UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 (I.R.S. Employer
incorporation or organization) Identification Number)
NUMBER ONE TANTALUM PLACE, NORTH CHICAGO, ILLINOIS 60064
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (847) 689-4900
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
COMMON STOCK PAR VALUE $2.50 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 23, 1999 was $24,715,460.
8,598,858
(Number of shares of common stock outstanding as of February 23, 1999)
Part III incorporates information by reference from the Company's definitive
proxy statement for the annual meeting of shareholders to be held on April 19,
1999.
The total number of pages in this Form 10-K is 57 with the exhibit index being
on page 56.
PART I
ITEM 1 - BUSINESS
(a) On August 27, 1998, the Company acquired the property, plant
and equipment of Attwood de Mexico S. de R.L. de C.V. and
Attwood Corporation in Reynosa, Mexico for a cash price of
$3,779,307. A new Company, Fansteel de Mexico S. de R.L. de
C.V., was established to produce steel alloy investment
castings in conjunction with the Company's Escast Inc.
subsidiary, which is in the Industrial Metal Components
business segment.
On September 30, 1997, the Company acquired all the assets and
certain liabilities of Schulz Products, Inc. (Schulz) for the
cash price of $1,865,986. The nature of the business of Schulz
is the machining of aircraft components. While Schulz will
operate from a separate facility, the operating management has
been combined with our forging operation which also serves the
aircraft/aerospace market. The acquisition was accounted for
as a purchase and is included in the Company's Advanced
Structures business segment.
On July 31, 1996, the Company acquired all of the assets and
certain liabilities of American Sintered Technologies, Inc.
(AST) for the cash price of $6,937,000. In addition to the
cash paid, the Company assumed $954,000 of various
Pennsylvania Economic Agencies loans. AST manufactures
ferrous and non-ferrous powdered metal components serving the
automotive, lawn and garden, plumbing, hardware, and
electrical hardware industries. The acquisition was accounted
for as a purchase and is included in the Company's Industrial
Metal Components business segment.
The Precision Sheet Metal (PSM) plant in Los Angeles,
California completed the phase-out of all operations during
1993. In 1998, the remaining land and buildings of PSM, which
had been classified in Other Assets - Property held for sale,
were sold. Proceeds, less retained liabilities for
environmental clean-up, were approximately equal to carrying
amounts.
(b) Incorporated by reference from the Notes to Consolidated
Financial Statements pages 35 through 51.
ITEM 1 - BUSINESS (Contd.)
(c)(1)(i) Fansteel is a specialty metals manufacturer of products for
use in the metalworking; automotive; energy (coal mining, oil
and gas drilling); military and commercial aircraft, aerospace
and weapon systems; agricultural machinery; lawn and garden
equipment; and plumbing and electrical hardware industries.
The principal products of the Industrial Tools business
segment include tungsten carbide cutting tools, milling tools,
toolholding devices, mining tools and accessories,
construction tools, and wear resistant parts. The principal
products of the Advanced Structures business segment include
titanium, nickel base and alloy steel forgings; high integrity
aluminum and magnesium sand mold castings; and machined
forgings and castings. The principal products of the
Industrial Metal Components business segment include carbon
steel, stainless steel, brass and aluminum special wire forms
and fasteners; brass, bronze and ferrous alloy investment
castings; and ferrous and non-ferrous powdered metal
components.
Sales of the Company's products are made through a direct
sales organization and through distributors, manufacturers'
representatives and agents. In each of the three business
segments, distributors, manufacturers' representatives and
agents account for the majority of sales.
The percentage of net sales for classes of similar products
which equaled or exceeded ten percent of the Company's
consolidated net sales for the years indicated is set forth
below:
Consolidated Net Sales
Products Business Segment 1998 1997 1996
Tungsten carbide
cutting tools Industrial Tools 26% 27% 30%
Nonferrous Advanced
forgings Structures 16 15 12
Investment Industrial Metal
castings Components 10 10 9
(ii) At this time, there are no new products in production or in
the development stage in continuing operations that require
investment of a material amount of the Company's assets.
However, the Company is involved in substantial investment in
design, engineering, equipment and start-up of a reclamation
processing plant as discussed in Note 4 to the Consolidated
Financial Statements contained in Item 8 hereof.
ITEM 1 - BUSINESS (Contd.)
(c)(1) (iii) The most important raw materials used by the Company are
tungsten carbide powder, cobalt, titanium, magnesium,
aluminum, iron, bronze, copper, stainless steel, and alloy
steel. Prices of some of these raw materials have been
volatile in recent years, and changes in raw material prices
have had an impact on the Company's dollar sales volume.
Several of the raw materials used, including cobalt, are
purchased principally from foreign sources, many of them
located in developing countries, and availability can be
affected by political developments and trade restrictions,
both domestic and foreign. The Company believes that the
sources and availability of these materials are adequate for
present needs, although spot shortages of certain raw
materials may occur from time to time.
(iv) The Company owns a number of patents which relate to a wide
range of products and processes and is licensed under certain
patents. The Company does not consider any of its patents or
group of patents to be material to any of its business
segments taken as a whole.
(v) None of the operations of any business segment are seasonal.
(vi) Working capital requirements for each business segment are
substantial, but the Company's investment in working capital
is fairly typical of the specialty metals manufacturing
industry.
(vii) The Company serves a wide variety of industries. No one
individual customer accounts for a significant portion of the
Company's overall business.
Substantial sales for those operating units within the
Advanced Structures segment servicing the aerospace market are
concentrated in a relatively small customer base. The loss of
any individual customer within this base could have an adverse
effect on the segment. Relations with these customers have
existed for years and the Company believes them to be sound.
However, in the last half of 1998 the major commercial
aircraft producers significantly revised their production
schedules for 1999 and later years. As a result, the forgings
and machining product lines within the Advanced Structures
business segment experienced a notable decline in order
activity, especially in the last two months of 1998.
(viii) The backlog of orders not shipped and believed to be firm as
of the dates shown are set forth below (in thousands):
December 31,
1998 1997
Industrial Tools $ 5,723 $ 7,880
Advanced Structures 38,482 40,782
Industrial Metal Components 10,180 8,618
$ 54,385 $ 57,280
ITEM 1 - BUSINESS (Contd.)
(c)(1)(viii) In the Industrial Tools and Industrial Metals Components
business segments, virtually all backlog is shipped in less
than 12 months, generally within 3 months. In the Advanced
Structures segment, shipments are typically made between 1 and
24 months after an order is received. The Company believes
that approximately 94% of the backlog at December 31, 1998
will be shipped before the end of 1999.
Because of the substantial size of some orders received by the
Company, particularly orders for products sold by the Advanced
Structures segment, the Company's backlog can fluctuate
substantially from one fiscal period to another. Because of
the differences in lead-time for filling orders among the
Company's business segments, overall backlogs at different
times will not necessarily be comparable as predictors of the
Company's near-term sales.
(ix) The Company's Advanced Structures segment has orders subject
to termination at the election of the government. The Company
would be compensated for costs up to the date of termination
if terminated for the convenience of the government.
Termination without compensation could result if the Company
was in default as determined by the government. The Company
is not aware of any current orders which would be terminated
for default.
(x) In general, the Company competes in its markets on the basis
of technical expertise, product reliability, quality, sales
support, availability and price. Most of the Company's
products are sold in highly competitive markets, and some of
the Company's competitors are larger in size and have greater
financial resources than Fansteel.
(xi) The development of new products and processes and the
improvement of existing products and processes is conducted by
each operating unit.
The Company has a staff of technically trained people who
support sales, manufacturing and quality assurance. The
majority of the Company's products and processes require
technically sophisticated application engineering and process
control. This kind of technical support is charged to the
cost of products sold.
(xii) The Company expensed $485,000 to continuing operations in 1998
for costs related to compliance with government environmental
regulations. Capital expenditures in 1998 included $45,000 at
the Hydro Carbide facility in Latrobe, Pennsylvania for an
above ground heptane storage tank, and $28,000 at the
Lexington facility in Lexington, Kentucky for a waste storage
building. During 1998, the Company charged $826,000 for
continuing operations against liabilities for environmental
remediation established in previous years. In addition to the
two sites included in the discontinued operations, the Company
has a total of seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken.
Certain of these
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) 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.
In 1998, the remaining land and buildings of PSM, which had
been classified in Other Assets - Property held for sale, were
sold. The cost of preparing the property for sale, principally
environmental clean-up, had been capitalized. Proceeds, less
retained liabilities for environmental clean-up, were
approximately equal to carrying amounts. The Company believes
the liabilities established for other costs associated with
the environmental clean-up of PSM are adequate to cover such
costs. An 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 six sites owned by third parties. The
Company's participation at four sites is de minimis, and at
the other two sites the Company is either being defended by
its insurance carriers or has meritorious defenses to
liability.
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 for continuing operations
was recorded in 1997 for the estimated potential exposure for
such costs expected to be incurred in the future. Actual costs
to be incurred in future periods at identified sites may vary
from the estimates, given the inherent uncertainties in
evaluating environmental exposures. Future information and
developments will require the Company to continually reassess
the expected impact of these environmental matters. The
Company does not expect that any sums it may have to pay in
connection with these environmental liabilities would have a
materially adverse effect on its consolidated financial
position.
The Company discontinued its Metal Products business segment
in 1989. Environmental reclamation and decommissioning is
required for the segment's primary plant that processed
certain ores which are subject to regulations of several
government agencies. The residues from these processed ores
were stored on-site. Remaining assets were written down to
estimated realizable value, and provisions were made for the
estimated costs for decommissioning. The Company, in
association with outside consultants, has developed a
decommissioning plan for the site involved, and has submitted
that plan and a related decommissioning funding plan to the
Nuclear Regulatory Commission ("NRC") as required by law.
Prior to decommissioning, the Company will construct and
operate for approximately ten years a commercial plant to
complete the
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) 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 by the
end of the first quarter of 1999.
During 1998, the Company charged $1,009,000 for discontinued
operations against liabilities for environmental remediation
and decommissioning established in previous years. In
addition, the Company expended $9,595,000 for design,
engineering costs, and equipment for the processing plant.
At December 31, 1998 and 1997, the Company had recorded
liabilities of $9.8 million and $10.8 million, respectively,
for discontinued operations including the estimated net costs
of reclaiming and decommissioning the site during and after
the approximate ten years of processing the residues described
above. An additional provision for discontinued operations of
$7.1 million was recorded in 1997 to increase the established
liabilities for the estimated cost of additional studies which
may be required by regulatory agencies, higher start-up costs,
and potentially greater disposal costs after completion of the
residue processing period, as well as for cost estimates
related to probable future environmental remediation at a
second site which had been part of the Metal Products business
segment. The second site is regulated under the Resource
Conservation and Recovery Act and, as a result of alleged
migration of contaminants from this second site, the Company
also has been identified as a potentially responsible party
under the Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the
first site during the residue processing period include
estimated annual revenues of approximately $8 million per year
over the ten year processing period and estimated annual
operating costs, including depreciation, of approximately the
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) 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 NRC regulations or provisions of the Nuclear Waste
Policy Act of 1982. 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
ITEM 1 - BUSINESS (Contd.)
(c)(1)(xii) Company can demonstrate the sufficiency of the remaining funds
or surety to assure the completion of decommissioning.
The ultimate costs to the Company for the remediation of the
sites in which the Company is involved cannot be predicted
with certainty due to the often unknown magnitude of the
pollution or the necessary clean-up, the varying costs of
alternative clean-up methods, the evolving nature of clean-up
technologies and government regulations, and the inability to
determine the Company's share of multi-party clean-ups or the
extent to which contribution will be available from other
parties. The Company has established liabilities for
environmental remediation costs in amounts which it believes
are probable and reasonably estimable. Although the ultimate
outcome of pending environmental matters cannot be determined
with certainty, management believes that any resulting costs,
after considering existing liabilities, will not have a
material adverse effect on the consolidated financial position
of the Company.
(xiii) The Company employed 1,283 persons as of December 31, 1998.
(d) Net sales, income and identifiable assets of foreign
operations and export sales are not significant. The Company
considers the United States as one inseparable geographic area
for its domestic operations.
ITEM 2 - PROPERTIES
Manufacturing facility locations and corresponding square
footage are as follows:
Business Square Feet
Location Segment Owned Leased Total
Plantsville, Connecticut Industrial 60,000 0 60,000
Tools
Gulfport, Mississippi Industrial 32,000 0 32,000
Tools
Latrobe, Pennsylvania Industrial 43,000 0 43,000
Tools
Lexington, Kentucky Industrial 98,000 1,900 99,900
Tools
Los Angeles, California Advanced 48,000 5,000 53,000
Structures
San Gabriel, California Advanced 0 9,000 9,000
Structures
Creston, Iowa Advanced 293,000 0 293,000
Structures
Sarasota, Florida Industrial 6,000 0 6,000
Metal
Components
Addison, Illinois Industrial 0 46,000 46,000
Metal
Components
Reynosa, Mexico Industrial 69,000 0 69,000
Metal
Components
Washington, Iowa Industrial 98,000 0 98,000
Metal
Components
Emporium, Pennsylvania Industrial 44,000 0 44,000
Metal
Components
ITEM 2 - PROPERTIES (Contd.)
All plants are well-maintained and in good operating order.
The plants have sufficient capacity to meet present market
requirements. All of the properties described above are fully
utilized on a 1 or 2 shift basis, except the Lexington
facility, which is operating at approximately 90% utilization.
The Company owns properties in North Chicago, Illinois and
Muskogee, Oklahoma associated with operations discontinued in
prior years. These properties are included as part of net
assets of discontinued operations. The Company's PSM facility
in Los Angeles, California completed the phase out of all
operations in 1993. In 1998, the remaining land and buildings
of PSM, which had been classified in other assets - property
held for sale, were sold. Proceeds, less retained liabilities
for environmental clean-up, were approximately equal to
carrying amounts.
The Company's executive offices are located in North Chicago,
Illinois.
ITEM 3 - LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or
its subsidiaries are a party or of which any of their property
is the subject other than ordinary routine litigation
incidental to the Company's business. None of these legal
proceedings are material.
However, the Company is involved in certain regulatory
proceedings involving environmental matters which are
discussed in Note 4 to the Consolidated Financial Statements
contained in Item 8 hereof.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during
the fourth quarter of 1998.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below are the principal executive officers and directors of the
Company:
Years of Service
In
Position with the Company and With Present
Name Age Principal Occupation Fansteel Position
Gary L. 54 Director; Chairman of the Board, 0 0
Tessitore President and Chief Executive
Officer
Edward P. 57 Director; Personal Investments 2 2
Evans
Robert S. 54 Director; Chairman and Chief 7 7
Evans Executive Officer, Crane Co.
Thomas M. 61 Director; Personal Investments 13 13
Evans, Jr.
Peter J. 49 Director; Kirkpatrick and 3 3
Kalis Lockhart, LLP (Attorneys);
Chairman of the Management
Committee
R. Michael 45 Vice President and Chief 19 8
McEntee Financial Officer
Michael J. 46 Vice President, General Counsel 13 12
Mocniak and Secretary
Jack S. 69 Director; Vice President and 14 14
Petrik Director (Retired), Turner
Broadcasting System, Inc.
Additional information as to Directors of the Company is herein incorporated by
reference to the information under the caption "Nominees for Election as
Directors" in the Company's definitive proxy statement for the annual meeting of
shareholders on April 19, 1999.
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The New York Stock Exchange is the principal market upon which
the shares of the Company are traded.
The number of shareholders of the Company as of February 23,
1999 were 761.
Per share stock market and dividend information for each
quarter of the last two fiscal years are set forth below:
Cash
Dividends
High Low Declared
1998:
First Quarter $ 8 7/16 $ 6 3/16 $ -
Second Quarter 9 1/4 7 1/2 -
Third Quarter 9 5/16 5 -
Fourth Quarter 6 1/2 5 -
1997:
First Quarter $ 7 1/8 $ 6 1/8 $ -
Second Quarter 8 1/2 6 5/8 -
Third Quarter 10 3/16 7 5/16 -
Fourth Quarter 11 8 1/8 -
The Company announced on November 10, 1995 the suspension of
its regular quarterly cash dividend pending review of its
dividend policy relative to comparable publicly traded
companies and its capital requirements. The Company believes
it is in the best interests of shareholders to conserve
capital in light of anticipated acquisitions and production
facility expansions as well as uncertainties surrounding
funding requirements for decommissioning at the Company's
discontinued operations at Muskogee, Oklahoma. While the
Company believes that its current reserve for environmental
clean-up for discontinued operations is adequate, it decided
to take this action pending greater certainty as to the costs
which ultimately may be incurred.
ITEM 6 - SELECTED FINANCIAL DATA
Selected financial data for the Company for the five year period ended December
31, 1998 are as follows:
Years Ended December 31,
(thousands of dollars
except per share 1998 1997 1996 1995 1994
data)
Operating Results
Net Sales $153,797 $140,194 $120,834 $102,598 $ 89,287
Income (Loss) from
Continuing
Operations 5,406 (2,508) 4,277 3,333 3,609
Loss from Discon-
tinued Operations - (5,856) - - -
Net Income (Loss) 5,406 (8,364) 4,277 3,333 3,609
Per Share of Common
Stock: (a)
Income (loss) from
continuing
operations .63 (.29) .50 .39 .42
Loss from
discontinued
operations - (.68) - - -
Net income (loss) .63 (.97) .50 .39 .42
Cash dividends - - - .30 .40
Shareholders'
equity 5.53 5.46 6.43 5.93 5.83
Financial Position
Working capital $ 27,589 $ 35,126 $ 28,542 $ 21,862 $ 21,101
Net property, plant
and equipment 20,456 14,665 14,306 10,220 9,364
Total assets 88,717 88,832 82,127 74,530 72,881
Long-term debt 2,507 1,600 1,779 298 -
Shareholders'
equity 47,547 46,920 55,284 51,023 50,172
Other Data
Common shares
outstanding 8,598,858 8,598,858 8,598,858 8,598,858 8,598,858
Number of
shareholders (b) 772 826 812 891 1,055
Number of employees 1,283 1,127 1,031 911 867
(a) Basic earnings per share and diluted earnings per share are the same.
(b) Number of shareholders consists of the approximate shareholders of record
which include nominees and street name accounts.
ITEM 6 - SELECTED FINANCIAL DATA
SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(thousands of dollars except per
share data) Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998
Net sales $ 39,789 $ 39,644 $ 36,746 $ 37,618
Gross profit 7,186 6,882 5,672 6,461
Net income 1,729 1,621 825 1,231
Net income per common share (a) .20 .19 .10 .14
1997
Net sales $ 33,714 $ 35,841 $ 34,040 $ 36,599
Gross profit 6,027 6,645 2,931 5,914
Income (loss) from continuing
operations 1,335 1,558 (840) (4,561)
Net income (loss) 1,335 1,558 (840) (10,417)
Income (loss) per common share
from continuing operations (a) .16 .18 (.10) (.53)
Net income (loss) per common
share (a) .16 .18 (.10) (1.21)
(a) Basic earnings per share and diluted earnings per share are the same.
The third quarter, 1997 loss from continuing operations included unusual
charges, net of tax benefit, of $1,818,000 or $.21 per share relating primarily
to the write-off of non-salable inventory resulting from production problems in
the sand casting operation. The fourth quarter, 1997 loss from continuing
operations included a charge, net of tax benefit, for environmental remediation
of $5,589,000 or $.65 per share. The fourth quarter, 1997 net loss included a
charge for additional environmental remediation of $5,856,000 or $.68 per share
for discontinued operations.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations may contain various "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which can be
identified by the use of forward-looking terminology such as "believes",
"expects", "prospects", "estimated", "should", "may" or the negative thereof or
other variations thereon or comparable terminology indicating the Company's
expectations or beliefs concerning future events. The Company cautions that such
statements are qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, a number of
which are identified in the discussion which follows. Other factors could also
cause actual results to differ materially from expected results included in
these statements.
The following discussion should be read in connection with the consolidated
financial statements of the Company and the related notes to the consolidated
financial statements.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
Results of Operations - 1998 Compared to 1997
Net sales for the year ended December 31, 1998 were $153,797,000 compared to
$140,194,000 in 1997, an increase of $13,603,000, or 9.7%.
Net sales for the Industrial Tools business segment for 1998 were $58,437,000,
an increase of $2,146,000, or 3.8%, from 1997. Tungsten carbide cutting tools
experienced a strong first half of 1998, particularly in rotary tools. Rotary
tools benefited from equipment investments made in 1997 which provided the
production capacity needed to meet the higher customer demand and improved stock
availability. Insert sales, also classified within the cutting tools product
line, showed improvement as customers placed heavier emphasis on a mix of
products related to diamond-tipped inserts. Construction tool sales posted its
highest quarterly sales of the last two years in the second and third quarters
of 1998, resulting in full year sales gains over the prior year. The improvement
in construction tool sales is attributable to new tool designs and increased
marketing efforts, as well as increased demand from road construction and repair
programs across the country. Coal mining tool sales improved as order activity
from the mines continued to be solid throughout 1998. Shipments of wear parts
decreased from 1997 primarily due to slowdowns in the die market and
particularly in the oil drilling market as the price of oil has declined
approximately 25% since year-end 1997.
Advanced Structures business segment net sales for 1998 were $54,512,000
compared to $45,827,000 in the prior year, an increase of $8,685,000, or 19.0%.
Machined aircraft components, produced by Schulz Products which was acquired
September 30, 1997, were responsible for $2,596,000 of this increase. Forging
sales improved by 16.5% from the prior year, and sand casting products improved
9.9% based primarily on the strong commercial aircraft market.
Industrial Metal Components business segment net sales for 1998 were
$40,847,000 compared to $38,075,000 for 1997, an increase of $2,772,000, or
7.3%. Wire formed products reported its highest quarterly sales ever in the
first and second quarters of 1998, which led to a 10.7% increase in sales over
1997. Improvements were due primarily to the strong demand from the lawn and
garden equipment industry as well as from intensified efforts to increase the
customer base within this product line. Investment casting revenues, which
improved 8.3%, were positively impacted by increased demand for engine
components used in the medium-duty truck industry. Sales of powdered metal
components remained flat compared to 1997 as key customers experienced capacity
constraints and production problems.
The Company's operating income for 1998 was $8,320,000 compared to a 1997
operating loss of $1,892,000. Operating loss in 1997 included unusual charges of
$2,800,000, related primarily to the write-off of non-salable inventories at the
sand casting operation, and a provision of $6,900,000 for environmental
remediation.
Industrial Tools business segment operating income was $3,896,000 for 1998
compared to $3,860,000 for 1997. As a percentage of net sales, operating income
was 6.7% for 1998 compared to 6.9% in 1997. While the segment has experienced
higher production volume, the full benefit of the volume increase has been
hampered by expansion expenses. As a percentage of net sales, operating income
was positively impacted by lower material and outside processing costs. This was
more than offset by higher labor and overhead costs which resulted from capacity
constraints and the related facility expansions. ITEM 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Contd.)
Compared with 1997, selling, general and administrative expenses increased as a
percentage of sales due to a higher level of investment in conventional
marketing strategies.
Advanced Structures business segment operating income for the period ended
December 31, 1998 was $2,640,000, compared to an operating loss of $1,056,000 in
1997. Results for 1997 included 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 4.8% in 1998 compared with 3.8%,
excluding the unusual charges, in 1997. The sand casting operation was able to
improve operating margins as some sales price increases were attained, scrap
costs were better controlled, and rework was reduced. Operating margin in 1998
was negatively impacted by production inefficiencies at the forging facility
related primarily to the steam delivery system. An upgraded system is expected
to be in full operation in the second quarter of 1999. Installation was delayed
in the fourth quarter of 1998 due to new requirements imposed by regulatory
agencies.
Industrial Metal Components business segment operating income for 1998 was
$1,840,000 compared to $2,273,000 in 1997. As a percentage of net sales,
operating income was 4.5% for 1998 compared to 6.0% in 1997. Operating income
was negatively impacted by production inefficiencies at the investment casting
facility which has been operating over capacity, adversely impacting direct
labor, outside services, and process yields. Fansteel de Mexico was established
in August, 1998 to relieve capacity constraints. The segment was negatively
impacted by start-up expenses associated with Fansteel de Mexico. The production
inefficiencies are expected to be minimized once the Mexico facility is in full
operation, which is projected to occur in the first quarter of 1999.
Other income for 1998 was $319,000, an increase of $58,000 from $261,000 in
1997. Nonrecurring gains increased $195,000, the majority of which was from the
sale of unused land. Bad debts decreased $212,000 from 1997. Interest earned on
marketable securities decreased $243,000, as less cash was available for
investment since the September, 1997 acquisition of Schulz Products, the August,
1998 acquisition of property, plant and equipment for Fansteel de Mexico, and
the start-up of the construction phase for the environmental reclamation and
decommissioning at the discontinued operation in Muskogee, Oklahoma.
Net income for 1998 was $5,406,000, or $.63 per share, compared to a net loss
of $8,364,000, or $.97 per share in 1997. The net loss in 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. The 1997 net loss also included provisions for environmental
remediation, net of tax benefits, of $5,589,000 or $.65 per share for continuing
operations and $5,856,000 or $.68 per share for discontinued operations.
Order backlog at December 31, 1998 was $54,385,000 compared to $57,280,000 at
December 31, 1997, a decrease of $2,895,000, or 5.1%, with order activity
softening in the second half of 1998. Industrial Tools business segment backlog
of $5,723,000 at December 31, 1998 decreased by $2,157,000, or 27.4%, compared
to December 31, 1997 backlog of $7,880,000. A decrease in the tungsten carbide
cutting tool backlog was responsible for a large portion of ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Contd.)
the segment decline as these product sales suffered from lower order rates from
the metalworking industry. Wear parts backlog also decreased as a result of a
slowdown in business, particularly in oil drilling, as the price of oil
continues to remain low. Construction tools backlog improved as demand from road
construction projects remains solid. Advanced Structures business segment
backlog at December 31, 1998 was $38,482,000, a decrease of $2,300,000, or 5.6%,
from December 31, 1997. Most of the decrease came from the forgings and
machining backlogs which experienced lower order activity in the last half of
the year, especially in the last two months of 1998. This decline in order
activity is related to the significant revision of production schedules by the
major commercial aircraft producers for 1999 and later years. The sand casting
products backlog increased $1,099,000 from December 31, 1997 based on solid
order activity, particularly in helicopter production. Industrial Metal
Components business segment backlog increased by $1,562,000, or 18.1%, to
$10,180,000 at December 31, 1998. Orders received for investment castings were
strong during 1998 which was due partially from a continued effort to increase
its customer base. However, the order activity from the light truck market
remains the key factor in the growth of the investment castings backlog. Backlog
for wire formed products was stable with an improved order rate over the prior
year. The powdered metal components backlog increased from December 31, 1997,
even though orders were soft in the fourth quarter when a number of key
customers made adjustments to reduce inventory.
Inflation factors did not, and generally do not, significantly affect the
overall operations of the Company.
Results of Operations - 1997 Compared to 1996
Net sales for the year ended December 31, 1997 were $140,194,000, an increase
of $19,360,000 or 16.0% from 1996 net sales of $120,834,000.
Industrial Tools business segment net sales were $56,291,000 in 1997 compared
to $54,068,000 in 1996, an increase of $2,223,000 or 4.1%. Within the tungsten
carbide cutting tools product line, sales of rotary tools strengthened in the
last half of 1997 after experiencing increased competition from other
manufacturers and vertical integration within the customer base in the first six
months of 1997. This rebound was due largely to increased production capacity,
which improved our ability to meet customer delivery demands, and increased
stock availability. Continued investment in machinery and equipment, as well as
plant expansion, facilitated a significant increase in production capacity.
Insert sales, also within the tungsten carbide cutting tools product line,
declined compared to 1996 due to lower customer demand for our standard products
in the metalworking industry. Wear parts sales, also serving the metalworking
industry, were up slightly over 1996. Coal mining tool shipments improved over
1996, especially in the last six months of 1997, due to increased demand for
high sulfur coal. After improved sales in 1996, construction tools declined in
1997 as sales to foreign markets were lower and penetration into domestic
markets showed little progress.
Advanced Structures business segment net sales for 1997 were $45,827,000
compared to $39,377,000 for 1996, an increase of $6,450,000 or 16.4%. Net sales
increased $5.0 million in the forgings product line due to a strong commercial
aircraft market. The addition in the fourth quarter of 1997 of machining
capabilities from the acquisition of Schulz Products added nearly $1.0 million
to the segment sales. While the market for aircraft parts and ITEM 7 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Contd.)
components continued strong throughout 1997, manufacturing performance problems
developed at the sand casting operation that impacted product flow and caused
sales to increase only slightly over 1996.
Industrial Metal Components business segment net sales for 1997 were
$38,075,000 compared to $27,389,000 for 1996, an increase of $10,686,000 or
39.0%. Powdered metal components manufactured by AST, which was acquired in
July, 1996, added revenues of $10,326,000 for twelve months of sales in 1997
versus $3,737,000 for five months of sales in 1996. Investment castings sales
grew by $2.6 million in 1997 due to increased demand in the military ordnance
and oil drilling markets as well as continued strong demand for engine
components for the medium-duty truck market. Wire formed product line net sales
increased in 1997 by $1.8 million due to a stable economy as well as to
supplying a greater variety of parts to continuing customers.
The Company's operating loss for the year ended December 31, 1997 was
$1,892,000 compared to operating income of $6,342,000 in 1996, a decrease of
$8,234,000. The significant factors in this decrease were the third quarter,
1997 unusual charge of $2,800,000 related primarily to the write-off of non-
salable inventories at the sand casting operation and the fourth quarter, 1997
provision of $6,900,000 for environmental remediation at continuing operations.
In 1997, the Company accrued for certain environmental investigatory and
noncapital remediation costs after completing initial environmental studies at
all sites owned by the Company and testing soil and groundwater at selected
sites as indicated by the environmental studies. The environmental studies were
undertaken after implementing a new comprehensive environmental policy and
hiring staff to support these efforts in 1997. Excluding the environmental
remediation provision and the unusual charge, operating income as a percentage
of net sales was 5.6% in 1997 compared to 5.3% in 1996.
Industrial Tools business segment operating income for 1997 was $3,860,000
compared to 1996 operating income of $3,052,000, an increase of $808,000, or
26.5%. The sales volume increase, lower material costs and improved absorption
of overhead benefited operating income. As a percentage of sales, operating
income for 1997 improved to 6.9% from 5.6% in 1996.
Advanced Structures business segment operating loss for 1997 was $1,056,000, a
decrease of $2,835,000 from operating income of $1,779,000 in 1996. The
significant factor in this decrease was the third quarter, 1997 unusual charge
of $2,800,000 related primarily to the write-off of non-salable inventories at
the sand casting operation. Exclusive of the unusual charge, operating income as
a percentage of sales for this segment was 3.8% in 1997 compared to 4.5% in
1996. The manufacturing performance problems in 1997 at the sand casting
operation offset significant income growth experienced at the forging facility
over 1996.
Industrial Metal Components business segment operating income was $2,273,000
in 1997 compared to $1,573,000 in 1996, an increase of $700,000, or 44.5%. This
increase was due primarily to twelve months of operating income for AST in 1997
compared to five months in 1996. However, the sales volume improvement at the
other operations in this segment also contributed to the operating income
increase. As a percentage of sales, operating income improved to 6.0% in 1997
compared to 5.7% in 1996.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
Other income for the year ended December 31, 1997 was $261,000 compared to
$711,000 for the same period of 1996. Income earned on investments was $681,000,
which was $183,000 less than 1996. The July, 1996 acquisition of AST and the
September, 1997 acquisition of Schulz resulted in less cash being available for
investment in 1997. A $246,000 increase in bad debt expense over 1996 and an
$85,000 charge related to a closed facility also reduced other income.
Loss from continuing operations for the year ended December 31, 1997 was
$2,508,000 or $.29 per share, compared to income from continuing operations of
$4,277,000 or $.50 per share in 1996. The 1997 results included environmental
remediation charges, net of tax benefits, of $5,589,000 or $.65 per share and
unusual charges, net of tax benefits, of $1,818,000 or $.21 per share, related
primarily to the write-off of non-salable inventories within the sand casting
operation. The unusual charge in the third quarter, 1997 at the sand casting
operation diminished the positive trends of the other operating units. A
reorganization of the sand casting operation management staff and restructuring
of manufacturing processes employed in the developmental stages for production
of aircraft castings were implemented. Focus on production and inventory
control, cost control, and customer service levels were intensified in order to
provide solutions to the production problems.
Loss from discontinued operations of $5,856,000 or $.68 per share in 1997
represented an additional provision of $7,100,000, less tax benefit of
$1,244,000, to increase the established liabilities for the estimated cost of
environmental remediation and decommissioning at Metal Products business segment
sites. The additional estimated costs included further studies which may be
required by regulatory agencies, higher start-up costs, and potentially greater
disposal costs after completion of the residue processing period at the primary
site, as well as probable future environmental remediation at a second site
which had been part of the Metal Products business segment. The second site is
regulated under the Resource Conservation and Recovery Act and, as a result of
alleged migration of contaminants from this second site, the Company also was
identified as a potentially responsible party under the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA) at a neighboring
third-party site.
Net loss for the year ended December 31, 1997 was $8,364,000 or $.97 per
share, compared to net income of $4,277,000 or $.50 per share for the year ended
December 31, 1996. The fourth quarter, 1997 provisions for environmental
remediation cost estimates in 1997 at continuing and discontinued operations,
net of tax benefits, of $11,445,000 or $1.33 per share and the third quarter,
1997 unusual charges, net of tax benefits, of $1,818,000 or $.21 per share,
related to write-off of non-salable inventory at the sand casting operation
resulted in the significant change in 1997 from 1996.
Order backlog at December 31, 1997 was $57,280,000 compared to $44,696,000 at
December 31, 1996, an increase of $12,584,000 or 28.2%. Backlog in the
Industrial Tools business segment was $7,880,000 at December 31, 1997, an
increase of $1,563,000 or 24.7% from the December 31, 1996 backlog of
$6,317,000. Nearly all of this increase was attributed to orders of tungsten
carbide rotary cutting tools, which had experienced excellent growth over the
past several years. This product line was enhanced by increased production
capacity in 1997. A backlog decrease for cutting tool inserts and blades, which
encountered increased competition, slightly reduced the overall increase ITEM 7
- - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Contd.)
in the cutting tool product line. The wear parts product line was down from 1996
due to reduced demand from the metalworking industry. The mining tools backlog
increased in 1997 after a depressed backlog in 1996 due to several coal mine
closings. Construction tools backlog declined as orders were soft in
the last quarter of 1997. Advanced Structures business segment backlog at
December 31, 1997 was $40,782,000 compared to $31,423,000 on the same date of
1996, an increase of $9,359,000 or 29.8%. The forgings backlog increased $3.6
million as orders from commercial aircraft manufacturers continued to rise.
Backlog of orders for sand castings and patterns increased $3.5 million from
1996 also due to the strong aircraft market. Delayed shipments, due to the poor
production performance at the sand casting operation, caused some of the
increase in the backlog. Schulz Products, Inc. added $2.3 million for machined
products to the backlog at December 31, 1997. Industrial Metal Components
business segment backlog at December 31, 1997 was $8,618,000 compared to
$6,956,000 at December 31, 1996, an increase of $1,662,000 or 23.9%. Wire formed
products backlog increased $1.0 million in 1997, with growth coming from lawn
and garden equipment, agricultural equipment, and vending machines. Investment
castings backlog was up 9.1% from 1996 as demand continued to be heavy from the
medium-duty truck, military ordnance and oil drilling industries. Backlog of
powdered metal components, added with the July, 1996 AST acquisition, increased
18.9% over 1996.
Outlook
Sales and order rates in a number of key markets including automotive,
metalworking, and the commercial aircraft market experienced decreases in the
last half of 1998 compared to the first half of the year. Growth in 1999
compared to the second half of 1998 will depend on opportunities from
improvements in the Company's production processes, new product development, and
investment in capital equipment. The Company is seeking increased share of
current markets, as well as new markets, through investment in current operating
units and acquisitions, such as the 1998 Fansteel de Mexico start-up which will
be in full production in the first quarter of 1999. Cost control programs remain
active in all operating plants throughout the Company.
Liquidity and Capital Resources
Cash and cash equivalents were $2,032,000 at December 31, 1998, a decrease of
$6,006,000 from December 31, 1997. Investing activities used $9,827,000. In
accordance with management's program to expand the operations of the Company,
$3,779,000 was used for the acquisition of property, plant and equipment for
Fansteel de Mexico and $4,162,000 was used for plant and equipment investments
at existing operating facilities. Design, engineering, and equipment costs of
$9,595,000 were incurred for the processing plant being built for reclamation
and decommissioning purposes in Muskogee, Oklahoma. A $5,000,000 marketable
security matured on April 30, 1998 and was reinvested in interest-bearing cash
equivalents. Proceeds from the sale of assets held for sale were $2,442,000
while proceeds from the sale of property, plant, and equipment, primarily from
unused land, provided $267,000. Operations provided $2,930,000 with net income,
depreciation and amortization generating $5,406,000, $2,027,000 and $230,000,
respectively. The deferred income tax charge provided $1,229,000. Working
capital needs were greater due to higher sales and production volumes resulting
in increases in accounts receivable of $366,000 and in inventory of $2,978,000.
Days outstanding and inventory turns have remained consistent with prior
periods. Accounts payable and accruals decreased $2,760,000, due primarily to
the timing of payments for capital expenditures. Cash flows from
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
financing activities provided $891,000, 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 1998 were $334,000.
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 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 December 31, 1998. The
Company expects to further use the revolving credit agreement in 1999 to fund
the start-up of the reclamation processing plant in Muskogee.
Funding assistance by states and municipalities is investigated when any
significant expenditures are proposed. All of the Company's debt is related to
development loans obtained from various states. In February of 1998, the Company
received a $125,000 development loan with an interest rate of 5.0% from the
State of Pennsylvania for the expansion of the powdered metal components
facility. To fund the expansion of an Industrial Tools facility, the Company
closed on a development loan in April, 1998 for $1,100,000 from the State of
Pennsylvania with a variable interest rate which was 4.2% at December 31, 1998.
As of December 31, 1998 all funds related to this loan had been received.
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
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
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 by the end
of the first quarter of 1999.
At December 31, 1998 and 1997, the Company had recorded liabilities of $9.8
million and $10.8 million, respectively, for discontinued operations including
the estimated net costs of reclaiming and decommissioning the site during and
after the approximate ten years of processing the residues described above. An
additional provision for discontinued operations of $7.1 million was recorded in
1997 to increase the established liabilities for the estimated cost of
additional studies which may be required by regulatory agencies, higher start-up
costs, and potentially greater disposal costs after completion of the residue
processing period, as well as for cost estimates related to probable future
environmental remediation at a second site which had been part of the Metal
Products business segment. The second site is regulated under the Resource
Conservation and Recovery Act and, as a result of alleged migration of
contaminants from this second site, the Company also has been identified as a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated value of materials to
be extracted is based on analysis of samples taken from the residues and a
valuation of such materials using current market prices discounted to reflect
possible price decreases, including those which could result from the increased
quantities of certain of these materials made available for sale. However, there
can be no assurance as to the level of demand for the extracted materials or the
actual prices which may be obtained for them, which could vary over time. The
estimated costs of residue processing were developed by Company personnel and
independent consultants using third-party evaluations based on the pilot testing
performed. Unforeseen production complications could cause processing costs to
increase from current estimates.
In October 1995 the NRC advised the Company that a decommissioning funding
plan cost estimate based upon on-site disposal of most of the radioactive wastes
at the site was appropriate to consider. The NRC cautioned the Company, however,
that on-site disposal may require preparation of an Environmental
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
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 NRC regulations or provisions of the Nuclear Waste
Policy Act of 1982. 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 seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken. Certain of these
sites were identified as a result of environmental studies conducted by the
Company during 1997 at all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the environmental studies.
In 1998, the remaining land and buildings of the Company's former Precision
Sheet Metal operation, which had been classified as Other Assets - Property held
for sale, were sold. Proceeds, less retained liabilities for environmental
clean-up, were approximately equal to carrying amounts.
The Company has also been notified that it is a potentially responsible party
at six sites owned by third parties. The Company's participation at four sites
is de minimis, and at the other two sites the Company is either being defended
by its insurance carriers or has meritorious defenses to liability.
At December 31, 1998 and 1997, the Company had recorded liabilities of $8.4
million and $8.1 million, respectively, for estimated environmental
investigatory and remediation costs based upon an evaluation of currently
available facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. An additional provision of $6,900,000 was
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
recorded in 1997 for the estimated potential exposure for such costs. Actual
costs to be incurred in future periods at identified sites may vary from the
estimates, given the inherent uncertainties in evaluating environmental
exposures. Future information and developments will require the Company to
continually reassess the expected impact of these environmental matters. The
Company does not expect that any sums it may have to pay in connection with
these environmental liabilities would have a materially adverse effect on its
consolidated financial position.
Impact of Year 2000
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 middle of 1999. 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 half 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. Three or four year operating leases
have been obtained for a majority of the new IT products and systems, 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
25% made in 1998.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
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 were determined based upon the amount of
business and the importance to the Company of the material or services provided.
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 by
reviewing responses, obtaining updates and identifying new key suppliers and
customers. To date, no negative responses have been received, but there is no
guarantee that systems of other companies on which the Company's systems rely
will be converted timely and would not have a material adverse effect on the
Company's systems.
The Year 2000 project is estimated to be completed in 1999 prior to any
anticipated impact on the Company's 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.
Market Risk
The company is exposed to the impact of interest rate changes. Currently, the
Company does not enter into derivatives relating to this risk.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flow and related weighted-average
interest rates by expected maturity dates. Weighted-average variable rates are
based on implied forward rates as derived from appropriate annual spot rate
observations as of the reporting date.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Contd.)
Interest Rate Sensitivity
Long-Term Debt Including Current Portion
(thousands of dollars except percentages)
Fixed Variable
Average Average
Cash Interest Cash Interest
Flow Rate Flow Rate
1999 $ 307 3.58% $ - 4.36%
2000 266 3.45% - 4.36%
2001 138 4.52% 100 4.41%
2002 109 4.97% 100 4.46%
2003 89 4.84% 100 4.50%
Thereafter 804 5.05% 800 4.60%
Total $1,713 4.48% $1,100 4.46%
Fair Market Value $1,553 $1,100
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Fansteel Inc.:
We have audited the accompanying consolidated balance sheets of Fansteel Inc. as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. Our audits also included the financial
statement schedule listed in the Index at Item 14(a)(2). These financial
statements and schedule are the responsibility of Fansteel Inc. management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Fansteel Inc. at December 31, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
\s\ Ernst & Young LLP
Chicago, Illinois
January 19, 1999
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENT OF OPERATIONS
For the Years Ended December 31,
1998 1997 1996
Net Sales $153,796,547 $140,194,075 $120,833,831
Cost and Expenses
Cost of products sold 127,595,846 118,677,180 99,990,541
Selling, general and
administrative 17,881,015 16,508,472 14,500,746
Environmental remediation - 6,900,000 -
145,476,861 142,085,652 114,491,287
Operating Income (Loss) 8,319,686 (1,891,577) 6,342,544
Other Income (Expense)
Interest income on investments 438,276 681,157 864,569
Interest expense (102,393) (88,780) (34,409)
Other ( 17,212) (331,397) (119,276)
318,671 260,980 710,884
Income (Loss) from Continuing
Operations Before Income Taxes 8,638,357 (1,630,597) 7,053,428
Income Tax Provision 3,232,000 877,000 2,776,000
Income (Loss) from Continuing
Operations 5,406,357 (2,507,597) 4,277,428
Loss from Discontinued
Operations - (5,856,000) -
Net Income (Loss) $ 5,406,357 $ (8,363,597) $ 4,277,428
Income (Loss) Per Common
Share:(a)
Continuing operations $.63 $(.29) $.50
Discontinued operations - (.68) -
Net income (loss) $.63 $(.97) $.50
(a) Basic earnings per share and diluted earnings per share are the same.
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET
At December 31,
1998 1997
ASSETS
Current Assets
Cash and cash equivalents $ 2,031,835 $ 8,038,229
Marketable securities - 5,041,196
Accounts receivable, less allowance of
$259,000 in 1998 and $280,000 in 1997 22,148,457 21,782,872
Inventories
Raw material and supplies 5,341,512 3,815,376
Work-in-process 15,177,294 15,306,393
Finished goods 8,686,552 7,273,625
29,205,358 26,395,394
Less:
Reserve to state certain inventories at
LIFO cost 6,763,841 6,931,677
Total inventories 22,441,517 19,463,717
Other assets - current
Deferred income taxes 2,575,684 2,279,162
Other 1,325,492 1,576,333
Total Current Assets 50,522,985 58,181,509
Net Assets of Discontinued Operations 13,668,396 4,073,442
Property, Plant and Equipment
Land 1,911,631 1,421,641
Buildings 13,046,957 10,802,718
Machinery and equipment 55,552,823 51,293,733
70,511,411 63,518,092
Less accumulated depreciation 50,055,789 48,853,529
Net Property, Plant and Equipment 20,455,622 14,664,563
Other Assets
Prepaid pension asset - 7,493,212
Deferred income taxes 1,087,598 -
Property held for sale - 1,249,692
Goodwill 2,897,972 3,128,276
Other 84,799 41,721
Total Other Assets 4,070,369 11,912,901
$88,717,372 $88,832,415
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED BALANCE SHEET (Contd.)
At December 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $11,185,587 $10,678,303
Accrued liabilities 10,733,582 11,553,266
Income taxes 707,772 501,745
Current maturities of long-term debt 306,578 322,499
Total Current Liabilities 22,933,519 23,055,813
Long-term Debt 2,506,746 1,599,962
Other Liabilities
Environmental remediation 15,646,000 16,900,000
Pension liabilities 84,017 -
Deferred income taxes - 356,220
Total Other Liabilities 15,730,017 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 30,829,632 25,423,275
Other comprehensive income
Minimum pension liability (4,778,714) -
Foreign currency translation (973) -
Total other comprehensive income (4,779,687) -
Total Shareholders' Equity 47,547,090 46,920,420
$88,717,372 $88,832,415
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31,
1998 1997 1996
Cash Flows From Operating
Activities
Net income (loss) $ 5,406,357 $(8,363,597) $ 4,277,428
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 2,257,476 2,155,974 1,933,166
Provision for environmental
remediation & discontinued
operations - 14,000,000 -
Net pension (credit) charge (170,463) 204,026 12,570
Deferred income tax charge
(credit) 1,228,638 (2,286,078) 667,702
Gain from disposals of
property, plant and equipment (143,798) - -
Gain on sale of marketable
securities - - (2,899)
Changes in assets and
liabilities:
Decrease (increase) in
marketable securities 41,196 121,767 (147,702)
(Increase) in accounts
receivable (365,585) (2,433,940) (3,557,360)
(Increase) in inventories (2,977,800) (974,196) (2,664,065)
Decrease (increase) in other
assets - current 250,841 (193,753) (325,909)
(Decrease) increase in
accounts payable and accrued
liabilities (2,759,902) 2,750,059 (309,505)
Increase (decrease) in income
taxes payable 206,027 (88,348) (104,154)
(Increase) in other assets (43,078) (109,499) (22,000)
Net cash provided by (used
in) operating activities 2,929,909 4,782,415 (242,728)
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF CASH FLOWS (Contd.)
For the Years Ended December 31,
1998 1997 1996
Cash Flows From Investing
Activities
Payments for acquisitions $(3,779,307) $(1,865,986) $(6,937,409)
Investment in marketable
securities - - (9,100,000)
Proceeds from disposition of
marketable securities 5,000,000 5,000,000 14,753,135
Proceeds from sale of assets
held for sale 2,442,221 - 597,255
Proceeds from sale of property,
plant and equipment 266,537 2,800 -
Capital expenditures (4,161,663) (1,727,523) (2,039,452)
Increase in net assets of
discontinued operations-
design, engineering and
equipment for processing
plant (9,594,954) (1,541,011) (968,424)
Net cash used in investing
activities (9,827,166) (131,720) (3,694,895)
Cash Flows From Financing
Activities
Payments on long-term debt (334,137) (335,522) (171,224)
Proceeds from long-term debt 1,225,000 143,404 956,596
Principal payments for capital
leases - (8,638) (98,419)
Net cash provided by
(used in) financing
activities 890,863 (200,756) 686,953
Net (Decrease) Increase In Cash
And Cash Equivalents (6,006,394) 4,449,939 (3,250,670)
Cash And Cash Equivalents At
Beginning Of Year 8,038,229 3,588,290 6,838,960
Cash And Cash Equivalents At End
Of Year $ 2,031,835 $ 8,038,229 $ 3,588,290
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Other
For the Years Ended Common Retained Comprehensive
December 31, Stock Earnings Income Total
1996
Balance at January 1 $21,497,145 $29,509,444 $ 16,398 $51,022,987
Net income 4,277,428 4,277,428
Other comprehensive
income
Unrealized loss on
securities, net of
$10,000 in taxes (16,398) (16,398)
Comprehensive income 4,261,030
Balance at December 31 21,497,145 33,786,872 - 55,284,017
1997
Net loss (8,363,597) (8,363,597)
Balance at December 31 21,497,145 25,423,275 - 46,920,420
1998
Net income 5,406,357 5,406,357
Other comprehensive
income
Minimum pension
liability
adjustment, net of
$2,969,000 in taxes (4,778,714) (4,778,714)
Foreign currency
translation
adjustment (973) (973)
Comprehensive income 626,670
Balance at December 31 $21,497,145 $30,829,632 $ (4,779,687) $47,547,090
See Notes to Consolidated Financial Statements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
The consolidated financial statements include the accounts of Fansteel Inc.
and its subsidiaries (the "Company").
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company considers all investments purchased with a maturity of three
months or less to be cash equivalents. At December 31, 1998 and 1997, the
Company had purchased $1,775,000 and $6,750,000, respectively, of securities
through banks under agreements to resell on January 4, 1999 and January 2, 1998,
respectively. Due to the short-term nature of the agreements, the Company did
not take possession of the securities which were instead held in the Company's
safekeeping accounts at the banks.
All investments with a maturity greater than three months are accounted for
under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The Company determines
the appropriate classification at time of purchase. Securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Held-to-maturity securities are stated at cost,
adjusted for amortization of premiums and discounts to maturity. Marketable
securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are carried at fair value,
which is based on quoted prices. Unrealized gains and losses, net of tax, are
reported as a separate component of shareholders' equity. The cost of securities
available-for-sale is adjusted for amortization of premiums and discounts to
maturity. Interest and amortization of premiums and discounts for all securities
are included in interest income. Realized gains and losses are included in other
income. Cost of securities sold is determined on a specific identification
basis.
Inventories are valued at the lower of cost, determined principally on the
"last-in, first-out" (LIFO) basis, or market. Costs include direct material,
labor and applicable manufacturing overhead. Inventories valued using the LIFO
method comprised 88% and 89% of inventories at current cost at December 31, 1998
and 1997, respectively.
Acquisitions of properties and additions to existing facilities and equipment
are recorded at cost. For financial reporting purposes, straight-line
depreciation is used for assets placed-in-service after December 31, 1995, while
accelerated depreciation is the principal method used for assets
placed-in-service before January 1, 1996. For assets placed-in-service beginning
in 1996, depreciation is recorded using the straight-line method over the
estimated useful life in order to better match expenses and revenues for
financial reporting purposes. Accelerated depreciation is used for income tax
purposes.
Goodwill of $2,898,000 at December 31, 1998, from the acquisition of American
Sintered Technologies, Inc. on July 31, 1996, represents the excess of cost over
fair value of the assets acquired and is being amortized over its estimated
useful life of 15 years using the straight-line method for financial
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
reporting and income tax purposes. Amortization of goodwill was $230,000 in 1998
and 1997 and $96,000 in 1996.
Revenue from sales of products is generally recognized upon shipment to
customers. Revenue from sales of tooling, patterns and dies is generally
recognized upon acceptance by the customer.
Income tax expense is based on reported earnings before income taxes. Deferred
income taxes reflect the temporary difference between assets and liabilities
recognized for financial reporting and such amounts recognized for tax purposes
which requires recognition of deferred tax liabilities and assets. Deferred tax
liabilities and assets are determined based on the differences between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse. A
valuation allowance is recognized if it is anticipated that some or all of a
deferred tax asset may not be realized.
The functional currency for the Company's foreign operation is the applicable
local currency. The translation from the applicable foreign currency to U.S.
Dollars is performed for the balance sheet accounts using current exchange rates
in effect at the balance sheet date and for revenue and expense accounts using
an average exchange rate during the period. The resulting translation
adjustments are recorded as a component of other comprehensive income in
shareholders' equity. Gains or losses resulting from foreign currency
translations are included in other income.
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
requires a dual presentation of earnings per share, basic and diluted. Basic
earnings per share are computed by dividing net income applicable to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share reflect the increase in average common shares
outstanding that would result from the assumed exercise of outstanding stock
options, calculated using the treasury stock method. The Company does not have
any dilutive shares for any of the three years in the period ended December 31,
1998. The financial statements present basic net income per share.
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," in 1998 which changes the way the Company reports
information about its operating segments. The information for 1997 and 1996 has
been restated from the prior years' presentation in order to conform to the 1998
presentation. The Company's business units have separate management teams and
infrastructures that offer different products and services.
In March 1998, the AICPA issued a Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The SOP is effective beginning January 1, 1999. The SOP will
require the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Company currently expenses such costs as incurred. The Company has not yet
assessed what the impact of the SOP will be on the Company's future earnings or
financial position.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities," which is
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
required to be adopted after June 15, 1999. Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
Certain reclassifications have been made to prior years' financial statements
to conform with the 1998 presentation.
2. Marketable Securities
At December 31, 1998, the Company held no investments in marketable
securities.
At December 31, 1997, the Company held investments in marketable securities
which were classified as held-to-maturity. The held-to-maturity securities at
December 31, 1997 included a 5.125% U.S. Treasury Note with a face value of
$5,000,000 due April 30, 1998. This security was stated at amortized cost plus
accrued interest, and classified as marketable securities as a part of current
assets. The net book value of this note at December 31, 1997 was $5,041,196,
consisting of amortized cost of $4,997,318 and accrued interest of $43,878. The
fair value of the note at December 31, 1997 was $4,992,188.
There were no gross unrealized gains or losses for the year ended December 31,
1998. The gross unrealized loss for the year ended December 31, 1997 on the
held-to-maturity security was $5,130, with a fair value of $4,992,188 and
amortized cost of $4,997,318. Net unrealized gains or losses on held-to-maturity
securities have not been recognized in the accompanying financial statements.
Net realized gains on marketable securities for the year ended December 31,
1996 were $2,899. There were no realized gains or losses for the years ended
December 31, 1998 or 1997.
3. Accrued Liabilities
Accrued liabilities at December 31, 1998 and 1997 include the following:
1998 1997
Payroll and related costs $ 3,907,148 $ 3,832,133
Taxes, other than income 337,076 288,574
Profit sharing 1,142,492 1,040,804
Insurance 3,075,719 2,990,037
Environmental 1,363,462 2,153,948
Professional fees 248,524 536,161
Other 659,161 711,609
$ 10,733,582 $ 11,553,266
4. Discontinued Operations, Contingent Liabilities, and Other Liabilities
The Company discontinued its Metal Products business segment in 1989.
Environmental reclamation and decommissioning is required for the segment's
primary plant that processed certain ores which are subject to regulations of
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
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 by the end
of the first quarter of 1999.
At December 31, 1998 and 1997, the Company had recorded liabilities of $9.8
million and $10.8 million, respectively, for discontinued operations including
the estimated net costs of reclaiming and decommissioning the site during and
after the approximate ten years of processing the residues described above. An
additional provision for discontinued operations of $7.1 million was recorded in
1997 to increase the established liabilities for the estimated cost of
additional studies which may be required by regulatory agencies, higher start-up
costs, and potentially greater disposal costs after completion of the residue
processing period, as well as for cost estimates related to probable future
environmental remediation at a second site which had been part of the Metal
Products business segment. The second site is regulated under the Resource
Conservation and Recovery Act and, as a result of alleged migration of
contaminants from this second site, the Company also has been identified as a
potentially responsible party under the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA) at a neighboring third-party site.
The estimated net costs of reclaiming and decommissioning the first site
during the residue processing period include estimated annual revenues of
approximately $8 million per year over the ten year processing period and
estimated annual operating costs, including depreciation, of approximately the
same amount, related to residue processing. The estimated value of materials to
be extracted is based on analysis of samples taken from the residues and a
valuation of such materials using current market prices discounted to reflect
possible price decreases, including those which could result from the increased
quantities of certain of these materials made available for sale. However, ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
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 NRC regulations or provisions of the Nuclear Waste Policy Act of
1982. 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.
Expenditures for environmental reclamation and decommissioning for
discontinued operations were $1,009,000, $1,859,000 and $1,516,000 in 1998,
1997, and 1996, respectively. Costs which are expected to be incurred within the
next year are included as environmental costs in accrued liabilities. Costs
expected to be incurred after one year are reflected on the balance sheet in
discontinued operations and environmental remediation as part of other
liabilities. Based upon continuing assessment of the proposed decommissioning
plan, taking into consideration the most current information, existing
technology and regulations in effect, management believes that the amounts
reserved at December 31, 1998 are adequate to cover the costs of environmental
clean-up for discontinued operations and that the Company has the ability to
meet the NRC decommissioning funding assurance requirements.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The net assets of discontinued operations at December 31, 1998 and 1997
include the following (in thousands of dollars):
1998 1997
Land $ 110 $ 110
Building 5,885 5,292
Machinery & equipment 9,694 750
15,689 6,152
Less accumulated depreciation 4,805 4,805
Net fixed assets 10,884 1,347
Design and engineering costs
for processing plant 2,784 2,726
$ 13,668 $ 4,073
In addition to the two sites included in the discontinued operations, the
Company has a total of seven sites at other Company facilities where
environmental remediation is ongoing or will be undertaken. Certain of these
sites were identified as a result of environmental studies conducted by the
Company during 1997 at all of its owned sites, including testing of soil and
groundwater at selected sites as indicated by the environmental studies.
In 1998, the remaining land and buildings of the Company's former Precision
Sheet Metal operation, which had been classified as Other Assets - Property held
for sale, were sold. Proceeds, less retained liabilities for environmental
clean-up, were approximately equal to carrying amounts.
The Company has also been notified that it is a potentially responsible party
at six sites owned by third parties. The Company's participation at four sites
is de minimis, and at the other two sites the Company is either being defended
by its insurance carriers or has meritorious defenses to liability.
At December 31, 1998 and 1997, the Company had recorded liabilities of $8.4
million and $8.1 million, respectively, for estimated environmental
investigatory and remediation costs based upon an evaluation of currently
available facts with respect to each individual site, including the results of
environmental studies and testing conducted in 1997, and considering existing
technology, presently enacted laws and regulations, and prior experience in
remediation of contaminated sites. An additional provision of $6,900,000 was
recorded in 1997 for the estimated potential exposure for such costs. 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 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
5. Debt
Long-term debt at December 31, 1998 and 1997 consisted of the following:
1998 1997
Mississippi Business Finance
Corporation 5.487% Note, due 2011 $ 1,005,000 $ 1,055,000
Loans from various Pennsylvania
Economic Agencies with interest rates
ranging from 2.0% to 5.0%, due from
1998 to 2010 1,667,773 647,729
Loans from various Iowa Economic
Agencies with interest rates ranging
from 0.0% to 4.0%, due 2000 140,551 219,732
2,813,324 1,922,461
Less current maturities 306,578 322,499
Total long-term debt $ 2,506,746 $ 1,599,962
The above loans are collateralized by machinery and equipment with a net book
value of $1,449,000.
The aggregate maturities for long-term debt for the five years after December
31, 1998 are $307,000, $266,000, $238,000, $209,000, and $189,000, respectively.
Interest paid on debt for the years ended December 31, 1998, 1997 and 1996
amounted to $107,000, $89,000, and $17,000, respectively.
The fair value of the Company's debt at December 31, 1998 and 1997 was
$2,653,000 and $1,779,000, respectively, which was estimated using a discounted
cash flow analysis, based upon the Company's current incremental borrowing rates
for similar types of borrowing arrangements.
6. Income Taxes
Deferred income taxes reflect the tax effect of temporary differences between
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts for income tax purposes.
Valuation allowances were established in 1997 in accordance with provisions of
FASB Statement No. 109, "Accounting for Income Taxes." The valuation allowances
are attributable to federal and state deferred tax assets.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
1998 1997
Deferred tax assets - current:
Environmental costs $ 699,102 $ 431,677
Self-insurance accruals 829,370 781,246
Vacation accruals 338,097 371,767
State income taxes 388,108 350,780
Other 321,007 343,692
$ 2,575,684 $ 2,279,162
Deferred tax assets (liabilities) -
non-current:
Environmental costs $ 3,321,505 $ 4,536,752
Pensions 32,230 (2,374,928)
Tax depreciation in excess of book
depreciation (648,265) (388,444)
Other 176,683 102,164
2,882,153 1,875,544
State income tax net operating loss
carryforwards 424,827 504,955
State income taxes 599,113 169,145
1,023,940 674,100
Valuation allowances (2,818,495) (2,905,864)
$ 1,087,598 $ (356,220)
At December 31, 1998 and 1997, the Company had potential state income tax
benefits from net operating loss carryforwards that expire in various years
through 2012. For financial reporting purposes, valuation allowances of $336,495
and $423,864 at December 31, 1998 and 1997 were recognized for net operating
loss carryforwards not anticipated to be realized before expiration. State
income tax benefits of $47,687 expired after returns were filed for the year
ended December 31, 1997, which were offset by $47,687 of valuation allowance.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Details of the provision (benefit) for income taxes in the consolidated
statements of operations are as follows:
1998 1997 1996
Current taxes
Federal $ 1,662,000 $ 1,378,000 $ 1,767,000
State 341,000 541,000 341,000
2,003,000 1,919,000 2,108,000
Deferred income tax
charge (credit)
Federal 1,196,000 (4,489,000) 524,000
State 33,000 (753,000) 144,000
Valuation allowances - 2,956,000 -
1,229,000 (2,286,000) 668,000
Total $ 3,232,000 $ (367,000) $ 2,776,000
Allocated to discontinued
operations - (1,244,000) -
Continuing Operations $ 3,232,000 $ 877,000 $ 2,776,000
The deferred income tax charge in 1998 resulted primarily from payments for
certain environmental costs accrued in prior years, and from tax depreciation
exceeding book depreciation.
The deferred income tax credit in 1997 resulted from provisions for
environmental costs accrued for continuing and discontinued operations reduced
by valuation allowances established in 1997.
The deferred tax charge in 1996 resulted primarily from payments for certain
plant shutdown, idle facilities and environmental costs accrued in prior years,
and from the net effect of timing of deductions of certain employee fringe
benefits.
A reconciliation of the total provision for income taxes with amounts
determined by applying statutory U.S. Federal income tax rate to income before
income tax provision is as follows:
1998 1997 1996
Income tax provision at
statutory rate $ 2,937,000 $(2,968,000) $ 2,398,000
Add:
State income taxes, net of
federal income tax provision 338,000 (395,000) 320,000
Change in valuation
allowances (91,000) 2,956,000 -
Other, net 48,000 40,000 58,000
Total income tax provision $ 3,232,000 $ (367,000) $ 2,776,000
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Income taxes paid for each of the three years in the period ended December
31, 1998 amounted to $2,267,000, $2,161,000, and $2,189,000, respectively.
Income tax refunds in the three year period ended December 31, 1998 amounted to
$469,000, $262,000, and $30,000, respectively.
7. Retirement Plans
The Company has several non-contributory defined benefit plans covering
approximately 25% of its employees. Benefits for salaried plans are generally
based on salary and years of service, while hourly plans are based upon a fixed
benefit rate in effect at retirement date and years of service. The Company's
funding of the plans is equal to the minimum contribution required by ERISA.
Contributions to defined benefit plans totaled $600,146, $80,964 and $22,380 in
1998, 1997 and 1996, respectively.
A minimum pension liability adjustment is required when the actuarial present
value of accumulated benefits exceeds plan assets and accrued pension
liabilities. A minimum pension liability adjustment of $4,778,714, net of tax
benefit, was recorded as a reduction to shareholders' equity in 1998.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The net pension expense (credit) in 1998 and 1997 is comprised of:
1998 1997
Change in benefit obligation
Benefit obligation at beginning of year $ 41,057,007 $ 41,417,209
Service cost 483,670 393,406
Interest cost 2,899,232 3,048,778
Amendments 124,467 46,332
Actuarial gain 837,991 (236,311)
Benefits paid (3,583,936) (3,612,407)
Benefit obligation at end of the year 41,818,431 41,057,007
Change in plan assets
Fair market value of plan assets at
beginning of year 40,112,613 40,136,249
Actual return on plan assets 3,927,608 2,999,592
Employer contribution 76,608 589,179
Plan participants' contributions - -
Benefits paid (3,583,936) (3,612,407)
Fair value of plan assets at end of year 40,532,893 40,112,613
Funded status (1,285,538) (944,394)
Unrecognized actuarial loss 8,164,401 8,326,563
Unrecognized transition asset (84,163) (706,407)
Unrecognized prior service cost 818,725 817,450
Net amount recognized $ 7,613,425 $ 7,493,212
Amounts recognized in the statement of
financial position consist of:
Prepaid benefit cost $ - $ 7,493,212
Accrued benefit liability (860,627) -
Intangible asset 726,270 -
Accumulated other comprehensive income 7,747,782 -
Net amount recognized $ 7,613,425 $ 7,493,212
Weighted-average assumptions of December 31 1998 1997
Discount rate 7.25% 7.75%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 3.50% 5.00%
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
1998 1997
Components of net periodic benefit cost
Service cost $ 483,670 $ 393,406
Interest cost 2,899,232 3,048,778
Expected return on plan assets (3,071,621) (3,070,713)
Amortization of prior service cost 123,192 114,667
Amortization of transition asset (622,244) (680,473)
Recognized actuarial loss 609,792 428,100
Net periodic benefit cost $ 422,021 $ 233,765
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $37,422,242, $36,824,545, and $36,014,168,
respectively, as of December 31, 1998.
The Company has several defined contribution plans covering approximately 80%
of its employees. Almost all of the defined contribution plans have funding
provisions which, in certain situations, require Company contributions based
upon formulae relating to employee gross wages, participant contributions or
hours worked. Almost all of the defined contribution plans also allow for
additional discretionary Company contributions based upon profitability. The
costs of these plans for 1998, 1997 and 1996 were $1,519,000, $1,494,000 and
$1,235,000, respectively.
The Company makes medical insurance available and provides limited amounts of
life insurance to retirees. Retirees electing to be covered by Company sponsored
health insurance pay the full cost of such insurance. The Company accrues the
cost of the retiree life insurance benefits in relation to the employee's
service with the Company. Costs of postretirement benefits other than pensions
for the years ended December 31, 1998, 1997 and 1996 were $49,000, $40,000 and
$37,000, respectively.
8. Business Segments
The Company is a specialty metals manufacturer with substantially all
operations located in the United States. For financial reporting purposes, the
Company classifies its products into the following three business segments:
Industrial Tools:
Tungsten carbide cutting tools, milling tools, toolholding devices, mining
tools and accessories, construction tools, wear parts and related industrial
parts.
Advanced Structures:
Titanium, nickel base and high alloy steel forgings; aluminum and magnesium
sand castings.
Industrial Metal Components:
Special wire products, powdered metal components, and investment castings.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Financial information concerning the Company's segments for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
NET SALES:
INDUSTRIAL TOOLS
Sales $ 58,442,892 $ 56,292,542 $ 54,068,214
Intersegment sales (5,582) (1,133) (239)
58,437,310 56,291,409 54,067,975
ADVANCED STRUCTURES
Sales 54,512,070 45,827,350 39,376,729
Intersegment sales - - -
54,512,070 45,827,350 39,376,729
INDUSTRIAL METAL
COMPONENTS
Sales 40,860,593 38,144,417 27,408,163
Intersegment sales (13,426) (69,101) (19,036)
40,847,167 38,075,316 27,389,127
$153,796,547 $140,194,075 $120,833,831
OPERATING INCOME (LOSS):
INDUSTRIAL TOOLS $ 3,895,736 $ 3,860,150 $ 3,052,446
ADVANCED STRUCTURES 2,639,782 (1,055,575) 1,778,774
INDUSTRIAL METAL
COMPONENTS 1,840,208 2,273,052 1,572,943
CORPORATE (56,040) (6,969,204) (61,619)
$ 8,319,686 $ (1,891,577) $ 6,342,544
Intersegment sales are accounted for at prices equivalent to the competitive
market prices for similar products.
The operating loss for Corporate in 1997 includes a provision for
environmental remediation of $6,900,000 of which $3,076,000 relates to
Industrial Tools facilities, $3,781,000 relates to Advanced Structures
facilities, and $43,000 relates to Industrial Metal Components facilities.
Segment performance is evaluated without these special charges.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The percentages of net sales for classes of similar products which exceeded
ten percent of the Company's consolidated net sales, for the period indicated,
are set forth below:
Percentage of
Consolidated Net Sales
Products Business Segments 1998 1997 1996
Tungsten carbide
cutting tools Industrial Tools 26% 27% 30%
Nonferrous forgings Advanced Structures 16% 15% 12%
Investment castings Industrial Metal 10% 10% 9%
Components
The identifiable assets, depreciation and amortization, and capital
expenditures for the years ended December 31, 1998, 1997 and 1996 are as
follows:
1998 1997 1996
Identifiable assets
Industrial Tools $21,853,599 $19,854,696 $17,383,706
Advanced Structures 25,560,655 24,746,415 22,741,686
Industrial Metal Components 20,429,505 14,993,384 13,985,879
Corporate/Discontinued 20,873,613 29,237,920 28,016,171
Total assets $88,717,372 $88,832,415 $82,127,442
Depreciation and amortization
Industrial Tools $ 674,904 $ 684,961 $ 773,130
Advanced Structures 623,556 630,153 627,976
Industrial Metal Components 959,016 840,860 532,060
Corporate/Discontinued - - -
Total depreciation and
amortization $ 2,257,476 $ 2,155,974 $ 1,933,166
Capital expenditures
Industrial Tools $ 1,866,258 $ 890,465 $ 1,553,372
Advanced Structures 1,239,232 644,483 148,879
Industrial Metal Components 4,835,480 751,629 4,221,201
Corporate/Discontinued - - -
Total capital expenditures $ 7,940,970 $ 2,286,577 $ 5,923,452
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Capital expenditures for the Advanced Structures segment include $559,000 from
the acquisition of Schulz Products, Inc. in 1997. Capital expenditures for the
Industrial Metal Components segment include $3,779,000 for the property, plant
and equipment of Fansteel de Mexico in 1998 and $3,884,000 from the acquisition
of American Sintered Technologies, Inc. in 1996.
9. Lease Commitments
The Company leases data processing, transportation and other equipment, as
well as certain facilities, under operating leases. Such leases do not involve
contingent rentals, nor do they contain significant renewals or escalation
clauses.
Total minimum future rentals under noncancelable leases at December 31, 1998
were $1,107,000, including $579,000 in 1999, $294,000 in 2000, $232,000 in 2001,
$2,000 in 2002, and $0 in 2003 and thereafter. Rental expense was $1,455,000 in
1998, $1,224,000 in 1997, and $1,174,000 in 1996.
10. Acquisition
On August 27, 1998, the Company acquired the property, plant and equipment of
Attwood de Mexico S. de R. L. de C.V. and Attwood Corporation in Reynosa, Mexico
for a cash price of $3,779,000. A new Company, Fansteel de Mexico S. de R. L. de
C.V., was established to produce steel and alloy investment castings in
conjunction with the Company's Escast Inc. subsidiary, which is in the
Industrial Metal Components business segment.
On September 30, 1997, the Company acquired all the assets and certain
liabilities of Schulz Products, Inc. (Schulz) for the cash price of $1,866,000.
The nature of the business of Schulz is the machining of aircraft components.
Schulz is included in the Advanced Structures business segment.
On July 31, 1996, the Company acquired all of the assets and certain
liabilities of American Sintered Technologies, Inc. (AST) for the cash price of
$6,937,000. In addition to the cash paid, the Company assumed $954,000 of
various Pennsylvania Economic Agencies loans. The nature of the business of AST
is the manufacture of ferrous and non-ferrous powdered metal components serving
the automotive, lawn and garden, plumbing, hardware, and electrical hardware
industries. AST is included in the Industrial Metal Components business segment.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
The acquisitions were accounted for as purchases. The Company's results for
the years of these acquisitions would not be materially different if these
acquisitions were made at the beginning of the respective year. The fair value
of assets purchased and liabilities assumed for Schulz in 1997 and AST in 1996
are shown below:
1997 1996
Accounts receivable $ 648,005 $ 837,938
Inventory 972,615 337,534
Other assets - current 12,518 42,077
Property, plant and equipment 559,054 3,884,000
Goodwill - 3,454,540
Accounts payable and accrued liabilities (326,206) (664,586)
Debt - (954,094)
Net cash paid $ 1,865,986 $ 6,937,409
11. Stock-Based Compensation Plan
The Shareholders approved the 1998 Long-Term Incentive Plan (Incentive Plan)
on May 20, 1998. The Incentive Plan is administered by the Compensation and
Nominating Committee of the Board of Directors. No member of the Committee is
eligible to receive awards under the Incentive Plan. Officers, key employees and
non-employees, who in the judgment of the Committee, render significant service
to the Company, are eligible to participate. The Incentive Plan provides for the
award of a broad variety of stock-based compensation alternatives such as
non-qualified stock options, incentive stock options, restricted stock,
performance awards and stock appreciation rights. The Incentive Plan provided
400,000 shares of common stock to be offered from either authorized and unissued
shares or issued shares which have been reacquired by the Company. Options
granted will vest equally over three years and expire ten years after the grant
date. The exercise price is equal to 100% of the fair market value of a common
stock on the grant date.
On May 20, 1998, the Board of Directors granted 175,000 incentive stock
options to officers and key employees of the Company with an exercise price of
$9.19 per option. The status of the stock options is as follows:
Number
of Shares
Granted on May 20, 1998 175,000
Forfeited (12,200)
Outstanding at December 31, 1998 162,800
Options Exercisable at :
December 31, 1998 -
December 31, 1999 54,267
December 31, 2000 54,267
December 31, 2001 54,266
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Contd.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Contd.)
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plan under APB Opinion 25
"Accounting for Stock Issued to Employees" and adopt the disclosure only
provisions of SFAS No. 123. Under APB 25, no compensation costs are recognized
because the option exercise price is equal to the fair market price of the
common stock on the date of the grant. Under SFAS No. 123, stock options are
valued at grant date using the Black-Scholes valuation model and compensation
costs are recognized ratably over the vesting period. Had compensation costs
been determined as prescribed by SFAS No. 123, the Company's net earnings and
earnings per share would have been reduced to pro forma amounts indicated below:
1998
Net Earnings
As Reported $5,406,357
Pro Forma 5,329,072
Net Earnings Per Share
As Reported $.63
Pro Forma $.62
Pro forma diluted income per common share has not been presented for 1998
because assuming the conversion of stock options would have an anti-dilutive
effect.
The fair value of the Company stock options estimated on the date of grant
using the Black Scholes option-pricing model was $3.90 with the following
assumptions: expected stock price volatility of 24.4%; expected dividend yield
of 0.0%; risk-free interest rate of 5.71%; and an expected 8 year life.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive
officers is included in Part I page 12.
Additional information concerning the Company's directors is
incorporated by reference to information under the caption
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 19, 1999.
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated herein by reference to information under the
caption "Compensation of Directors and Executive Officers" in
the Company's definitive proxy statement for the annual
meeting of shareholders to be held on April 19, 1999.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)(b)(c) The information required by this Item 12 is incorporated
herein by reference to the information under the captions
"Voting Securities and Principal Holders Thereof" and
"Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 19, 1999.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the information under the
caption "Nominees for Election as Directors" in the Company's
definitive proxy statement for the annual meeting of
shareholders to be held on April 19, 1999.
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
(a)(1) Index to Consolidated Financial Statements:
Form 10-K
Page
Summary of Quarterly Results of Operations
for the years ended December 31, 1998 and
1997. 15
Report of Independent Auditors. 28
Consolidated Statement of Operations for each
of the three years in the period ended
December 31, 1998. 29
Consolidated Balance Sheet at December 31,
1998 and 1997. 30-31
Consolidated Statement of Cash Flows for each
of the three years in the period ended
December 31, 1998. 32-33
Consolidated Statement of Shareholders'
Equity for each of the three years in the
period ended December 31, 1998. 34
Notes to Consolidated Financial Statements. 35-51
(a)(2) Index to Consolidated Financial Statement Schedule:
Consolidated Financial Statement Schedule
for each of the three years ended
December 31, 1998:
II. Valuation and qualifying accounts 54
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule, or because the information required is included in
the Consolidated Financial Statements and Notes thereto.
(a)(3) The following exhibits required by Item 601 of Regulation S-K
are submitted as follows:
Exhibit 3.1 - Certificate of Incorporation
Exhibit 3.2 - By-Laws
Exhibit 22 - Subsidiaries of the Registrant
All other exhibits are omitted since the required information is not present
or is not present in amounts sufficient to require submission.
(b) No reports have been filed on Form 8-K during the last quarter
of the year ended December 31, 1998.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance
Beginning Cost and Deductions at End
of Year Expenses (1) of Year
Allowance for Doubtful
Accounts:
Year ended 12/31/98 $ 280,440 $ 22,746 $ 43,939 $ 259,247
Year ended 12/31/97 $ 276,440 $ 234,463 $ 230,463 $ 280,440
Year ended 12/31/96 $ 276,440 $ (11,665) $ (11,665) $ 276,440
(1) Accounts written off, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
FANSTEEL INC.
Registrant
Date: 3/26/99 By: \s\ Gary L. Tessitore
Gary L. Tessitore, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the dates indicated:
Signature Title Date
Director; Chairman of the
Board, President and
/s/ Gary L. Tessitore Chief Executive Officer 3/26/99
Gary L. Tessitore
Vice President and Chief
/s/ R. Michael McEntee Financial Officer 3/26/99
R. Michael McEntee
/s/ Edward P. Evans Director 3/26/99
Edward P. Evans
/s/ R. S. Evans Director 3/26/99
R. S. Evans
/s/ Thomas M. Evans, Jr. Director 3/26/99
Thomas M. Evans, Jr.
/s/ Peter J. Kalis Director 3/26/99
Peter J. Kalis
/s/ Jack S. Petrik Director 3/26/99
Jack S. Petrik
INDEX TO EXHIBITS
The following Exhibits to this report are filed herewith or, if marked with an
asterisk (*), are incorporated by reference:
Exhibit Prior Filing or Sequential
No. Page Number Herein
3.1 Certificate of Incorporation Company's Form 10-K filed
March 31, 1993 (*)
3.2 By-Laws Annex II to the Company's
annual proxy statement
dated March 15, 1985,
File No. 1-8676 (*)
10a Fansteel Inc. 1998 Long-Term Exhibit A of the Company's
Incentive Plan annual proxy statement
dated April 17, 1998,
File No. 1-8676 (*)
22 Subsidiaries of the Registrant 57
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet of Fansteel Inc. as of December 31, 1998 and the
related consolidated statement of income for the year ended December 31, 1998
and is qualified in its entirety by reference to the Company's Form 10K filing
for the period ended December 31, 1998.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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<RECEIVABLES> 22,407,457
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<NET-INCOME> 5,406,357
<EPS-PRIMARY> .63
<EPS-DILUTED> .63
</TABLE>
EXHIBIT 22 - SUBSIDIARIES OF THE REGISTRANT
The subsidiaries of Fansteel Inc. and their state or country of incorporation
are as follows:
State or Country
Name of Subsidiary of Incorporation
Custom Technologies Corporation Delaware
Wellman Dynamics (1) Delaware
Escast, Inc. (1) Illinois
Washington Manufacturing (1) Delaware
Fansteel Holdings Incorporated Delaware
Fansteel Sales Corporation, Inc. Barbados
Phoenix Aerospace Corp. Delaware
American Sintered Technologies, Inc. Delaware
Fansteel Schulz Products, Inc. Delaware
Fansteel de Mexico S. de R.L. de C.V.(2) Mexico
(1) These entities are wholly-owned subsidiaries of Custom Technologies
Corporation.
(2) This entity is a wholly-owned subsidiary of Escast, Inc. and Fansteel
Holdings, Inc.
