 322,499
Total current liabilities 23,422,282 23,055,813
Long-term Debt 2,126,685 1,599,962
Other Liabilities
Discontinued operations and environmental
remediation 16,300,000 16,900,000
Deferred income taxes 994,801 356,220
Total other liabilities 17,294,801 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 28,773,060 25,423,275
Total Shareholder's Equity 50,270,205 46,920,420
Total Liabilities and Shareholders' Equity $93,113,973 $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
June 30, June 30,
1998 1997
Net sales $ 39,643,710 $ 35,841,277
Costs and expenses
Cost of products sold 32,761,600 29,196,317
Selling, general and administrative 4,531,455 4,218,835
37,293,055 33,415,152
Operating income 2,350,655 2,426,125
Other income (expense)
Interest income on investments 135,828 171,546
Interest expense (22,219) (22,283)
Other 98,833 935
212,442 150,198
Income before income taxes 2,563,097 2,576,323
Income tax provision 942,000 1,018,000
Net income $ 1,621,097 $ 1,558,323
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Basic and diluted net income per share $0.19 $0.18
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 Six Months Ended
June 30, June 30,
1998 1997
Net sales $ 79,433,195 $ 69,555,519
Costs and expenses
Cost of products sold 65,365,087 56,883,651
Selling, general and administrative 9,052,378 8,167,437
74,417,465 65,051,088
Operating income 5,015,730 4,504,431
Other income (expense)
Interest income on investments 292,146 329,136
Interest expense (43,244) (45,505)
Other 64,153 (16,813)
313,055 266,818
Income before income taxes 5,328,785 4,771,249
Income tax provision 1,979,000 1,878,000
Net income $ 3,349,785 $ 2,893,249
Weighted average number of common
shares outstanding 8,598,858 8,598,858
Basic and diluted net income per share $0.39 $0.34
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 SIX MONTHS ENDED JUNE 30,
1998 1997
Increase (decrease) in
cash and cash equivalents
Cash flows from operating activities:
Net income $ 3,349,785 $ 2,893,249
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,116,532 1,109,895
Net pension (credit) charge (334,511) 70,636
Deferred income tax charge 648,610 456,748
Gain from disposals of property, plant,
and equipment (136,527) -
Changes in assets and liabilities:
Decrease in marketable securities 41,196 126,933
Decrease (increase) in accounts
receivable 199,927 (1,322,634)
(Increase) in inventories (2,390,835) (1,149,599)
Decrease (increase) in other assets-
current 106,556 (187,486)
(Decrease) in accounts payable & accruals (518,686) (100,617)
Increase in income taxes payable 186,966 79,163
(Increase) in other assets (182,580) (59,714)
Net cash provided by operating activities 2,086,433 1,916,574
Cash flows from investing activities:
Additions to property, plant and equipment (1,588,921) (523,054)
Increase in net assets of discontinued
operations-design, engineering and
equipment for processing plant (2,628,723) (216,845)
Proceeds from disposition of marketable
securities - current 5,000,000 5,000,000
Proceeds from sale of property, plant and
equipment 246,537 -
Net cash provided by investing activities 1,028,893 4,260,101
Cash flows from financing activities:
Proceeds from long-term debt 828,774 143,404
Payments of long-term debt (203,862) (202,103)
Principal payments for capital leases - (8,638)
Net cash provided by (used in) financing
activities 624,912 (67,337)
Net increase in cash and cash equivalents 3,740,238 6,109,338
Cash and cash equivalents at beginning of
period 8,038,229 3,588,290
Cash and cash equivalents at June 30 $11,778,467 $ 9,697,628
(See Notes to Consolidated Financial Statements)
PART 1 - FINANCIAL INFORMATION Form 10-Q
ITEM 1 - FINANCIAL STATEMENTS Page 7
FANSTEEL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Financial Statements
The consolidated balance sheet at June 30, 1998, and the consolidated
statements of income for the three months and six months ended June 30, 1998 and
1997, and the consolidated statements of cash flows for the six months ended
June 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 June 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 June 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 six months ended June 30, 1998
and 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 8
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 second quarter and six
months ended June 30, 1998 and 1997 for each of the Company's business segments
are summarized below:
Second Quarter Six Months
1998 1997 1998 1997
Net Sales:
Industrial Tools
Sales $15,102,758 $14,204,615 $30,455,788 $27,555,445
Intersegment sales (579) - (4,807) -
15,102,179 14,204,615 30,450,981 27,555,445
Metal Fabrications
Sales 24,545,312 21,668,621 48,994,984 42,057,543
Intersegment sales (3,781) (31,959) (12,770) (57,469)
24,541,531 21,636,662 48,982,214 42,000,074
$39,643,710 $35,841,277 $79,433,195 $69,555,519
Operating Income:
Industrial Tools $ 958,223 $ 989,400 $ 2,102,592 $ 1,814,785
Metal Fabrications 1,403,892 1,453,184 2,940,368 2,717,115
Corporate (11,460) (16,459) (27,230) (27,469)
$ 2,350,655 $ 2,426,125 $ 5,015,730 $ 4,504,431
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 9
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 June 30, 1998 Compared to Quarter Ended June 30, 1997
Net sales for the quarter ended June 30, 1998 of $39,644,000 increased
$3,803,000, or 10.6%, from the second quarter, 1997 net sales of $35,841,000.
Industrial Tools business segment net sales for the second quarter of 1998 were
$15,102,000 compared to $14,205,000 for the same period of 1997, an increase of
$897,000, or 6.3%. The tungsten carbide cutting tools product line provided most
of this increase, primarily in sales of rotary tools, as recent equipment
investments resulted in expanded production capacity. Construction tool sales
experienced its strongest quarterly sales in the last two years, as demand
increased overall due to the addition of new tool designs, the efforts of an
increased marketing staff, and a higher level of investment into conventional
marketing strategies. Compared to the second quarter of 1997, coal mining tool
sales improved in the current quarter as order activity was strong from the
mines in the Midwest. Sales of wear parts declined in the second quarter of 1998
compared to the second quarter sales of 1997 primarily due to a slowdown in the
oil drilling and die markets.
Metal Fabrications business segment net sales for the quarter ended June 30,
1998 were $24,542,000, an increase of $2,905,000, or 13.4%, from the second
quarter, 1997 net sales of $21,637,000. Sales of machined aircraft parts, which
were added to our product offerings with the September 30, 1997 acquisition of
Schulz Products Inc., contributed over a third of the total increase, but the
operation represents less than 5% of the total segment sales. Forging sales
increased 12.5% over the second quarter of 1997 based on the continuing strength
of the commercial aircraft market. Sales of magnesium and aluminum sand casting
products also increased in the second quarter of 1998, due to the strength of
the commercial aircraft market. The mix of production castings sold versus new
casting tooling sold also improved. Investment castings revenues posted strong
sales gains over the second quarter of 1997, due to increased customer demand,
particularly in the medium-duty truck market. After recording its highest ever
quarterly sales in the first quarter of 1998, wire formed products exceeded that
record in the second quarter of 1998. Sales to the lawn and garden equipment
market, which is the largest market served by the wire formed products line, are
historically the highest in the first quarter, as shipments generally decline in
the following quarters due to the seasonal nature of the industry. However,
demand for wire formed products from this industry continued to be strong into
the second quarter of 1998. Increased demand from a more diversified customer
base also impacted sales of this product line. Sales of powdered metal
components decreased from the second quarter of 1997, as key customers
experienced capacity problems which caused them to reduce inventory inputs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 10
The Company's operating income for the quarter ended June 30, 1998 of
$2,351,000 decreased $75,000, or 3.1%, from second quarter, 1997 operating
income of $2,426,000. As a percentage of net sales, operating income in the
second quarter of 1998 decreased to 5.9% from 6.8% in the second quarter of
1997.
Industrial Tools business segment operating income for the second quarter of
1998 was $958,000 compared to $989,000 for the same period of 1997, a decrease
of $31,000, or 3.1%. As a percentage of net sales, operating income was 6.3% for
the second quarter of 1998 compared to 7.0% for the same period last year.
Increases in labor, manufacturing overhead, and selling expenses offset the
profits from the higher sales volume. The largest increase was in manufacturing
overhead, of which a substantial portion relates to facility expansion. As a
percentage of sales, material and outside processing costs declined.
Operating income for the Metal Fabrications business segment for the second
quarter of 1998 was $1,404,000, compared to $1,453,000 for the same period of
1997, a decrease of $49,000, or 3.4%. As a percentage of net sales, operating
income was 5.7% for the second quarter of 1998 compared to 6.7% in the same
period last year. Despite the higher sales volume, operating income as a
percentage of sales was lower as a result of production inefficiencies.
Production flows were hindered at the Company's forging operation as the steam
delivery system was not able to meet current capacity requirements. The steam
delivery system is being upgraded and replaced concurrently with a new system
that is scheduled to be fully operational during the latter part of the third
quarter. In addition, the Company's investment casting facility experienced a
degree of inefficiency caused by ramping up production quickly to meet
escalating sales and the need to maintain on-time deliveries. The Company is
exploring methods of providing the operation with capacity expansion relatively
quickly.
Other income for the second quarter of 1998 was $212,000, an increase of
$62,000 from 1997 other income of $150,000. Nonrecurring gains of $137,000 were
recorded during the second quarter of 1998, which included the sale of excess,
unused land. Interest earned on marketable securities decreased $36,000 from the
second quarter of 1997 as less cash was available for investment since the
September 30, 1997 acquisition of Schulz Products.
Net income for the quarter ended June 30, 1998 was $1,621,000 or $.19 per
share compared to $1,558,000 or $.18 per share for the same period of 1997, an
increase of $63,000, or 4.0%. Net income as a percentage of net sales for the
second quarter of 1998 was 4.1% compared to 4.3% for the second quarter of 1997.
Net income benefited from a lower tax rate in the second quarter of 1998 related
to state income tax valuation allowance reduction.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Net sales for the first six months of 1998 were $79,433,000 compared to
$69,556,000 for the same period in 1997, an increase of $9,877,000, or 14.2%.
Net sales for the Industrial Tools business segment for the first six months
of 1998 were $30,451,000, an increase of $2,896,000, or 10.5%, from net sales of
$27,555,000 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 showed improvement within the
cutting tool product line, as customers placed higher emphasis on
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 11
special orders. Construction tool sales for the first half of 1998 improved over
the prior year as demand for the new pyramid-tipped construction tool was
greater than anticipated and the investments into marketing staff and
conventional marketing strategies started to materialize. In addition,
construction tool shipments for the first half of 1998 included sales for a
municipality contract which did not begin until the second quarter of 1997.
Compared to the first six months of 1997, coal mining tool sales improved as
order activity for existing tool designs increased from the mines in the
Midwest. Sales of wear parts declined in the first six months of 1998 compared
to 1997 primarily due to a slowdown in the oil drilling and die markets.
Metal Fabrications business segment net sales for the first six months of 1998
were $48,982,000 compared to $42,000,000 for the first half of 1997, an increase
of $6,982,000, or 16.6%. 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 were up 23.4% from the prior year
due to the continued strength of the commercial aircraft market. Also
increasing on the strength of the commercial aircraft market were sales of
magnesium and aluminum sand casting products which increased 4.4% over the prior
year. The increase in sand casting products was not as large as other aerospace-
related product lines due to the decrease in new casting tooling sales. The mix
of sales shifted to production castings, which increased 15.1%. Investment
casting revenues grew 6.3% over the prior year, based largely on the increased
demand for engine components used in the medium-duty truck industry. Wire formed
products reported its two strongest quarters ever, resulting in a 12.5% increase
over last year. Demand for wire formed products was especially strong in the
lawn and garden equipment industry. Sales of powdered metal components increased
2.1% over the first six months of 1997, partially as a result of increased
production capacity made available through 1997 capital investments.
The Company's operating income of $5,016,000 for the six months ended June 30,
1998 increased by $512,000, or 11.4%, from operating income of $4,504,000 for
the first six months of 1997. As a percentage of net sales, operating income for
the first half of 1998 decreased to 6.3% from 6.5% in the first half of 1997.
Industrial Tools business segment operating income for the first six months of
1998 was $2,103,000, compared to $1,815,000 for the same period of 1997, an
increase of $288,000, or 15.9%. As a percentage of net sales, operating income
was 6.9% for the first half of 1998 compared to 6.6% in the same period of the
prior year. Operating income increased in relation to the higher sales volume.
As a percentage of net sales, operating income was positively impacted by lower
material and outside processing costs, offset partially by higher labor and
overhead costs. Selling, general and administrative expenses remained the same
as a percent of net sales compared to the first six months of 1997.
Metal Fabrications business segment operating income for the first half of
1998 was $2,940,000, compared to $2,717,000 for the same period of 1997, an
increase of $223,000, or 8.2%. Operating income increased in relation to the
higher sales volume. As a percentage of net sales, operating income was 6.0% for
the six months ended June 30, 1998 compared to 6.5% for the same period last
year. Operating income as a percentage of sales was negatively impacted by the
second quarter production inefficiencies at the forging facility and investment
casting facility. Operating income as a percentage of sales was positively
impacted by reduced selling, general, and administrative expenses for the six
months ended June 30, 1998 compared to the same period of the prior year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 12
Other income for the first half of 1998 was $313,000, an increase of $46,000
from other income of $267,000 for the first half of 1997. Nonrecurring gains
increased $137,000 during the first half of 1998 compared to the same period of
1997 as a result of the sale of excess, unused land. Interest earned on
marketable securities decreased $37,000 from the prior first six months as less
cash was available for investment since the September 30, 1997 acquisition of
Schulz Products.
Net income for the six months ended June 30, 1998 was $3,350,000 or $.39 per
share compared to $2,893,000, or $.34 per share, for the same period of 1997, an
increase of $457,000, or 15.8%. Net income as a percentage of net sales at 4.2%
for the first half of 1998 remained the same as the same period of the prior
year.
Order backlog at June 30, 1998 was $60,151,000 compared to $52,069,000 at June
30, 1997, an increase of $8,082,000, or 15.5%, 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 $1,165,000 to the backlog for machined aircraft
components. Industrial Tools business segment backlog at $7,116,000 at June 30,
1998 remained nearly the same compared to June 30, 1997, increasing $40,000 or
0.6%. Within the tungsten carbide cutting tool product line, backlog for rotary
tools and inserts increased as customer demand for these products remained
strong. These increases were offset by lower backlogs for carbide wear parts,
construction tools and mining tools. Wear parts backlog decreased due to a
decline in orders for other die parts and drilling compacts. While the
construction tools backlog decreased, the change in the backlog is not a key
indicator of construction tool business as the majority of sales are from
finished stock. Coal mining tools backlog decreased from June 30, 1997 partially
due to the inclement weather in the eastern part of the United States during the
first quarter of 1998. Metal Fabrications business segment backlog at June 30,
1998 was $53,035,000, an increase of $8,042,000, or 17.9%, from June 30, 1997.
The forgings and sand casting products backlogs increased $1,155,000 and
$3,889,000, respectively, from June 30, 1997 based on the strength of the
aerospace market. Orders received for investment castings were strong during the
second quarter, resulting in a 41.4% increase in the ending backlog over the
prior year. The wire forming backlog improved as order activity was strong in
1998, but tapered off during the second quarter which is indicative of the lawn
and garden season slowing. The powdered metal backlog increased from June 30,
1997, as order activity improved in the second quarter 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, oil drilling 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 13
investment in current 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 $11,778,000 at June 30, 1998, an increase
of $3,740,000 from December 31, 1997. Investing activities provided $1,029,000
as a $5,000,000 marketable security matured and was reinvested in interest-
bearing cash equivalents. Investments in plant and equipment at operating
locations totaled $1,589,000, in accordance with management's program to expand
the operations of the Company. Design, engineering, and equipment costs of
$2,629,000 were incurred for the processing plant being built for reclamation
and decommissioning purposes in Muskogee, Oklahoma. Proceeds from the sale of
property, plant, and equipment provided $247,000. Working capital needs were
greater due to higher sales and production volumes resulting in an inventory
increase of $2,391,000. Inventory turns have improved compared to prior periods.
Cash flows from financing activities provided $625,000, with $829,000 received
from the state of Pennsylvania for low-interest development loans for expansion
at the Company's two Pennsylvania facilities. Debt payments were $204,000.
In the fourth quarter of 1995, the Company announced the suspension of the
quarterly shareholder dividend for the purpose of conserving cash for capital
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 June 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 proceeds 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 from the state of Pennsylvania to fund expansion
of an Industrial Tools facility. Funds of $704,000 were received in the second
quarter for this loan.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 14
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.
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 June 30, 1998 and 1997, the Company had recorded liabilities of $10.4
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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 15
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 $1,418,000 at June 30, 1998.
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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Form 10-Q
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 16
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 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.
Form 10-Q
Page 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
a) The Annual Meeting of Shareholders was held on May 20, 1998.
c) The nominations for Directors of the Company were brought
before shareholders of the Company at the Annual Meeting of
Shareholders. The votes cast for and votes withheld for each
of the following nominees are as follows:
Votes Votes
Nominee For Withheld
E. P. Evans 8,055,586 162,773
R. S. Evans 8,055,586 162,773
T. M. Evans, Jr. 8,055,586 162,773
W. D. Jarosz 8,055,520 162,839
P. J. Kalis 8,055,586 162,773
J. S. Petrik 8,055,496 162,863
The appointment of Ernst & Young LLP as auditors of the Company for the
year ending December 31, 1998 was placed before shareholders for
ratification at the Annual Meeting of Shareholders. The appointment of
Ernst & Young LLP as auditors of the Company was ratified with
8,099,142 votes cast for, 9,356 votes cast against, and 5,599
abstentions.
A Long-Term Incentive Compensation plan, designed to assist in
attracting and retaining highly competent employees and to act as an
incentive in motivating selected officers and other key employees of
the Company and its Subsidiaries to achieve long-term corporate
objectives, was placed before shareholders for approval at the Annual
Meeting of Shareholders. The Long-Term Incentive Compensation plan was
approved, with 6,674,104 votes cast for the plan, 1,359,723 votes cast
against the plan, and 80,587 abstentions.
Item 6. Exhibits and Reports on Form 8-K
b) No reports on Form 8-K were filed during the quarter ended
June 30, 1998.
Form 10-Q
Page 18
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 - 08/11/98 /s/William D. Jarosz
William D. Jarosz
Chairman, Chief Executive Officer
and President
Date - 08/11/98 /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 June 30, 1998 and the related
consolidated statment of income for the six months ended June 30, 1998 and
is qualified in its entirety be reference to the Company's Form 10Q filing for
the period ended June 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,778,467
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<RECEIVABLES> 21,892,141
<ALLOWANCES> 309,196
<INVENTORY> 21,854,552
<CURRENT-ASSETS> 58,954,874
<PP&E> 64,680,506
<DEPRECIATION> 49,538,412
<TOTAL-ASSETS> 93,113,973
<CURRENT-LIABILITIES> 23,422,282
<BONDS> 2,126,685
<COMMON> 21,497,145
0
0
<OTHER-SE> 28,773,060
<TOTAL-LIABILITY-AND-EQUITY> 93,113,973
<SALES> 79,433,195
<TOTAL-REVENUES> 79,433,195
<CGS> 65,365,087
<TOTAL-COSTS> 74,417,465
<OTHER-EXPENSES> (313,055)
<LOSS-PROVISION> 8,371
<INTEREST-EXPENSE> 43,244
<INCOME-PRETAX> 5,328,785
<INCOME-TAX> 1,979,000
<INCOME-CONTINUING> 3,349,785
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<NET-INCOME> 3,349,785
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